Creation and Requirements

Pursuant to 12 USCS § 3500.17, an escrow account means any account that a servicer establishes or controls on behalf of a borrower to pay taxes, insurance premiums (including flood insurance), or other charges with respect to a federally related mortgage loan, including charges that the borrower and servicer have voluntarily agreed that the servicer should collect and pay.  The definition encompasses any account established for this purpose, including a “trust account”, a “reserve account”,  an “impound account”, or other term depending on the locality.  An “escrow account” includes any arrangement where the servicer adds a portion of the borrower’s payments to principal and subsequently deducts from principal the disbursements for escrow account items. For purposes of this section, the term “escrow account” excludes any account that is under the borrower’s total control.

The statute sets out the requirements for an escrow account.  Accordingly, a lender establishes an escrow account in connection with a federally related mortgage loan.  It sets limits for escrow accounts using calculations based on monthly payments and disbursements within a calendar year.

If an escrow account involves biweekly or any other payment period, the requirements in this section shall be modified accordingly.  A HUD Public Guidance Document entitled “Biweekly Payments-Example” provides examples of biweekly accounting and a HUD Public Guidance Document entitled “Annual Escrow Account Disclosure Statement-Example” provides examples of a 3-year accounting cycle.  A HUD Public Guidance Document entitled “Consumer Disclosure for Voluntary Escrow Account Payments” provides a model disclosure format that originators and servicers are encouraged, but not required, to provide to consumers when the originator or servicer anticipates a substantial increase in disbursements from the escrow account after the first year of the loan.

The following are the limits on payments to escrow accounts:

(1) A lender or servicer (hereafter servicer) shall not require a borrower to deposit into any escrow account, created in connection with a federally related mortgage loan, more than the following amounts:

(i) Charges at settlement or upon creation of an escrow account: at the time a servicer creates an escrow account for a borrower, the servicer may charge the borrower an amount sufficient to pay the charges respecting the mortgaged property, such as taxes and insurance, which are attributable to the period from the date such payment(s) were last paid until the initial payment date.  The “amount sufficient to pay” is computed so that the lowest month end target balance projected for the escrow account computation year is zero.  In addition, the servicer may charge the borrower a cushion that shall be no greater than one-sixth (1/6) of the estimated total annual payments from the escrow account.

(ii) Charges during the life of the escrow account: throughout the life of an escrow account, the servicer may charge the borrower a monthly sum equal to one-twelfth (1/12) of the total annual escrow payments which the servicer reasonably anticipates paying from the account. In addition, the servicer may add an amount to maintain a cushion no greater than one-sixth (1/6) of the estimated total annual payments from the account. However, if a servicer determines through an escrow account analysis that there is a shortage or deficiency, the servicer may require the borrower to pay additional deposits to make up the shortage or eliminate the deficiency.

(2) Escrow analysis at creation of escrow account: before establishing an escrow account, the servicer must conduct an escrow account analysis to determine the amount the borrower must deposit into the escrow account.  Upon completing the initial escrow account analysis, the servicer must prepare and deliver an initial escrow account statement to the borrower.  The servicer must use the escrow account analysis to determine whether a surplus, shortage, or deficiency exists and must make any adjustments to the account

(3) Subsequent escrow account analyses: for each escrow account, the servicer must conduct an escrow account analysis at the completion of the escrow account computation year to determine the borrower’s monthly escrow account payments for the next computation year.  The servicer must use the escrow account analysis to determine whether a surplus, shortage, or deficiency exists, and must make any adjustments to the account.

(4) Aggregate accounting required: all servicers must use the aggregate accounting method in conducting escrow account analyses.

(5) Cushion: the cushion must be no greater than one-sixth (1/6) of the estimated total annual disbursements from the escrow account.

(6) Restrictions on pre-accrual: a servicer must not practice pre-accrual.

(7) Servicer estimates of disbursement amounts: to conduct an escrow account analysis, the servicer shall estimate the amount of escrow account items to be disbursed. If the servicer knows the charge for an escrow item in the next computation year, then the servicer shall use that amount in estimating disbursement amounts. If the charge is unknown to the servicer, the servicer may base the estimate on the preceding year’s charge, or the preceding year’s charge as modified by an amount not exceeding the most recent year’s change in the national Consumer Price Index for all urban consumers.  In cases of unassessed new construction, the servicer may base an estimate on the assessment of comparable residential property in the market area.

(8) Provisions in mortgage documents: the servicer must examine the mortgage loan documents to determine the applicable cushion for each escrow account. If the mortgage loan documents provide for lower cushion limits, then the terms of the loan documents apply. Where the terms of any mortgage loan document allow greater payments to an escrow account than allowed by this section, then this section controls the applicable limits.

Where the mortgage loan documents do not specifically establish an escrow account, whether a servicer may establish an escrow account for the loan is a matter for determination by other Federal or State law. If the mortgage loan document is silent on the escrow account limits and a servicer establishes an escrow account under other Federal or State law, then the limitations of this section apply unless applicable Federal or State law provides for a lower amount. If the loan documents provide for escrow accounts up to the RESPA limits, then the servicer may require the maximum amounts consistent with this section, unless an applicable Federal or State law sets a lesser amount.

(9) Assessments for periods longer than one year: some escrow account items may be billed for periods longer than one year. For example, servicers may need to collect flood insurance or water purification escrow funds for payment every three years.  In such cases, the servicer shall estimate the borrower’s payments for a full cycle of disbursements.  For a flood insurance premium payable every 3 years, the servicer shall collect the payments reflecting 36 equal monthly amounts.  For two out of the three years, however, the account balance may not reach its low monthly balance because the low point will be on a three-year cycle, as compared to an annual one.


Inside Creation and Requirements