Table
of Contents
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 additional 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
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
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.
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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:
- 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.]
- Divide
this total amount by 12 monthly payments ($1560 divided by 12
= $130).
- 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.
- 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.
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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.
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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)
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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 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 by correcting
the account or giving a statement of the reasons for its position.
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.
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