RESPA and Establishing an Escrow Account for an Existing Loan

Issue/Inquiry

Customers have contacted the Bank regarding their residential mortgage, which closed last year.  They are requesting that the Bank begin escrowing for their taxes.  Prior to January of 2018, the Bank was not escrowing for taxes.  Are there any regulatory implications or requirements if it was to begin escrowing for this customers taxes at this time?

Response Detail

The Bank should review the existing loan documentation to determine what it provides for with respect to an escrow account, and modify the documentation as necessary. An initial escrow account statement must be issued within 45 days of the establishment of the escrow account, based on an escrow account analysis for the escrow account computational year.

Response Summary

The Bank should review its loan documentation to determine whether any provision was made for an escrow account. If it was not, then the loan documentation should be modified to provide for an escrow account and an escrow agreement executed. If it was, but the provision does not conform to the Bank’s current practice, then the documentation should also be modified and an escrow agreement executed. In this regard, the Bank should consult with outside legal counsel.

With respect to the establishment of an escrow account for an existing loan, Regulation X, which implements the Real Estate Settlement and Procedures Act (“RESPA”) requires the mortgage loan servicer to submit an initial escrow account statement to the borrower within 45 calendar days of the date of the establishment of the escrow account. 12 CFR §1024.17(g)(2).

An “initial escrow account statement” discloses the amount of the borrower’s monthly mortgage payment and the portion of the monthly payment going into the escrow account. It must itemize the estimated taxes, insurance premiums, and other charges that the servicer reasonably anticipates will be paid from the escrow account during the escrow account computation year and the anticipated disbursement dates for those charges. The initial escrow account statement must also include the amount selected by the servicer as a cushion. 12 CFR §1024.17(b),(g)(1)(i).

The format for the initial escrow account statement is set forth in the Public Guidance Documents titled “Initial Escrow Account Disclosure Statement – Format,” which may be obtained from the Bureau of Consumer Financial Protection.  12 CFR §1024.17(h)(1).

The “escrow account computational year” is the period the servicer has selected for the escrow account, beginning with the date of the first payment. The cushion is limited to one-sixth of the estimated total payments from the account. 12 CFR §1024.17(b),(c)(1)(ii).

In order to prepare the initial escrow account statement, the servicer must conduct an escrow account analysis to determine the amount the borrower must deposit into the escrow account and the amount of the borrower’s periodic payments. The escrow account analysis is based on an estimate of the amount of escrow account items to be disbursed. If the servicer knows the charge for an escrow item for the next computation year, the servicer shall use that amount in estimating disbursement amounts. If the charge is unknown to the servicer, the servicer may base the estimate on the preceding year’s charge, or the preceding year’s charge as modified by the most recent year’s change in the Consumer Price Index. 12 CFR §1024.17(h)(2),(7).

In this case, the itemized escrow item in the initial escrow account statement would be taxes. The Bank should obtain the most recent tax bill for the property in question and base the estimate on the amount detailed in the bill.  A cushion in an amount equal to two months’ taxes (i.e., one-sixth of the estimated total payments) can be established.

Thereafter, the Bank will perform an escrow account analysis for each escrow account computational year and issue and an annual escrow account statement within 30 days of the completion of the computational year. 12 CFR §1024.17(i).

 

This entry was posted on Monday, October 1st, 2018 at 6:00 am.