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A question from one of our members:
We have a high priced/high cost mortgage loan. The purpose is consumer to purchase a lot. The customer did not have the means to make the LTV within policy, so his mother (not on the note) pledged her house and lot. She has no other liens on the property. Should an escrow account have been established? And if so, would we escrow both the lot property taxes and the mother’s insurance and property taxes or just the lot being purchased taxes?
It sounds like it might not meet the escrow requirements:
(b) Escrow accounts. (1) Requirement to escrow for property taxes and insurance. Except as provided in paragraph (b)(2) of this section, a creditor may not extend a higher-priced mortgage loan secured by a first lien on a consumer’s principal dwelling unless an escrow account is established before consummation for payment of property taxes and premiums for mortgage-related insurance required by the creditor, such as insurance against loss of or damage to property, or against liability arising out of the ownership or use of the property, or insurance protecting the creditor against the consumer’s default or other credit loss. For purposes of this paragraph (b), the term “escrow account” has the same meaning as under Regulation X (12 CFR 1024.17(b)), as amended.
Consumer is a cardholder or natural person to whom consumer credit is offered or extended.
From what you’ve stated it sound like the consumer’s principal dwelling is not securing the loan (land only is securing the loan) and the mother is not a co-applicant/consumer so the fact that her principal dwelling is being taken as collateral would not meet the criteria for requiring escrow. If she is a co-applicant (meets definition of consumer), then I would say that, yes, you would need to escrow.
If I’ve misunderstood the circumstances please let me know. Hope this helps.
Another question not using a lot, but father’s house and land.
On a consumer purpose loan to John and Jane Doe, that is secured by John Doe’s father, Bob Doe’s primary residence, would the loan need to be checked for HPML?
Per 1026.35(b) the loan is a higher-priced mortgage loan secured by a first lien on a consumer’s principal dwelling, but looking at the definition 1026.2(a)(11)(1) for consumer it says: Guarantors, endorsers, and sureties are not generally consumers for purposes of the regulation, but they may be entitled to rescind under certain circumstances and they may have certain rights if they are obligated on credit card plans.
We know this loan will need the right to rescind, but are we required to escrow if the loan is HPML?Thanks for the question! If it isn’t the consumer’s principal dwelling I don’t think it meets the requirement. With that said, this has always been an debated area. I’ll ask Jack what he sees from other banks as the industry standard practice or if he’s heard any examiners’ take on this.
The question is determined by whether Bob Doe is a consumer or not. You are correct that Bob is not a consumer if serving as a guarantor, endorser, and surety. Bob would be a consumer if serving as a joint applicant. If Bob’s sole role is to provide his home as collateral then he is not a consumer and the loan does not need an escrow.
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