This article, originally published in March 2010, has been updated to reflect the separate mandatory escrow requirements for Jumbo Higher-Priced Mortgage Loans that became effective April 1, 2011.
In July 2008, the Federal Reserve Board issued an amendment to Regulation Z requiring lenders to establish escrow accounts for certain mortgage loans. Under these rules, which were effective for loan applications received on or after April 1, 2010, and for loans on manufactured housing beginning October 1, 2010, a creditor may not extend a loan secured by a first lien on a principal dwelling if the loan is also a higher-priced mortgage loan under Regulation Z Section 226.35 unless, prior to consummation, an escrow account is established for the payment of property taxes and mortgage-related insurance premiums required by the creditor, such as hazard insurance, liability insurance and mortgage insurance. A creditor or servicer may permit the escrow account to be cancelled only pursuant to a consumer's dated written request received no earlier than 365 days after consummation.
On March 2, 2011, new final rules amending the mandatory escrow account requirements were published. The final rules revise Regulation Z to provide a higher APR threshold for determining whether “jumbo” mortgage loans secured by a first lien on a consumer’s principal dwelling are higher priced mortgage loans for which an escrow account must be established. A jumbo loan covered by the rule is a closed-end mortgage loan secured by a first-lien on the consumer’s principal dwelling that exceeds the limit in effect as of the date the loan’s rate is set for the maximum principal obligation (i.e., conforming loan limit) eligible for purchase by Freddie Mac. The current maximum principal obligation for a mortgage loan that is eligible for purchase by Freddie Mac is $417,000 for a single-family property that is not located in a designated “high-cost” area. (Please see this article regarding 2011 conforming loan limits.) Note that adjustments to the maximum principal obligation made by the Federal Housing Finance Agency (FHFA) or by other federal law will apply in determining whether a loan is a jumbo loan subject to the higher APR threshold under Reg. Z Section 226.35(b)(3)(v).
Effective April 1, 2011, the threshold for coverage of the escrow requirement for “jumbo” loans is 2.5 percentage points (rather than 1.5 percentage points) above the average prime offer rate for a comparable transaction, as of the date the transaction’s interest rate is set. The escrow requirements for HMPLs that are not “jumbo” loans remain the same.
Under both rules, an escrow account need not be established for mortgage-related insurance that is not required by the creditor, such as earthquake insurance or debt-protection insurance. Escrow accounts are not required for either loans secured by shares in a cooperative or for loans secured by condominium units, provided the condominium association is obligated to maintain a master policy insuring condominium units. Note, however, that an escrow account for the payment of property taxes for condominium units must still be established if the other conditions are satisfied. See generally, Regulation Z Section 226.35(b)(3) and related commentary here and here, respectively.
To better assist you in ensuring compliance with HPML escrow account requirements, DocMagic has created the following audits to identify those loans for which escrow accounts are required.
An escrow account must be established for loans that meet the following criteria:
-
The loan application date is on or after April 1, 2010
- The loan is a first lien loan
-
The property is the borrower's principal dwelling (i.e., owner-occupied)
-
The property is a SFR, Condo, PUD, Manufactured Housing (PUD or Condo included) or 1-4 Family (i.e., not a cooperative, multifamily, commercial, or vacant lot)
-
The loan is a federal "higher-priced mortgage loan" (more commonly referred to as a "Section 35" loan or more simply as an "HPML" (please go
here for a more complete description of HPMLs) and either
- The loan amount is less than or equal to the maximum principal obligation eligible for purchase by Freddie Mac, or
- The loan amount exceeds the maximum principal obligation eligible for purchase by Freddie Mac (designated in the final rule as a “jumbo” loan) and the APR exceeds the applicable average prime offer rate by 2.5 or more percentage points.
If the foregoing conditions are met, then the following audits have been implemented and will appear when applicable:
AUDIT 1: "Lender Required" Flag Set to "Yes." The first audit is to confirm that the "Lender Required" flag that appears in the "Impounds" screen is set to "Yes" (recall that the Lender Required field was created in response to the new RESPA 2010 rules to ensure that the new GFE is properly completed (see here)).
If the flag is not set to Yes (that is, it is set to NO or blank), then an audit reading substantially as set forth below will appear:
WARNING: THIS IS A FEDERAL HIGHER-PRICED MORTGAGE LOAN SECURED BY A FIRST LIEN ON A PRINCIPAL DWELLING; THE CREDITOR MUST ESTABLISH AN ESCROW ACCOUNT FOR THE PAYMENT OF PROPERTY TAXES AND CREDITOR-REQUIRED MORTGAGE-RELATED INSURANCE PREMIUMS (REG. Z SECTION 226.35(B)(3)).
If an escrow account is required and the "Lender Required" flag is properly set to "Yes," the following additional audits have also been implemented:
Audit 2: Escrow for Property Tax Impounds. Because impounds must be established for some form of "property tax," and given the myriad descriptions for property-related taxes used from state to state, the DocMagic audit system will check to confirm that at least one form of property tax-related impounds appears in the worksheet. These would include one or more of the following: Annual Assessments, City Property Tax, County Property Tax, School Tax, School/Town Tax, Summer Tax, Town Tax, Village Tax, Water & Sewer Tax or Winter Tax. If one of these is not entered in the worksheet, then an audit reading substantially as set forth below will appear:
WARNING: THIS IS A FEDERAL HIGHER-PRICED MORTGAGE LOAN SECURED BY A FIRST LIEN ON A PRINCIPAL DWELLING; THE CREDITOR MUST ESTABLISH AN ESCROW ACCOUNT FOR THE PAYMENT OF PROPERTY TAXES (REG. Z SECTION 226.35(B)(3)).
Audit 3: Escrow for Property Insurance Impounds. Because impounds must be established for some form of property insurance, the DocMagic audit system will check to confirm that at least one form of property insurance-related impounds appears in the worksheet. These would include one or more of the following: Earthquake Insurance, Flood Insurance, Hazard Insurance, Hurricane Insurance, or Wind Coverage. If one of these is not entered in the worksheet, then an audit reading substantially as set forth below will appear:
WARNING: THIS IS A FEDERAL HIGHER-PRICED MORTGAGE LOAN SECURED BY A FIRST LIEN ON A PRINCIPAL DWELLING; THE CREDITOR MUST ESTABLISH AN ESCROW ACCOUNT FOR THE PAYMENT OF PROPERTY INSURANCE (REG. Z SECTION 226.35(B)(3)).
Audit 4: Escrow for Mortgage Insurance Impounds. If mortgage insurance is required by the lender, an escrow must be established for mortgage insurance impounds. Because it is not always clear when mortgage insurance is required, the following audit is limited to FHA loans only. Accordingly, if the loan is an FHA loan and there are no monthly PMI amounts entered in the PMI/MMI screens in DocMagic, then an audit reading substantially as set forth below will appear:
WARNING: THIS IS A FEDERAL HIGHER-PRICED MORTGAGE LOAN SECURED BY A FIRST LIEN ON A PRINCIPAL DWELLING; THE CREDITOR MUST ESTABLISH AN ESCROW ACCOUNT FOR THE PAYMENT OF MORTGAGE INSURANCE (REG. Z SECTION 226.35(B)(3)).
Please contact DocMagic, Inc.'s Compliance Department if you have any questions or comments regarding the audits described in this article.
An escrow account for property insurance is not required for a loan secured by a condominium unit if the condominium association is obligated to maintain a master policy insuring the condominium units. However, an escrow account for the payment of property taxes for a condominium unit must still be established if the other conditions are satisfied. For purposes of these audits, we do not treat condominiums differently.
RSS 
