RESPA and Changing Escrow Account Payments

Issue/Inquiry

The Bank asks, “What are the timing requirements for notifying borrowers of federally-related mortgage loans of a change in loan payments resulting from a change in the escrow?”

Response Summary

Under RESPA, changes in payments for federally-related mortgage loans resulting from a change in escrow payments are generally made with the issuance of an annual statement or a short-year statement. The annual statement must be submitted to the borrower within 30 days of the completion of the annual computational year, meaning that it has to be mailed or hand-delivered to the borrower within that timeframe. The short-year statement must be submitted within 60 days from the end of the short year.

Response Detail

Under the Real Estate Settlement Procedures Act (“RESPA”), as implemented by Regulation X, adjustments in the payments for federally-related mortgage loans resulting from changes in escrow payments would generally be made either with the annual statement or a short-year statement.

A financial institution is required to perform an escrow account analysis at least once for each 12-month period, known as an “escrow account computation year,” in order 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(b).

After conducting the escrow account analysis, the financial institution must provide the borrower with an annual statement itemizing 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. 12 CFR 1024.17(i)

The annual statement must be submitted to the borrower within 30 days of the completion of the computation year. “Submitted” means the delivery of the statement. “Delivery” means the placing of the statement in the United States mail, first-class, postage paid, and addressed to the last known address of the recipient. Hand delivery also constitutes delivery. 12 CFR 1024.17(b),(i).

If the financial institution wants to adjust payments before the end of the computation year, RESPA also allows a “short-year” statement” to be used in ending the escrow account computation year and establishing 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 the trial balance of the account during the short-year, rather than the 12-month period for the annual statement.

RESPA does not require or restrict the use of the short-year statement, but only describes its effect in establishing the beginning date of the new computation year. Though financial institutions often use short-year statements to bring the escrow account computation year into line with its business cycle or when a loan is satisfied prior to maturity, such statements could also be used to give effect to changes in payments, as would be necessary to resolve escrow account deficiencies and surpluses.

The short-year statement would be submitted to the borrower within 60 days from the end of the short-year. 12 CFR 1024.17(i)(4). The term “submission” has the same meaning as it does when used with respect to the annual statement.

This entry was posted on Monday, October 17th, 2016 at 2:00 pm.