Adjusting Escrow Payments

Issue/Question

The Bank wants to know whether it is necessary to adjust escrow account payments for residential mortgage loans when tax payments change, and if so, how can this be done?

Response Summary

It is only necessary to make adjustments at the end of the escrow account computational year. If the Bank wants to make the adjustment sooner, a short-year statement would allow it to establish the beginning date of a new computational year, which would also allow a determination of appropriate target balances reflecting changes in the charges and fees being escrowed for.

Response Detail

When a federally-related mortgage is made and an escrow account will be established, RESPA requires the Bank to provide the borrower with a statement that itemizes the estimated taxes, insurance premiums, and other charges that are reasonably anticipated to be paid from the account during the first 12 months after the escrow account is created [12 CFR §1024.17(g)].

Thereafter, the Bank must provide the borrower with a statement, at least once for each 12-month period, known as an “escrow account computation year.” This annual statement will be based on an escrow account analysis to:

• Determine the appropriate target balances.
• Compute the borrower’s monthly payments for the next escrow account computation year.
• Compute any deposits needed to establish or maintain the account.
• Determine whether shortages, surpluses, or deficiencies exist [12 CFR §§1024.17(d), (f)(1)].

There is no requirement to make the adjustment or to notify the borrower of a surplus or deficiency more often, but only to reflect the changes that have occurred in the amounts of the charges and fees being escrowed for.

The annual statement will itemize such factors as:

• The amount of the borrower’s current monthly payment.
• The portion of the monthly payment being placed in the escrow account.
• The total amount paid out of the escrow account during the period for taxes, insurance premiums, and other charges, as separately identified.
• The balance in the escrow account at the conclusion of the period.
• An explanation of how any surplus is being handled.
• An explanation of how any shortage or deficiency is to be paid by the borrower.
• The reasons why the estimated low monthly balance was not reached, if applicable.

This statement would be submitted within 30 days of the completion of the computation year [12 CFR §1024.17(i)].

If the Bank wants to adjust the payments sooner, RESPA also allows what are called “short-year” statements to be issued to end the escrow account computation year and establish the beginning date of the new computation year. An escrow account analysis would be performed just as for the annual statement, but it would reflect a trial balance of the account during the short-year, rather than the 12-month period for the annual statement. The short-year statement would be provided within 60 days of the end of the short-year [12 CFR §1024.17(i)(4)].

A bank must provide a short-year statement:

• When it transfers a loan to a new servicer.
• When a loan is paid off [12 CFR §1024.17(i)(4)(ii),(iii)].

Otherwise, RESPA does not restrict or require the use of the short-year statement, but only describes its effect in establishing the beginning date of the new computation year.

Banks often use short-year statements to bring the escrow account computation year into line with its business cycle. Conceivably, however, a bank could also use it as a way of reflecting changes in charges in payments, rather than waiting for the end of the escrow account computation year to determine the appropriate trial balances and to resolve deficiencies and surpluses.

This entry was posted on Monday, December 1st, 2014 at 7:29 pm.