We frequently waive our mortgage borrower's requirement for monthly escrow of taxes and insurance. Is there any federal regulatory requirement that we disclose to the borrower the implications of not escrowing?

Any guidance is appreciated.

None I'm aware of.

Thanks Dan. Neither am I but our outside QC auditor is listing it as an exception on loans we waive escrow. Guess I need to dig into deeper with them! Probably a trainee auditor!

I guess it could possibly be a state issue, but it would not be one in IN.

If they have a cite, please share it.

The standard FNMA/FHLMC mortgages have information in them regarding escrows, and both the lenders and borrowers responsibilities.

I agree with Dan-I am not aware of any federal requirements for this. We created an internal escrow waiver form, just to reinforce our and the borrowers responsibilities.

I would see the waiver of escrow requirements as more of a portfolio management issue than a regulatory compliance issue (assuming proper notifications have been given). We used to allow certain mortgagors to pay their own taxes directly to the collectors, and our outside auditor took exception to that, based on the concern that we would not be able to make sure taxes were paid on time, and so there was a greater risk of a tax lien than if we paid the taxes via escrow accounts.

Now the board will not allow us to waive escrow on any first mortgage loans.

We just had our external auditor site us for not disclosing the effects of not escrowing on loans that we did escrow! We aske them to please provide the regulation & sitation that requires this.

We do provide an Escrow Waiver notice on loans that the borrower opts to not have escrow though. I think most lenders do.

From the auditor:
Fannie Mae Announcement 04-06
"We encourage lenders to provide all borrowers with a timely, clearly written disclosure that advises them of the implications of not establishing an escrow account, particularly:
- informing borrowers of any applicable fees associated with the waiver of escrow;
- advising borrowers that they are responsible for personally and directly paying the non-escrowed items, in addition to paying the mortgage loan payment; and
- explaining the consequences of failure to pay non-escrowed items, including the requirement for lender placement of insurance and the potentially higher cost (including any potential commission payments to the lender) and/or reduced coverage for borrowers of lender-paid insurance." policies apply to all loans closed on or after 1/1/05.

What are our options, can we still make a business decision to not provide the waiver of escrow notice on loans that aren't waiving it? This is just a recommendation, right?

I realize the last post on this was from 2005, but the topic and subject line are appropriate...

Aside from mandatory Flood and HPML escrows, is there any prohibition or fair lending concern with requiring escrows for consumer mortgage loans but exemptions for certain high-net-worth borrowers?

Basically, I can make a safe argument that a borrower with X net worth is more than capable of covering their escrows on their own. Maybe even tie a credit score and LTV component to make it a three-tier test?

Thanks

Any time you condition the approval of a loan based on a certain condition (in this case required escrows when they are not mandatory), you have fair lending risks. Whatever criteria you select, you should make sure it is not applied in a manner that represents a disparate impact.

Thanks Randy. Keeping in line with what you've said- this would still be allowed as long as we developed the business reasoning behind it and stuck to the standard?

Obviously anything that tripped Flood or HPML would have to require escrows, regardless of the rule.

To add, I think it's more of a disparate impact to NOT require escrows. I think we set borrowers up for failure, particularly with regard to first time buyers and those with less than par credit quality.

Well, if you require escrows for all of the minority applicants because they do not meet some criteria you set but all the rich white guys do not have to have an escrow account was more of what I was driving at. You just have to have your business necessity argument in order if questioned.

Understood. May be something I run past my EIC to get it on record.

Appreciate your insight.