HPML Escrow Accounts: When They Are Required and When They Can End

A higher-priced mortgage loan (HPML) can trigger a special escrow requirement under Regulation Z. The creditor generally must establish and maintain an escrow account for property taxes and required premiums for mortgage-related insurance when the loan is a covered first lien secured by a consumer’s principal dwelling. This rule is separate from general escrow disclosures and from the rules that govern servicing an escrow account.

The exam issue is usually whether the transaction falls within the rule, whether an exception applies, and how long the account must remain open. Start with the lien position, occupancy, dwelling, and HPML status. A second lien is not covered by this first-lien HPML escrow requirement, though another law, contract, or investor rule may still require escrow.

How to identify an HPML

For a covered transaction, compare the annual percentage rate (APR) with the average prime offer rate (APOR) for a comparable transaction on the rate-set date. The applicable spread depends on lien position and loan type. Do not substitute the note rate, an advertised rate, or the borrower’s credit score for this APR-to-APOR comparison. Consult the current Regulation Z threshold for the transaction.

HPML and HOEPA high-cost mortgage are distinct categories. They have different triggers and protections. A loan can be an HPML without being a HOEPA loan. Do not infer that the HOEPA counseling or fee restrictions apply merely because a loan is higher priced.

Scope and exceptions

The special requirement applies to a first lien secured by the consumer’s principal dwelling. A vacation home or investment property is not the consumer’s principal dwelling for this test. A dwelling can include a house, condominium unit, cooperative unit, or qualifying manufactured home, depending on the facts and the regulatory definition.

Regulation Z provides exceptions for specific creditors and transactions. Examples include certain creditors operating predominantly in rural or underserved areas, creditors meeting limited-origination conditions, certain qualifying balloon-payment loans, construction or temporary financing, reverse mortgages, and specified open-end or cooperative-share transactions. These are conditional exceptions: being a small lender or operating outside a city does not automatically qualify. Verify every element in §1026.35 before relying on one.

A useful review order is: classify the collateral and occupancy; determine lien priority; test APR against APOR; identify the creditor and product; then apply any exception. Document the basis for an exception rather than treating it as an informal judgment.

What the escrow covers

The account covers property taxes and premiums for mortgage-related insurance required by the creditor. The rule does not turn every optional homeowner expense into an escrowed item. Insurance required to protect the creditor’s interest is central; a borrower’s voluntary purchase of an unrelated product is not automatically a required escrow disbursement.

Escrow deposits remain subject to limits. Regulation Z restricts collections to amounts reasonably necessary to pay charges as they come due, taking into account amounts already paid or scheduled and applicable state law. The HPML rule is not permission to collect an unlimited cushion. Other escrow-account statement and servicing requirements may also apply.

The five-year minimum and cancellation conditions

For most covered HPMLs, the creditor must maintain escrow for at least five years after consummation. Five years is a minimum, not an automatic cancellation date. After that point, cancellation generally requires the consumer to request it, the unpaid principal balance to be less than 80 percent of the property’s original value, and the consumer not to be delinquent or in default.

The creditor may also terminate the account when the underlying obligation ends, such as when the loan is paid off. A borrower cannot force cancellation just by reaching the fifth anniversary if the balance test or payment-status condition is not met. The lender evaluates these conditions when the consumer requests cancellation; reaching 80 percent does not itself require an automatic servicing change.

“Original value” generally means the lesser of the purchase contract sales price and the appraisal at consummation for a purchase loan. For a refinance it generally means the appraised value relied on by the creditor at consummation. The current market value is not substituted for this original-value figure, so later appreciation does not rewrite the calculation.

Example

A covered first-lien purchase loan is an HPML, and no exception applies. The borrower asks to cancel escrow four years after closing. The request is too early even if payments are current and the home has appreciated. At year six, the balance is 78 percent of original value and the account is current; the core federal conditions for cancellation are met. The creditor should still check contract, investor, and state requirements before closing the account.

Change one fact: if the balance is 82 percent of original value, the consumer-request pathway is not satisfied, even if a new appraisal shows a large increase in market value. If the borrower is delinquent, the payment-status condition is also unmet.

Exam checklist

Ask: Is this consumer credit secured by a principal dwelling? Is it a first lien? Does APR exceed APOR by the relevant HPML threshold? Does a specific exception apply? If cancellation is requested, has the five-year minimum passed, is the balance below 80 percent of original value, and is the consumer current? Keep the terms distinct: escrow is an account for charges; mortgage insurance is a separate product; HOEPA is a separate mortgage classification.

FAQs

Can escrow be cancelled automatically after five years? No. Five years is the minimum period; a request and the balance and payment-status conditions generally also apply.

Does the 80 percent calculation use current market value? No. It uses original value under Regulation Z’s definition.

Does this special rule cover second liens? The §1026.35(b) requirement is for covered first-lien transactions. Other rules may apply to a second lien.

Is every HPML a HOEPA loan? No. These are separate categories with separate tests.