RESPA and Escrow Accounts

The Real Estate Settlement Procedures Act (RESPA) places limits on how much money a lender can mandate a borrower to keep in an escrow account for paying taxes and insurance. The act also requires the lender to present the borrower with initial and annual escrow statements.

RESPA does not require borrowers to have an escrow account. The lender may choose to have the borrower maintain such an account, but the lender cannot require the borrower to hold an amount greater than the limit imposed by HUD regulations.

About Escrow Account Cushions

Likewise, RESPA does not mandate an escrow account cushion for lenders. However, they are permitted a cushion worth one-sixth of all items paid out of the account OR about two months in escrow payments — local laws or certain mortgage documents may set the cushion at the lesser of these two amounts.

In general, borrowers must keep a lesser amount in their account than the single-item method preferred by lenders. Nevertheless, most lenders have elected to increase the cushion to the highest amount that the law permits.

Lenders must comply with recent HUD regulations, which require them to shrink the cushion size for some accounts. Customers should be aware, however, that some lenders have created the false impression that they are required to increase the cushion to the maximum allowed limit when this is in fact their own decision, not HUD’s.

Interest and Escrow Accounts

Lenders are not required by HUD to pay interest on escrow accounts. This would have been changed in 1992 by legislation in Congress, but the bill never passed. Only a few states have interest payment requirements for escrow accounts in effect.

Figuring Escrow Accounts

If you want to determine what amount of money your lender can legally require you to have in an escrow account, you can make your own estimate using the steps and examples below.

First, list the amounts of all the items that are to be paid out of your account, and when they are to be paid, over the next 12 months (e.g. taxes = $1,600 — $900 paid June 5 / $700 paid December 2; hazard insurance = $530 paid July 27; TOTAL = $2,130).

(If you have a payment that occurs every three years, such as a flood insurance payment, you will have to estimate a trial balance for a period of three years.)

Next, divide this total by 12 monthly payments: $2,130 / 12 = $177.50.

Now make up a running balance for the following 12 months, listing all the payments into and out of the escrow account, and noting when they are paid.

Raise the monthly balance for every month so that the lowest point in the account is readjusted to $0. (In this case, it would be in December = -$1,065).

In this case, the maximum amount that the lender should require in the escrow account is $1,420. At least once over the year, the account should fall to the cushion, which in this example would occur in December ($355).

Therefore, if you were to settle on May 15 with the first payment due in July, $1,420 should be the maximum amount that the lender mandates to go in the escrow account. The amount would be lower if the lender requires an amount smaller than the maximum cushion.

Existing Aggregate Accounts

Continuing with this example, the lender would make a comparison of the required $1,420 with the actual account balance in June during the escrow analysis. Thus, if the balance is $1,466, the account has a surplus of $46. For surplus amounts less than $50, your lender may choose to apply these toward future payments, or may choose to return them to you.

If the balance is $1,475, the account has a surplus of $55. Surplus amounts greater than $50 must be returned to you by the lender within 30 days of analysis.

If the balance is $1,320, the account has a shortage of $100. Since this amount is less than one month’s escrow payment, the lender may require you to pay the amount within 30 days or spread it out over 12 months.

If the balance is $1,200, the account has a shortage of $220, which the lender must spread over a period of at least 12 months. If it is paid over the course of one year, your monthly escrow payment would rise to $196.

In the case of an account deficiency where the lender must pay a bill out of their own funds, you may be given 12 months to reimburse the lender. This reimbursement period may be as short as one month if the deficiency is less than a single monthly escrow payment.

Variations in Escrow Accounts

Your escrow account payments may increase rather than decrease for several reasons. These include a rise in the bills you are paying and an increase in the cushion amount to the maximum allowed by RESPA. To confirm the increase, you should check the statements your servicer sent, and look at your loan documents to see what the cushion should be. If you can’t find anything on the cushion in the loan documents, the amount is subject to RESPA’s two-month limits and any state laws that call for a lower amount.

Disbursement Date

The date on which the lender pays an escrow item from the account is considered a disbursement date. To avoid penalties that would affect your account, this date must fall on or before the deadline. Check your annual escrow statements to make sure the lender has not made any late payments and no penalties have been charged to your account.

Tips for Dealing with Lenders

 

My county informed me that my account is being penalized because my lender didn’t pay my taxes before the deadline. Am I responsible for this penalty?

Send any such notice to your lender. If you were current in your mortgage payments, the lender is responsible for paying taxes in a timely manner. If the lender refuses to pay, you are entitled to file a formal complaint.

The lender may follow an annual rather than monthly disbursement plan when a discount is offered to the consumer. However, an annual disbursement is not required by law. Rather, HUD encourages the lender to adhere to the borrower’s preference, whether annual payment or in installments.

Section 6 of RESPA requires lenders to make timely escrow disbursements. Lenders who fail to do so may be subject to private lawsuits by the borrower. In such a case, be prepared and have all of your documentation on hand. Send a copy of the bill to your lender and keep checking with the insurance company until the bill has been paid. If your policy is threatened by cancellation, you may choose to pay the insurance company and then seek reimbursement from your lender. You may also wish to consult with an attorney if the lender’s negligence causes you any harm.

What happens if the lender cancels my hazard insurance and force-places it with a different company, resulting in greater costs?

As long as you are not past due on your mortgage payment, the lender must continue to make escrow payments on time. If your insurance is force-placed, contact your lender and ask that they refund the higher expenses. If they refuse to resolve your complaint to your satisfaction, you may consider filing a complaint with HUD or your state’s Office of Consumer Protection. An attorney consultation can also help you to take the proper action.

How should I handle a lender who I feel requires an escrow amount that is too high?

As explained earlier, you should first make yourself aware of the maximum amount permitted by RESPA. After you have done this, if you still find your lender’s requirement to be too much, contact them directly and ask them to explain their policy.

Under Section 6 of RESPA, you are allowed to submit to the lender a “qualified written request” regarding the servicing of your loan account. You should send this request separately from your monthly mortgage payment. After receiving the complaint, the lender has 20 business days to acknowledge it and 60 business days to resolve it, either by correcting the account or stating the reasons for their position. You may file a complaint with HUD if your request is not satisfied by the lender, but nevertheless, continue making your regular mortgage payments on time during this conflict.