SECTION 10: ESCROW ACCOUNTS

RESPA and Escrow Accounts in General

Section 10 of the Real Estate Settlement Procedures Act (RESPA) limits the amount of money a lender may require the borrower to hold in an escrow account for payment of taxes, insurance, etc. RESPA also requires the lender to provide initial and annual escrow account statements. The newest escrow account regulations became effective in October 1997.

What is covered under RESPA

Does RESPA require borrowers to maintain an escrow account?

NO. It is the lender's decision whether the borrower must maintain an escrow account for the purpose of paying taxes and other items. The HUD regulations only limit the maximum amount that a lender can require a borrower to maintain in an account.

About Escrow Account Cushions

Does RESPA require lenders to maintain a cushion?

NO. The RESPA statute and regulations do not require the lender to maintain a cushion. However, since 1976 the RESPA statute has allowed lenders to maintain a cushion equal to one-sixth of the total amount of items paid out of the account, or approximately two months of escrow payments. If state law or mortgage documents allow for a lesser amount, the lesser amount prevails.

The new accounting method generally requires borrowers to maintain lesser amount in the account than the single-item method predominately used by lenders. However, many lenders have recently increased the escrow account cushion to the maximum allowed by law.

The recent regulations require lenders to reduce the size of the cushion in some accounts. Unfortunately, to avoid customer disapproval, some lenders may be giving their customers the impression that the HUD regulations require them to make this increase. This is a false impression. The lender, not HUD, has chosen to increase the cushion.

Can HUD require lenders to pay interest on escrow accounts?

NO. In 1992 and 1993, legislation was introduced in Congress that would have required lenders to pay interest on escrow account balances, but it never passed. Some states do require interest to be paid on escrow account funds, but many do not.

Figuring Escrow Accounts

How do I figure how much money the lender is allowed to require in my escrow account?

HUD cannot figure out your own escrow account cushion and payments. Please use the following steps and example to help you estimate the amount of money you may be required to put into your own escrow account, either a new or existing account, under aggregate accounting:

1. List all the payment amounts for items that will be paid out of your escrow account, and when paid, for the next 12 months (e.g., taxes- $1200 -- $500 paid July 25 and $700 paid December 10; hazard insurance -- $360 paid September 20).

   [If you have a payment like flood insurance, which is paid every 3 years, you must project a trial balance over that 3-year period.]

    

2. Divide this total amount by 12 monthly payments ($1560 divided by 12 = $130).

    

3. Create a trial running balance for the next 12 months listing all payments to the escrow account and all payments out of the account, when these items are paid.

    

4. Increase all the monthly balances to bring the lowest point in the account (December -$780) up to 0.

    

   pmt		dis	3) bal	4) bal
   Jun	-	-	0	780
   Jul	130	500	-370	410
   Aug	130	0	-240	540
   Sep	130	360	-470	310
   Oct	130	0	-340	440
   Nov	130	0	-210	570
   Dec	130	700	* -780	* 0
   Jan	130	0	-650	130
   Feb	130	0	-520	260
   Mar	130	0	-390	390
   Apr	130	0	-260	520
   May	130	0	-130	650
   Jun	130	0	0	780

   Add any cushion your lender requires to the monthly balances. The cushion may be a maximum of 1/6 of the total escrow charges (1/6 of $1560 = $260).
    

    

   pmt		dis	bal
   Jun	-	-	1040
   Jul	130	500	670
   Aug	130	0	800
   Sep	130	360	570
   Oct	130	0	700
   Nov	130	0	830
   DEC	130	700	* 260
   Jan	130	0	390
   Feb	130	0	520
   Mar	130	0	650
   APR	130	300	780
   May	130	0	910
   Jun	130	0	1040

    

In this example, $1040 is the maximum amount the lender should require in the account. The account should fall to the cushion at least once during the year. In this example, it is in December ($260).

New Accounts -- In this example, if you settled May 15, and the first payment was due in July, $1040 would be the maximum amount you should be required to place in an escrow account. If your lender requires less than the maximum cushion, the amount would be less.

Existing Aggregate Accounts -- In this example, during escrow analysis, the lender would compare the required amount of $1040 to the actual balance in your account in June. For example:

If your balance is $1076, there is a surplus of $36. Your lender may choose to apply any surplus less than $50 to future payments, reducing your monthly escrow payment to $127, or may choose to return the surplus to you.

If your balance is $1090, there is a surplus of $50. The lender must return any surplus of $50 or more to you within 30 days of the analysis.

