We are a lender, servicing our portfolio loans, and have a question regarding escrow accounts. We conduct our annual escrow analysis for residential mortgage accounts in September each year. Often, at some point during the escrow computation year, we receive a notice of an increase in taxes or insurance premium. If the increase is $200 or more, we recalculate the escrow, and spread the difference over the remaining months left in that escrow computation year, obviously resulting in an increased monthly mortgage payment for the customer. We do this to prevent a hardship by having a significant shortage in the customer’s escrow account at the time of the next annual analysis.
For example, we conduct the escrow analysis in September 2015. In January 2016, we receive a customer’s insurance renewal that reflects a $350 increase in the annual premium. We then recast the escrow account, beginning with the February 1 payment, so that the customer’s account will be at the estimated cushion by the September 1, 2016 payment.
We provide the customer with written notification of the change in the monthly payment and the reason for the increase. Are the foregoing procedures in compliance with RESPA’s escrow regulations?
While it is commendable that you do not want the customer to suffer a hardship by having a huge shortage at the next annual escrow analysis, the procedures you outline do not appear to be in compliance with the escrow regulations. Under Regulation X, a servicer is required to conduct an annual escrow analysis, which it appears you do, and establish the escrow cushion. The purpose of the escrow cushion is to cover unanticipated disbursements, such as increases in taxes and insurance, or disbursements made before the customer’s payments are available in the account. In your example, if the lender’s paying the additional $350 will result in a negative balance in the escrow account (a deficiency), you must conduct an escrow account analysis to determine the deficiency before seeking repayment of the funds from the customer. [12 CFR 1024(f)(1)(ii)]
If there is a deficiency, you can take one of the following actions:
1. If the deficiency is less than one month’s escrow account payment:
a. Allow the deficiency to exist and do nothing to change it;
b. Require the customer to repay the deficiency within 30 days; or
c. Require the customer to repay the deficiency in 2 or more equal monthly payments.
2. If the deficiency is greater than or equal to one month’s escrow account payment:
a. Allow the deficiency to exist and do nothing to change it; or
b. Require the customer to repay the deficiency in 2 or more equal monthly payments. [12 CFR 1024.17(f)(4)]
It is permissible to conduct an escrow analysis at other times during the 12-month escrow computation year.
However, if you discover a shortage (which appears to be the result in your scenario), you must take one of the following courses of action:
1. If the shortage is less than one month’s escrow account payment:
a. Allow the shortage to exist and do nothing to change it;
b. Require the customer to repay the shortage amount within 30 days; or
c. Require the customer to repay the shortage amount in equal monthly payments over at least a 12-month period.
2. If the shortage is greater than or equal to one month’s escrow account payment:
a. Allow the shortage to exist and do nothing to change it; or
b. Require the customer to repay the shortage in equal monthly payments over at least a 12-month period. [12 CFR 1024.17f(3)]
Another alternative is to issue a “short year” statement, which would enable you to “recast” the escrow payments and establish a different beginning date of the new escrow account computation year. Any shortages would need to be paid as set forth above. [12 CFR 1024.17(i)(4)]
Still another alternative is for the customer to deposit funds in the escrow account in addition to what was calculated for the particular escrow computation year (so, allows for deposit of additional funds to cover the projected shortage), which is what it appears you are trying to do. However, in order to do so, the servicer and customer must “enter into a voluntary agreement” regarding same. The agreement may only cover one escrow accounting period; however, a new voluntary agreement may be entered into after the next escrow analysis is performed. Should you choose this route, it is not enough to merely send the customer a notice informing him of the increased payment. You must obtain the customer’s written voluntary consent to the arrangement. Should the customer fail to consent, then there should be no increase in payment and, at the time of the next escrow analysis, the shortage or deficiency should be treated as outlined above. [12 CFR 1024(f)(2)(iii)]
Joyce Wilkins Pollison
Director/Legal & Regulatory Compliance
Lenders Compliance Group