RSK.IQ Question of the Week 10/12/15

Refund from Escrow Account


For a loan that closed in June 2015, the Bank sent out the “Tax and Insurance Account Disclosure Statement” for the escrow being taken. The Bank just discovered that it had been requiring the customer to pay $60 a month for more than was necessary.  At the present time, there is a surplus of $400 in the account.

The Bank believes that it is supposed to send the computation on, at least, an annual basis. What would be the proper way to remedy this situation?  Can it send another computation?  And if it does send another one, when does the new computation year begin?

Response Summary

RESPA allows the Bank to perform a “short-year” analysis to make adjustments in target balances and the payments needed to reach them and to identify any surplus. The short-year analysis will also establish a new “escrow account computation year.” If the analysis reveals a surplus greater than $50, the entire surplus must be refunded to the borrower.

Response Detail

Ordinarily, a bank must provide the borrower with an escrow account 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. If the escrow account analysis discloses a surplus, a bank must, within 30 days from the date of the analysis, refund the surplus to the borrower if it is greater than or equal to $50. 12 CFR §§1024.17(i); (f)(2)(i).

If a bank would want to adjust the payments sooner, RESPA 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).

Banks often use short-year statements to bring the escrow account computation year into line with their business cycles. A bank could also use it in the present situation, however, as a way of reflecting changes in payments or to resolve a surplus, rather than waiting for the end of the escrow account computation year.

What the Bank should do in this case is perform an escrow account analysis to determine the appropriate amount of the target balances and the payments to meet them, and identify the amount of the surplus. It will then issue a short-year statement to the borrower, which will establish a new escrow account computational year. If the surplus exceeds $50, it will refund the entire surplus to the borrower, not just the amount that exceeds $50.

This entry was posted on Monday, October 12th, 2015 at 2:00 pm.

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