Understanding the Requirements for Escrow and Impound Accounts
Understanding the Requirements for Escrow and Impound Accounts
Delve into escrow and impound accounts, which help homeowners manage property-related expenses. This blog post discusses their purpose, regulations, exceptions, and the small creditor exemption. Understanding these accounts enables homeowners to manage their finances and navigate property-related expenses better. 

Information from this article comes from Molly Stull's webinar, Escrow Excellence: From Loan Estimate to Annual Analysis. 

Understanding the Requirements for Escrow and Impound Accounts

An escrow or impound account is a financial account set up by your mortgage lender to pay certain property-related expenses, like taxes and insurance. Including these expenses in your monthly mortgage makes it easier to budget for large property-related bills. Many lenders require escrow accounts, and sometimes they're even mandated by law.

Understanding Escrow and Impound Accounts:

An escrow account helps homeowners manage property-related expenses by collecting a portion of their monthly mortgage payments. This money is used to pay bills such as property taxes and insurance premiums. Mortgage servicers manage these accounts and make payments on behalf of homeowners. Escrow accounts can change yearly based on property taxes and insurance premiums fluctuations, affecting the total monthly mortgage payment.

If a loan doesn't include an escrow account, it's crucial for homeowners to budget for these additional costs and stay current on their taxes and insurance payments. Failure to do so can result in fines, penalties, tax liens, and even foreclosure. Homeowners can voluntarily request an escrow account to help manage these expenses.

Escrow Requirements and Regulations:

Escrow requirements are addressed by several laws and regulations, including:
  • Real Estate Settlement Procedures Act (Regulation X)
  • Truth in Lending Act (Regulation Z)
  • Flood Disaster Protection Act (FDPA)
These regulations ensure that financial institutions thoroughly understand escrow requirements to maintain compliance.

Escrow for Higher-Priced Mortgage Loans:

The Consumer Financial Protection Bureau (CFPB) issued a final rule amending Regulation Z to implement a requirement of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). This rule exempts certain insured depository institutions and insured credit unions from establishing escrow accounts for specific higher-priced mortgage loans (HPMLs).

Higher-priced mortgage loans are consumer credit transactions secured by the borrower's principal dwelling and have an annual percentage rate above the Average Prime Offer Rate (APOR). Escrow accounts are required for all first-lien HPMLs, but borrowers can request to cancel escrows after five years, provided certain conditions are met.

Exceptions to the TILA Escrow Rule:

Escrow accounts do not need to be established for the following transactions:
  • Transactions secured by shares in a cooperative
  • Transactions to finance the initial construction of a dwelling
  • Temporary or “bridge” transactions with terms of 12 months or less
  • Reverse mortgages
  • Subordinate liens
  • Open-end credit (such as home equity lines of credit)
  • Insurance premiums the consumer purchases that the lender does not require

Small Creditor Exemption:

Small creditors that make more than half their loans to consumers in rural or underserved areas may be exempt from establishing escrow accounts, provided they meet specific loan volume and asset size requirements.

Escrow accounts play a crucial role in helping homeowners manage their property-related expenses. By understanding the regulations surrounding escrow accounts, homeowners can ensure they're adequately prepared for these financial responsibilities and achieve escrow excellence.

Escrow Excellence: From Loan Estimate to Annual Analysis

Deepen your knowledge on this topic with Molly Stull's webinar, Escrow Excellence: From Loan Estimate to Annual Analysis. After this webinar you will be able to:
  • Properly disclosing escrow items using TRID rules
  • Creating precise initial escrow account statements
  • Understanding single-item and aggregate analysis differences
  • Ensuring cushion limit compliance, resolving shortages
  • Surpluses or deficiencies
  • Conducting system testing for escrow account analysis accuracy
  • Identifying requirements under RESPA, TILA, and the Flood Disaster Protection Act
  • Reviewing escrow statements for necessary content
  • Testing for examiner-identified escrow accounting issues