We originate construction to perm loans as one-step products and establish escrows if they are HPML at time of origination, which would be at the beginning of the construction period.

If the borrower exercises the float down option at the end of the construction period (beginning of permanent phase) and the reduced rate makes the transaction no longer an HPML, can we cancel the escrow requirement?

According to1026.35(b)(1), only the permanent phase is subject to the escrow requirement. So, should our standard procedure be to test for HPML and establish escrow (if applicable) at the end of the construction period? It would be more difficult from an operational standpoint, since the transaction is a one-time close.

When you float down, likely that is being done with a modification that does not usually rise to the level of a refinance under 1026.20(a), then as such it is not a new transaction. If it is a true refinance, then yes, that would be possible. Beginning the escrow account at the start of construction loan is a little unusual as there is not much to escrow for at that point.