A first-lien higher-priced mortgage of $285,000 on a principal dwelling closes with no escrow account. The APR runs 2.1 points above the average prime offer rate and the lender meets no small-creditor exemption. Assuming no other escrow exemption applies and the loan remains outstanding, does closing without the required escrow account comply with the HPML rule?
Correct Answer
C) Non-compliant: escrow is required, and for at least the first 5 years
C. Closing without the required escrow account is non-compliant. The stem establishes a covered first-lien HPML with no applicable exemption. The account must be established before consummation. The outstanding-loan assumption makes the five-year minimum relevant. Scope and exceptions: Five years does not mean automatic cancellation: consumer-request cancellation also has balance and payment-status conditions. Termination of the debt is a separate basis. Source: 12 CFR 1026.35(b)(1)–(3) — https://www.consumerfinance.gov/rules-policy/regulations/1026/35/
Why This Is the Correct Answer
C. Closing without the required escrow account is non-compliant. The stem establishes a covered first-lien HPML with no applicable exemption. The account must be established before consummation. The outstanding-loan assumption makes the five-year minimum relevant. Scope and exceptions: Five years does not mean automatic cancellation: consumer-request cancellation also has balance and payment-status conditions. Termination of the debt is a separate basis.
Why the Other Options Are Wrong
Option A: Non-compliant, but the account may be opened within 12 months after
Opening it 12 months afterward does not meet the pre-consummation requirement.
Option B: Compliant, provided the borrower signed a waiver of escrow at closing
A borrower waiver cannot create an exemption the rule does not provide.
Option D: Compliant, since escrow is required only on government-backed loans
The requirement is not limited to government-backed loans.
Exam Tip
Separate the obligation to establish escrow from the conditions for later cancellation.
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