HPML Refinance: Escrow Waiver, Drive-By Appraisal, and a Three-Month Cushion
A borrower is refinancing her primary residence with a $520,000 first lien. The rate was set Tuesday, the APR is 7.85%, and the comparable average prime offer rate for that date is 6.20%. She has asked to waive escrow because she wants "the lowest possible payment," and her DTI is tight enough that the escrow amount matters to her. The property is in a county that qualifies as rural or underserved, but your lender is a large institution with well over $2 billion in assets and thousands of first liens per year. When the appraisal came back, it was an exterior-only report because the occupant did not answer the door; the appraisal management company says it can be upgraded "if you really need it." The settlement agent has also prepared an initial escrow deposit based on three months of payments: annual taxes are $7,200 and the hazard insurance premium is $2,400.
1. Is this a higher-priced mortgage loan, and can the escrow requirement be waived?
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HPML determination. Compare the APR to the average prime offer rate for a comparable transaction as of the date the rate was set. 7.85% − 6.20% = 1.65 percentage points, which exceeds the 1.50-point threshold for a first lien. The loan is a higher-priced mortgage loan under 12 C.F.R. § 1026.35.
Escrow. An HPML secured by a first lien on a principal dwelling requires an escrow account for taxes and insurance unless a specific exemption applies. The usual exemptions are reverse mortgages, business-purpose loans, bridge loans of 12 months or less, and the small-creditor rural or underserved exemption. That last one is unavailable here: it requires asset and volume limits that a large institution exceeds, plus origination activity in the county in the prior year. The fact that the county is rural does not help a large lender.
What she can be told. She cannot waive escrow at closing, and the loan officer should not suggest a workaround such as an unaffiliated escrow arrangement to keep the loan out of the rule. On a later date, after five years, she may request cancellation under the servicer's procedures if conditions are met, but that is not a closing option. The honest answer is that escrow is mandatory on this loan, and the payment quote must include it. If she cannot support the escrowed payment, the file needs a smaller loan, less debt, or a co-borrower, not a waiver.
2. What must be done about the exterior-only appraisal?
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It cannot be used. For an HPML, the creditor must obtain a written appraisal performed by a certified or licensed appraiser who conducts a physical visit of the interior of the property. An exterior-only or drive-by report does not satisfy that requirement, regardless of the value it produced or whether automated underwriting would accept it.
Order an interior inspection and appraisal. If the occupant cannot be reached, reschedule through the borrower, the tenant, or the listing agent as appropriate, and do not close until the interior visit is completed and the report is in the file. The appraisal management company's offer to upgrade "if you really need it" is not optional: you do need it. Keep the documentation showing the interior visit occurred, because this is an examined requirement and investors will look for it.
There is a secondary risk worth flagging. If the property was acquired by the seller within the past 90 days at a lower price, an HPML may require a second appraisal, and the file should be checked for that before scheduling. Tell the borrower plainly that the closing date may move by several days; substituting a false or incomplete appraisal is not an option.
3. Is the proposed three-month escrow deposit permissible, and what is the correct maximum?
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No. Under 12 C.F.R. § 1024.17, the servicer may maintain a cushion of no more than one-sixth of the estimated total annual payments, which is two months. Total annual disbursements here are $7,200 in taxes plus $2,400 in insurance, or $9,600, which is $800 per month. The maximum cushion is therefore $1,600, and the most that can be collected at closing is the cushion plus whatever is needed to bring the account to its target balance for the disbursement schedule, not an arbitrary three months.
The settlement agent's $2,400 deposit (three months) exceeds the permissible cushion by about $800, assuming no additional amount is justified by the actual bill timing. That overage must be removed and the Closing Disclosure and initial escrow statement corrected before closing. Because the borrower is already stretched, this correction also helps her cash to close.
Explain to her what escrow is: a collection account for taxes and insurance, not a fee, and the monthly amount is the $800 plus any shortage or cushion spread. Give her the corrected figures in writing and reconcile the Closing Disclosure to the settlement agent's worksheet rather than assuming the agent's numbers are right.