If your balance was $940, there is a shortage of $100. This amount is less than one month's escrow payment and the lender may ask you to pay this amount within 30 day or may spread it out over a year.

If your balance was $800, there is a shortage of $240. The lender must spread the collection over at least 12 months. If the lender spreads the shortage over 12 months, your monthly escrow payment would increase to $150.

If you have a deficiency in your account (where the lender has to use his own funds to pay a bill), you may have to reimburse the lender sooner than over 12 months. If the deficiency is less than one monthly escrow payment, you may have to repay the lender in 30 days. If the deficiency is more than or equal to one monthly escrow payment, the lender may require you to repay the amount over 2-12 months.

Variations in Escrow Accounts and Payments

My escrow account payments went up, rather than down. Why?

There could be a couple of reasons why your servicer is charging more for your escrow account. First, your bills may have gone up and the account changed to reflect that. Or, the servicer has changed the amount of cushion to the maximum amount allowed by RESPA. Check your statement from the servicer. You may also want to check your loan documents to figure out what is the appropriate cushion. If the mortgage loan documents are silent on the amount of the cushion or pre-accrual practices, then the RESPA "two month" limits apply, unless state law provides for a lower amount.

Disbursement Date

What is the disbursement date for paying escrow account items?

The disbursement date means the date on which the lender actually pays an escrow item from the escrow account. However, the lender must pay the items in a timely manner, that is, on or before the deadline to avoid a penalty. This is required as long as the borrower's payment is not more than 30 days overdue. Borrowers should review their annual escrow statement to make certain the lender did not make late payments and charge any penalties to the borrower's account. (See Homeowner Alert)

Dealing with Your Lender or Insurance Company:
Taxes, Insurance, RESPA and Escrow

I got a notice from the county that my lender did not pay my taxes on time and the county is assessing a penalty. Do I have to pay this bill?

Send the bill to the lender. The lender should pay the penalty for failing to pay the taxes on time as long you were current in your mortgage payments. If the lender refuses, you may wish to follow the guidelines for filing a complaint.

Are lenders required to pay taxes on an annual basis if a discount is offered to the consumer?

NO. The Department published a new rule in the Federal Register in January 1998. The rule clarifies what a lender should do when a taxing jurisdiction offers a choice of payment on an installment basis or an annual basis. If there is a discount to the consumer when disbursing on an annual basis or there is an additional charge for disbursing on an installment basis, the lender may disburse on an annual basis. Otherwise, the lender should disburse tax payments on an installment basis. The borrower and the lender may mutually agree to another disbursement basis or date. The Department encourages lenders to follow the preference of the borrower.

What steps should I take if the lender does not pay my hazard insurance on time or at all and my insurance is canceled?

Lenders are required by Section 6 to make escrow account disbursements on time. If a lender fails to do so, a borrower may bring a private law suit under this Section. Therefore, if you incur any damages due to the lender's negligence, you may wish to consult an attorney.

You should also contact your lender immediately and send a copy of the bill. Some lenders list a special address and/or FAX number for insurance and tax bills. Keep checking with the insurance company to make certain the bill is paid. You may wish to pay the insurance company directly to avoid cancellation of your policy and then seek a refund from your lender. Keep copies of all your correspondence and payments. If you incur any damages due to the lender's negligence, you may wish to consult an attorney.

I got a notice that my hazard insurance has been canceled. My lender force-placed hazard insurance with a different company and it costs a lot more. Can a lender do this?

As long as your mortgage payment is not more than 30 days late, Section 6 of RESPA requires the lender to make escrow payments, for taxes, insurance, etc., in a timely manner. You should write to your lender and complain. If your lender does not refund the difference or otherwise resolve your complaint satisfactorily, you may wish to file a complaint with HUD or the Consumer Protection Office of your State Attorney General's Office. You may also wish to consult an attorney.

What steps should I take if I think the lender is requiring too much money in my escrow account?

First, figure out the maximum amount RESPA allows to be required in your escrow account from the example. If you still believe your lender is requiring too much money, you should contact your lender for an explanation.

Section 6 of RESPA provides that borrowers may make a "qualified written request" to the lender concerning the servicing of their loan account. The request should not be included with the monthly mortgage payment. The lender must acknowledge the complaint within 20 business days and must resolve the complaint within 60 business days. If you do not get a satisfactory answer from the lender, you may wish to file a complaint with HUD. You should continue to make your mortgage payment during this time.