A higher-priced first-lien loan closed 3 years ago. The borrower is current and the balance is now 74% of the original value. He asks the servicer to close the escrow account. Assuming the escrow requirement applies and the loan has not been paid off, may the servicer cancel the escrow account at the borrower's request after three years?
Correct Answer
D) Not yet: a request may not come earlier than 5 years after consummation
D. Three years is too early for cancellation at the borrower’s request. Check timing before equity: the request-based cancellation route begins no earlier than five years after consummation. A 74% balance and current payments do not override that waiting period. The loan remains outstanding, so debt termination is not the basis here. Scope and exceptions: Five years alone is also insufficient: request-based cancellation requires the other conditions. Termination of the underlying obligation is a separate route. Source: 12 CFR 1026.35(b)(3) — https://www.consumerfinance.gov/rules-policy/regulations/1026/35/
Why This Is the Correct Answer
D. Three years is too early for cancellation at the borrower’s request. Check timing before equity: the request-based cancellation route begins no earlier than five years after consummation. A 74% balance and current payments do not override that waiting period. The loan remains outstanding, so debt termination is not the basis here. Scope and exceptions: Five years alone is also insufficient: request-based cancellation requires the other conditions. Termination of the underlying obligation is a separate route.
Why the Other Options Are Wrong
Option A: Not yet: the balance must fall under 65% before a request is possible
65% is not the balance threshold in this provision.
Option B: Yes: escrow on a higher-priced loan may be canceled at any time on request
A request alone does not remove the minimum duration.
Option C: Yes: the balance is under 80% of original value and he is current
It considers balance and payment status but misses timing.
Exam Tip
Satisfying one cancellation condition does not satisfy all of them.
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