RESPA - FAQs About Escrow Accounts
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 Department published escrow account regulations in October 1994, with an effective date of May 1995. The regulations required lenders to adopt the aggregate accounting method for newly established accounts. Lenders have until October 1997, for previously established accounts.
FREQUENTLY ASKED QUESTIONS ABOUT ESCROW ACCOUNTS
Did the new accounting method increase my escrow
payment? NO
The new accounting method generally requires borrowers to maintain a 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.
Did the new regulations establish a new escrow
account cushion? NO
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 lessor amount,
the lessor amount prevails.
Did HUD require lenders to increase the
cushion amount? NO
The new 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 new HUD regulations require them to make this increase.
This is a false impression. The lender, not HUD, has chosen to increase the cushion.
Does RESPA require lenders to maintain a
cushion? NO
Neither the RESPA statute nor regulations require the lender to maintain a
cushion. Furthermore, if state law or the mortgage documents provide for a lesser amount,
the lesser amount prevails.
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.
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.
Are lenders required to pay taxes on an annual
basis if a discount is offered to the consumer? NO
Some lender have interpreted the regulations to require that taxes should be
paid on an annual basis rather than a semi-annual basis, when a discount is available to
the consumer. The Department clarified by comment in the Federal Register on May 9, 1995,
that lenders were permitted (but not required) to make disbursements on an annual basis if
a discount was available.
How do I figure how much money the lender is
allowed to require in my escrow account?
The following steps and example should help you estimate the amount of money
you may be required to put into 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).
- 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 780Add 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
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.
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.
What steps should I take if I think the lender
is requiring too much money in my escrow account?
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. You should continue to make your mortgage
payment during this time.
What steps should I take if the lender does
not pay my hazard insurance on time and my insurance is cancelled?
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.
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.
I think I've been overcharged on my escrow
account. Will HUD figure out my escrow account for me?
No. HUD can't do that for everyone. See the instructions for calculating your
escrow account above.
What is the disbursement date for paying
escrow account items?
The rule states that the disbursement date for an escrow account item is a
date on or before the earlier of either a deadline to take advantage of discounts, if
available, or the deadline to avoid a penalty. [24 CFR 3500.17 (b)] The consumer and
servicer in some cases may agree to an even earlier date than would normally be necessary
to deliver the payment on time, if there are good reasons, such as letting the consumer
get a federal income tax deduction. Date Last
Modified: 9/15/2000
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