We have a rather unusual question regarding monthly escrow payments.
As a result of an internal audit, we found out that we had procedural issues with the estimated escrow payments, in that there were inaccuracies which the borrower would not learn about until after the closing, maybe much later.
So, we would like to know what is our risk exposure when the monthly escrow payment estimate is inaccurate until after closing?
The answer is more complicated than it may seem. We will take a brief Regulatory Tour of the so-called Escrow Rule. Then, we’ll discuss what is involved in Estimating Escrows. After that, we'll check out a Case that may provide further understanding. And we'll finish it off with an Observation.
A Regulatory Tour
TILA’s section 129D was added by Dodd-Frank. Generally, the section requires a creditor to establish an escrow account for a consumer credit transaction secured by a first lien on the consumer’s principal dwelling if one of four conditions pertains:
1) federal or state law requires an escrow account;
(2) the loan is made, guaranteed or insured by a state or federal governmental lending or insuring agency;
(3) the loan is not a jumbo mortgage and its APR will not exceed 1.5% plus the average prime offer rate (APOR) or the loan is a jumbo mortgage and its APR exceeds 2.5% plus the APOR; or
(4) a regulation requires an escrow account. TILA § 129D makes clear that it does not prohibit the establishment of escrow accounts for other transactions on terms mutually agreeable to the parties, at the discretion of the lender or servicer in accordance with contractual terms, or pursuant to flood insurance requirements.
Section 129D also requires the creditor to disclose for a mortgage loan secured by a first lien on the principal dwelling of a consumer
"the estimated monthly amount payable to be escrowed for taxes, hazard insurance (including flood insurance, if applicable), as well as any other required periodic payments or premiums on the property unless a new escrow or impound account is established."
In 2013, the CFPB implemented TILA’s section 129D in its "Escrow Rule," which generally amended Regulation Z’s section 1026.35(b) to replace and expand the existing higher-priced mortgage loan (HPML) escrow requirement for first-lien HPMLs. Regulation Z limits the general escrow requirement to first-lien HPMLs.
Regulation Z addresses escrow disclosures in sections 1026.37 and 1026.38, which specify the information that must appear on Loan Estimates and Closing Disclosures. Mortgage lenders required to use the CFPB’s integrated disclosure forms (Loan Estimates and Closing Disclosures) must provide the same disclosures when they require escrows, whether or not a loan is an HPML.
Among other things, Regulation Z’s sections 1026.37 and 1026.38 require Loan Estimates and Closing Disclosures to address escrowed amounts. Section 1026.37(c), regarding Loan Estimates, requires a Projected Payments table to include "an estimate of taxes, insurance, and assessments and the payments to be made with escrow account funds."
More specifically, section 1026.37(c)(2)(iii) requires disclosure of "[t]he amount payable into an escrow account to pay some or all of the charges described in paragraph (c)(4)(ii) (i.e., 'mortgage-related obligations')." Mortgage-related obligations are, among other things, property taxes; premiums and similar charges required by the creditor; fees and special assessments imposed by a condominium, cooperative, or homeowners association; ground rent; and leasehold payments, as applicable, labeled 'Escrow,' together with a statement that the amount disclosed can increase over time.
Section 1026.38 requires the Closing Disclosure to include a similar disclosure in a Projected Payments table. Section 1026.38(c) explains that estimated escrow payments may be determined under the escrow account analysis described in RESPA’s Regulation X section 1024.17 or in the manner set forth in Regulation Z’s section 1026.37(c)(5).
Section 1026.37(c)(5) states that estimated property taxes and homeowner’s insurance must reflect "the taxable assessed value of the real property or cooperative unit securing the transaction…, including the value of any improvements on the property or to be constructed on the property, if known, whether or not such construction will be financed from the proceeds of the transaction, for property taxes" and the replacement costs of the property during the initial year after the transaction for property insurance.
Regulation Z’s section 1026.31(d)(2) allows the use of estimates whenever information for an accurate disclosure is unknown to the creditor, provided the disclosure is clearly identified as an estimate. Each estimate must be made in good faith on the basis of the best information available.