RESPA and Establishment of an Escrow Account for an Existing Loan

Issue/Inquiry

The Bank does not escrow for real estate taxes on construction loans since the borrower pays the taxes directly to the municipality. Would there be any disclosures needed or issues if the Bank requires the borrower to escrow for real estate taxes as part of a modification of the construction loan to an amortizing schedule of payments?

Response Summary

The Bank could establish an escrow account as a condition of the change in terms. It would conduct an escrow account analysis in order to determine the amount the borrower must deposit into the escrow account, and provide an initial escrow account disclosure statement within 45 days of the establishment of the escrow account.

Response Detail

The Bank can establish an escrow account as a condition of the modification of a loan. The Change in Terms Agreement should provide for an escrow account, and an escrow agreement should be executed. In this regard, the Bank should consult with outside legal counsel as to the appropriate documentation.

When an escrow account is established 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 indicate 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).

Click here for a link which provides the form and an example of its completion.

The escrow account computation 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 expressed in the bill. It can have a cushion in an amount equal to two months’ taxes (i.e., one-sixth of the estimated total payments).

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

This entry was posted on Monday, February 4th, 2019 at 6:00 am.