The following is contributed by our Hugh Page of FM Lending. As always, Hugh, thank you for your insight!
Real Estate Settlement Procedures Act (RESPA) — Escrow Account
Escrow accounts are regulated under Section 10 of the Real Estate Settlement Procedures Act (RESPA). It 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.
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 insurance. HUD regulations only limit the maximum amount that a lender can require a borrower to maintain in an account if it is required.
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 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.
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.
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. For instance, the insurance premium you pay on your home may have gone up or down (we wish), or your tax bill has changed. In either case the escrow account me be changed to make sure the correct amount is collected. The servicer may have 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.
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.
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. 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.
As always, consult the Mortgage Professionals at FM Lending Services for assistance.