The Escrow Balance

If Goldilocks, the trespassing examiner, were to enter your credit union to determine what the escrow balance was for any given mortgage account, would you be able to provide her with an answer despite impending privacy and legal issues? Would she want to highlight your institution based on your efficient escrow analysis skillset? Credit unions may want to be aware of how to determine escrow balances when an official examiner shows up. This blog tackles the Real Estate Settlement Procedures Act or "RESPA" requirements to determine escrow balance account analysis.

RESPA requires mortgage servicers to perform an escrow account analysis to determine whether a surplus or deficiency exists. If either exists, the rule provides requirements on how the funds are to be returned to or collected from the borrower. This blog covers the rules for each of these scenarios.

Too Hot: Surpluses

When an escrow balance is too hot, or a surplus occurs, then there are certain procedures to follow. A surplus is defined as "an amount by which the current escrow account balance exceeds the target balance for the account". If the escrow analysis results in a surplus, RESPA's section 1024.17(f)(2) provides servicers with two options, depending on the amount of the surplus:

• If the surplus is $50 or more: then the amount must be refunded to the borrower within 30 days from the date of the analysis.
• If the surplus is less than $50, then the amount may either be refunded within 30 days or credited to the next escrow year.

Section 1024.17(f)(2) applies only to borrowers who are not delinquent on their mortgages at the time of the analysis or the servicer receives borrower's payment within 30 days of the due date. If borrower is delinquent, "then the servicer may retain the surplus in the escrow account pursuant to the terms of the federally related mortgage loan documents."

If the servicer refunds the surplus, servicers may want to review the loan agreement to determine whether the refund requires a particular method, like crediting the amount of surplus to the borrower's account or cutting a check. The method by which servicer handles the surplus must be on the annual escrow statement found here.

Too Cold: Deficiencies

A deficiency occurs when there is a negative balance in the escrow account, rather too cold for Goldilock's preference. If the escrow analysis results in a deficiency, RESPA provides servicers with several options to eliminate the deficiency, depending on the amount of the deficiency:

• If a deficiency is less than one month's escrow account payment, then the servicer can:
  • Do nothing to change it,
  • Require the borrower to repay the amount within 30 days, or
  • Require the borrower to repay the amount in two or more equal monthly payments.
• If the deficiency amount is equal to one month's escrow payment or more, then the servicer can:
  • Do nothing to change it, or
  • Require the borrower to repay the amount in 2 or more equal monthly payments.

Like the escrow surplus rules, deficiency rules apply only if the borrower is current at the time of the analysis or the servicer receives the payment within 30 days of the due date. If the borrower is not current with payments, then the servicer may require the borrower to repay the deficiency pursuant to the terms of the loan agreement.

Servicers have significant flexibility to determine how much time to allow the borrower to repay any deficiency. If the servicer allows more than one payment to repay the deficiency, the rule only requires equal payments. A mortgage servicer should consider factors like the deficiency amount and the financial status of the borrower. Ultimately, it will be left to the discretion of servicer, subject to contractual terms, to determine how much time the credit union will allow the borrower to repay a deficiency. However, the deficiency must be repaid by the borrower, the servicer must disclose that fact in the annual escrow statement, found here.

If you have any questions concerning this blog topic or other compliance topics, please reach out to our Compliance team using compliance@americascreditunions.org.