QUESTION
Our Company offers loans requiring mortgage insurance (MI) but collect
the MI premiums with the monthly mortgage payment, with no upfront MI premiums
collected at closing.
May we collect a cushion to avoid an escrow shortage at the end of the
year?
ANSWER
Bottom Line Up Front: You would not collect a “cushion”
at closing but you may collect an “escrow
deposit” to ensure that the consumer’s mortgage insurance premiums are paid
in a timely manner, ahead of due dates as applicable, to avoid penalty or harm
to the consumer, and to avoid a potential escrow shortage.
A “cushion” or “reserve” should not be confused with
the “escrow deposit” collected at closing. Even though these terms are often
used and understood interchangeably, Regulation X, the implementing regulation of the Real Estate Settlement Procedures
Act (“RESPA”), provides that that in
addition to the escrow deposit, the servicer may charge the borrower a cushion that shall be no
greater than one-sixth of the estimated total annual payments from the escrow
account (i.e., two monthly payments cushion as a maximum allowable reserve). Regulation X defines cushion or reserve as “funds
that a servicer may require a borrower to pay into an escrow account to cover
unanticipated disbursements or disbursements made before the borrower's
payments are available in the account”.
If the escrow
deposit is accurately calculated and collected at closing, the borrower’s
payments will be available in his or her escrow account to cover the premiums
when due. Mortgage premiums disbursed on
a consistent monthly schedule (as described in the question) cannot be
considered “unanticipated” and, therefore, would never be a need to collect a
“cushion” to cover unknown disbursements as allowed with other categories of
escrow payments under Regulation X.
The prepaid
escrow MI deposit would be included on the HUD as with other prepaid escrow
items. For example, the mortgage insurance escrow deposit required would be
entered on Line 1003 of the HUD to reflect the corresponding amount disclosed
on line 9 of the GFE.
The escrow deposit
amount should be the least amount possible to ensure that payments can be made
when due, and at the same time achieving a target balance of zero dollars
remaining at the end of projected escrow year. Of note, the escrow year is
defined under Regulation X as twelve consecutive months, not necessarily twelve
calendar months. If the escrow deposit is accurate at closing, there should be
no need to collect a “cushion” for monthly mortgage insurance premiums.
When MI is
collected upfront at closing, the premium is typically added to the total cash
settlement and financed into the mortgage. In your scenario, the insurance
premium is not a settlement cost to be paid at closing. HUD Line 902 would
indicate “zero” as would the disclosed amount of line 3 of the GFE. The
consumer should understand the difference between MI escrow deposits and
upfront MI premiums.
Final Note
Except for the
advance escrow deposit allowable at closing, no pre-accrual deposits can be
collected during the servicing life of the loan. Servicers may resolve escrow
shortages under annual escrow analysis adjustments. When complying with Regulation
X’s escrow requirements, remember that each of the follow require distinct
compliance procedures:
·
Initial
Escrow Account Analysis [12 CFR 1024.17(c)(2) and (3) and 12 CFR 1024.17(k)]
·
Annual
Escrow Account Statement requirements [12 CFR 1024.17(i)]
·
Shortages,
Surpluses, and Deficiency requirements [12 CFR 1024.17(f)]
Wendy Bernard
Director/Legal & Regulatory Compliance
Lenders Compliance Group
