Last week we went “Back to the Basics” and discussed escrow accounts. Specifically, we covered the rules that determine when the lender must establish an escrow account to ensure funds are set aside for the payment of property expenses such as taxes, insurance, and other items in connection with a federally related mortgage loan covered by the Real Estate Settlement Procedures Act (RESPA). In case you missed it, you can find the previous article using the following link if you are a Temenos Compliance Advisory customer –
This week, we’re circling back to escrow requirements; however, we’re going to discuss the very specific rules that a lender must follow in establishing and servicing the escrow account. The escrow account rules in Regulation X (RESPA) (12 CFR Part 1024.17) govern all aspects of an escrow account established for a covered loan. They limit the amount the borrower may be required to deposit into the account when it is established, the amount that the borrower may be required to deposit into the account on a periodic basis, and the reporting and escrow analysis that the lender must provide to the borrower at least annually. The regulation also establishes the rights and obligations of a lender when there is a surplus, a shortage, or a deficiency in an escrow account.
The analysis is the accounting that a servicer conducts in the form of a trial running balance for an escrow account to:
- Determine the appropriate target balances;
- Compute the borrower’s monthly payments for the next escrow account computation year and any deposits needed to establish or maintain the account; and
- Determine whether a shortage, surplus, or deficiency exists.
An escrow account analysis must be performed before an escrow account is established and at least annually thereafter. A servicer may perform an escrow analysis at any time that it chooses, provided that an escrow analysis must be performed no later than one year after the most recent analysis.
The first step in an escrow analysis is to prepare what the regulation refers to as a trial running balance. The trial running balance is a forecast analysis of what the account will look like during each month of the next year, beginning with the first month that a payment will be made into the escrow and assumes no initial deposit into the escrow. For a more detailed description of the escrow analysis, along with a hypothetical example of a trial running balance in connection with the escrow analysis, refer to our compliance manual chapter using the following link – RESPA: Escrow.
At the time of an escrow analysis, if the borrower is not more than thirty days past due and there is a surplus in the account of $50 or more, within 30 days of the analysis, the lender must return the surplus amount to the borrower. A surplus is the amount by which a current account balance exceeds the target balance at the time of an escrow analysis. The lender may not credit the surplus to future escrow payments to the borrower’s next monthly payment, reduce the principal balance or use it to offset any other outstanding fees, debt, etc., the borrower may have with the institution. The surplus amount must be returned to the borrower. However, if the surplus is less than $50, the lender may either return it to the borrower or credit the amount to future escrow payments. If the borrower is delinquent at the time of the analysis, the lender may hold the surplus in the escrow account, but it may not be applied to the delinquency on the loan without the borrower’s consent.
If there is a shortage in the escrow account at the time of an escrow analysis, the lender may always allow the shortage to continue. Alternatively, the lender may require the borrower to repay the shortage either in a lump sum or over the next twelve months. If the shortage is less than one month’s payment to the escrow account, the lender may require that the shortage be repaid in 30 days.
If there is a deficiency in the account at the time of an escrow analysis, the lender may always allow the deficiency to continue; the lender may require the borrower to repay the deficiency in two equal payments. If the amount of the deficiency is less than one month’s payment to the escrow account, the servicer may require the borrower to repay the deficiency in one payment. However, if the deficiency is greater than one monthly payment, the servicer may allow the borrower to repay the deficiency in two or more payments. If, at the time of the analysis, the borrower is more than 30 days past due, the lender may also collect the deficiency in accordance with the terms of the mortgage or deed of trust. In almost all cases where there is a deficiency, there is also a shortage. The deficiency and the shortage collections must be calculated separately pursuant to their individual rules.
Within 45 days of establishing an escrow account, the lender must provide the borrower with an initial escrow account statement that must include the following –
- The amount of the borrower’s monthly mortgage payment;
- The portion of the monthly mortgage payment that is paid into the escrow account;
- An itemization of the payments anticipated to be paid from the escrow account and each anticipated payment date.
- The amount of the cushion selected by the lender; and
- A projected trial running balance for the account for the next 12 months.
As I mentioned previously, at least annually and no later than 30 days before the completion of the previous escrow computation year, a lender must provide the borrower with an annual escrow account statement, which must include, at a minimum, the following –
- An account history reflecting the activity in the account since the date of the last account history provided to the borrower.
- A projection of activity in the account for the following year;
- The amount of the borrower’s monthly mortgage payment for the next account year;
- The portion of the mortgage payment that will be paid into escrow
- The total amount paid into the escrow during the prior computation year;
- The amount paid from the escrow during the prior computation year, identifying the purpose of each amount paid;
- The balance in the escrow account at the end of the period;
- An explanation of how any surplus is being handled by the lender;
- An explanation of how any shortage or deficiency is to be paid by the borrower; and
- If applicable, the reason(s) why the estimated low monthly balance was not reached.
If the loan is more than 30 days past due, in foreclosure, or the borrower has declared bankruptcy, the servicer is not required to provide an annual statement. If, however, the delinquency is cured or the loan is reinstated, the servicer, within 90 days, must provide a history of the account since the date of the most recent account history provided to the borrower. Additionally, a lender may analyze an escrow account at any time that it elects to do so, or even if a borrower requests one, and thereby change the escrow account computation year. The content of a short-year statement is the same as that of an annual statement.
If the servicing of a loan is transferred, the transferor (the old servicer) must provide the borrower a history of the account from the date of the last account history within 60 days of the effective date of the transfer. Similarly, if a loan is paid off during the escrow account computation year, the servicer must provide the borrower a history of the account from the date of the prior history through the date of the loan payoff within 60 days of receiving the payoff funds. However, any surplus due from the escrow account must be provided to the borrower within 30 days of completing the analysis.
If you have any questions about when an escrow account must be established or what you must consider in establishing and servicing an escrow account, don’t hesitate to reach out to one of our expert advisors through a consultation request. As always, we are here to help relieve the burden of compliance from your institution and thank you from everyone here on the Temenos Compliance Team for being a member of our service.
*The content of this article was obtained from the following resources –
- Temenos Compliance Manual Chapter – RESPA (Escrow)
- Regulation X (RESPA) Section 12 CFR 1024.17