QUESTION
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?
ANSWER
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.
Estimating Escrows
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.
The
disclosures on Loan Estimates are "estimates" by the very nature of the
disclosures.
In
contrast, each figure on a Closing Disclosure generally should not be an
“estimate” because the transaction has become final. If a Closing Disclosure is
an estimate, the creditor must so indicate.
Here's the important point: for
both Loan Estimates and Closing Disclosures, the creditor should implement a
process to ensure that it uses estimates only when information is unknown because it is not reasonably
available to the creditor at the time the estimate is made.
The fact is, Regulation
Z includes a mandatory and somewhat burdensome process for resolving inaccurate
estimates when the discrepancies between estimates and actual amounts are
apparent at or around the closing of a loan transaction.
A Case
Now
onto the question about what happens with estimated escrow payments, the inaccuracy of which a borrower is unlikely to discover until after closing or much
later.
It seems a federal district court in Illinois recently faced this issue. The case
I have in mind is Davis
v. Mortgage Research Center [2019 U.S. Dist. (N.D. Ill. Oct. 16, 2019)].
The
Davises financed the purchase of their home through a VA loan. The lender
required an escrow account for property taxes and homeowner’s insurance. The
lender disclosed that the total escrow deposit would equal $273.82 per month.
The disclosure, labeled an estimate, was flawed because the lender used only
one of the home’s two property identification numbers when calculating the
escrow amount. With the additional taxes, the actual monthly escrow payment
increased by $147.21 to a total of $421.03.
The
borrowers sued, alleging a violation of TILA section 129D, stating that they
would not have entered into the loan if they had been given accurate figures.
The court dismissed the claim because the statute explicitly required
disclosure of an estimate and the
borrowers were told that the disclosed amounts were estimates. The court noted
that the borrowers had failed to “cite any language in the statute or any case
law that evinces a statutory requirement that the disclosed estimates be
particularly accurate.”
Observation
So,
how should we view this outcome? Clearly, the Davises slipped up by failing to
point out to the court the Regulation Z requirements for using estimates. The
Davises apparently could have met at least part of the evidentiary burden by
showing that the lender had used only one of their home’s two property
identification numbers when calculating the escrow amount.
Presumably,
the information needed to develop an accurate estimate had been “reasonably
available” to the creditor when it developed the estimate.
Maybe TILA’s civil
liability provision (specifically, section 130) might have offered the basis
for a cause of action. But I doubt it. The Davises would have been hard-pressed to
prove they suffered actual damage from the alleged TILA violation.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group
