Escrow Requirements Under Regulation Z
When is it mandatory under Regulation Z to escrow for taxes and insurance? How long must a lender escrow for these items?
An escrow account for property taxes and insurance is mandatory under Regulation Z for certain higher-priced mortgage loans (“HPMLs”).
HPMLs covered by this requirement are closed-end consumer loans secured by a first lien on a consumer’s principal dwelling and have an annual percentage rate that exceeds the Average Prime Offer Rate (“APOR”) by 1.5 percentage points or more or by 2.5 percentage points or more, if the principal amount of the mortgage exceeds Freddie Mac’s limit for mortgages it will purchase. Escrows are not required for subordinate mortgages.12 CFR 1026.35(a)(1), (b)(1).
Before the loan is consummated, the escrow account must be established for the payment of property taxes and premiums for mortgage-related insurance required by the bank, such as insurance against loss or damage to property, or against liability arising out of the ownership or use of the property, or insurance protecting the bank against the consumer’s default or other credit loss. 12 CFR 1026.35(b)(1).
Certain transactions are exempted from this requirement:
- A transaction secured by shares in a cooperative;
- A transaction to finance the initial construction of a dwelling;
- A temporary or “bridge” loan with a loan term of 12 months or less;
- A reverse mortgage.
Insurance premiums also do not have to be included in escrow accounts for loans secured by dwellings in condominiums, planned unit developments, or other common interest communities in which the consumer is required to participate in the governing organization, and where the governing organization is obligated to the dwelling owners to maintain a master policy insuring all dwellings. 12 CFR 1026.35(b)(2).
The escrow account must be maintained until:
- The loan is terminated; or
- The consumer has requested that the escrow account be closed.
The bank can grant the consumer’s request to cancel the escrow account only if five years have elapsed since the loan was made, the unpaid principal balance is less than 80 percent of the original value of the property securing the underlying obligation, and the consumer is not currently delinquent or in default on the underlying obligation. 12 CFR 1026.35(b)(3).
There is an exemption from the escrow requirement for certain small creditors. In order to qualify for this exemption, a creditor must satisfy the following conditions:
- During any of the preceding three calendar years, more than 50 percent of its total first-lien consumer mortgage loans were secured by properties located in counties that are either “rural” or “underserved,” as listed by the Consumer Financial Protection Bureau for a particular calendar year;
- The creditor and its affiliates together originated 500 or fewer first-lien covered transactions;
- At the end of the preceding calendar year, the creditor had total assets that are less than the asset threshold for the relevant calendar year (e.g., $2,028,000.00 as of December 31, 2013); and
- The creditor and its affiliates do not maintain an escrow account for any mortgage transaction being serviced by the creditor and its affiliates at the time the transaction is consummated. 12 CFR 1026.35(b)(2)(iii).
As for the last condition, escrow accounts established for first-lien higher priced mortgage loans on or after April 1, 2010 and before January 1, 2014, and escrow accounts established after consummation as an accommodation to distressed consumers to help them avoid default or foreclosure, are not included.