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.

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 are addressed by several laws and regulations, including:

These regulations ensure that financial institutions thoroughly understand escrow requirements to maintain compliance.

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.

Escrow accounts do not need to be established for the following transactions:

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.