Notifying Consumers of a Change in Escrow Payments

Issue/Inquiry

The Bank asks what the timing requirements are for notifying borrowers of federally-related mortgage loans regarding a change in payment to an escrow account.

Response Summary

Under the Real Estate Settlement Procedures Act (“RESPA”), changes in payments for federally-related mortgage loans resulting from a change in the escrow payments would generally be 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 annual computational year, meaning that it has to be mailed or hand-delivered to the borrower within that time. The short-year statement must be submitted within 60 days of the end of the short year.

Response Detail

Under RESPA, as implemented by Regulation X, notice of payment adjustments for federally-related mortgage loans are usually made with either an annual statement or a short-year statement when they result from changes in the escrow payments.

A financial institution is required to perform an escrow account analysis at least once for each 12-month period, which is known as an “escrow account computation year.” This is an accounting procedure intended 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 which itemizes 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” meaning the delivery of the statement. “Delivery” signifies placing the statement in the United States mail, first-class, with the 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 sooner, RESPA also allows a “short-year” statement” 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 of the annual statement.

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. Financial institutions often use short-year statements to bring the escrow account computation year into line with its business cycle or to make refunds when a loan is satisfied. Such statements can also be used, however, to reflect changes in payments and determine the appropriate trial balances, as well as to resolve deficiencies and surpluses, rather than waiting for the end of the escrow account computation year in order to do so.

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

 

This entry was posted on Monday, May 16th, 2016 at 3:00 pm.