Buyers FAQ's about Escrow Accounts
When you apply for a home mortgage, you may think that the lender, or loan originator, will service the loan until it is paid off or your house is sold. However, in today's market mortgage servicing rights often are bought and sold. The Real Estate Settlement Procedures Act (RESPA) is a consumer protection statute. Sections 6 and 10 of RESPA provide you with certain rights regarding the servicing of your mortgage and escrow account. Please read this important information concerning your rights and the responsibility of your loan servicer.
Duty of Loan Servicer to Respond to Complaints. If you have questions or problems with the servicing of your loan, the servicer is required to respond to you. Write to your servicer and call it a "qualified written request under Section 6 of RESPA." It should be a separate letter and not mailed with your payment. The mortgage servicer must respond to you within 60 business days of receipt. (See below Sample Written Complaint to Lender.)
Loan Transferred to New Servicer.
Your loan servicer is required to notify you in writing at least 15 days before the servicing of your loan is transferred to a new servicer. The notice must include the following information:
- The effective date of the transfer,
- the date your current servicer will stop accepting payments
- the date the new servicer will begin accepting them. The name, address, and toll-free or collect call telephone number for the new servicer.
- Information that tells whether you can continue any optional insurance, such as mortgage life or disability insurance, and what action, if any, you must take to maintain coverage.
- A statement that the transfer of servicing does not affect any term or condition of your mortgage documents other than the terms directly related to the servicing of the loan.
Treatment of Payments During Transfer Period.
During the 60-day period beginning on the effective date of the transfer, the payment may not be treated as late if you mistakenly send it to the old mortgage servicer instead of the new one.
Escrow Account RESPA does not require that you maintain an escrow account for
the purpose of paying property taxes, hazard insurance, etc. Nor does RESPA have
any jurisdiction over the decision of the lender or servicer to require or
terminate an escrow account. RESPA does, however, provide you with the following
protections with regard to the escrow account:
If your lender or mortgage servicer requires you to maintain an escrow account
for the purpose of paying property taxes, hazard insurance, etc., RESPA requires
that the servicer pay such items by the dates due to avoid a penalty or late
charge.
RESPA sets limits on the maximum amount of money the servicer may require you to
maintain and pay in the escrow account.
FAQs About Escrow Accounts for Consumers
SECTION 10: ESCROW ACCOUNTS
RESPA and Escrow Accounts in General Section 10 of the Real Estate Settlement Procedures Act (RESPA) limits the amount of money a lender may require the borrower to hold in an escrow account for payment of taxes, insurance, etc.
RESPA also requires the lender to provide initial and annual escrow account statements. The newest escrow account regulations became effective in October 1997.
Does RESPA require borrowers to maintain an escrow account?
NO. It is the lender's decision whether the borrower must maintain an escrow account for the purpose of paying taxes and other items. The HUD regulations only limit the maximum amount that a lender can require a borrower to maintain in an account.
Does RESPA require lenders to maintain a cushion?
NO. The RESPA statute and regulations do not require the lender to maintain a
cushion. However, since 1976 the RESPA statute has allowed lenders to maintain a
cushion equal to one-sixth of the total amount of items paid out of the account,
or approximately two months of escrow payments. If state law or mortgage
documents allow for a lesser amount, the lesser amount prevails.
The new accounting method generally requires borrowers to maintain lesser amount
in the account than the single-item method predominately used by lenders.
However, many lenders have recently increased the escrow account cushion to the
maximum allowed by law.
The recent regulations require lenders to reduce the size of the cushion in some accounts. Unfortunately, to avoid customer disapproval, some lenders may be giving their customers the impression that the HUD regulations require them to make this increase. This is a false impression. The lender, not HUD, has chosen to increase the cushion.
Can HUD require lenders to pay interest on escrow accounts?
NO. In 1992 and 1993, legislation was introduced in Congress that would have required lenders to pay interest on escrow account balances, but it never passed. Some states do require interest to be paid on escrow account funds, but many do not.
My escrow account payments went up, rather than down. Why?
There could be a couple of reasons why your servicer is charging more for your escrow account. First, your bills may have gone up and the account changed to reflect that. Or, the servicer has changed the amount of cushion to the maximum amount allowed by RESPA. Check your statement from the servicer. You may also want to check your loan documents to figure out what is the appropriate cushion. If the mortgage loan documents are silent on the amount of the cushion or pre-accrual practices, then the RESPA "two month" limits apply, unless state law provides for a lower amount.
What is the disbursement date for paying escrow account items?
The disbursement date means the date on which the lender actually pays an escrow item from the escrow account. However, the lender must pay the items in a timely manner, that is, on or before the deadline to avoid a penalty. This is required as long as the borrower's payment is not more than 30 days overdue. Borrowers should review their annual escrow statement to make certain the lender did not make late payments and charge any penalties to the borrower's account. (See Homeowner Alert)
Dealing with Your Lender or Insurance Company:
Taxes, Insurance, RESPA and Escrow
I got a notice from the county that my lender did not pay my taxes on time and
the county is assessing a penalty. Do I have to pay this bill?
Send the bill to the lender.
The lender should pay the penalty for failing to pay the taxes on time as long you were current in your mortgage payments. If the lender refuses, you may wish to follow the guidelines for filing a complaint.
Are lenders required to pay taxes on an annual basis if a discount is offered to the consumer?
NO. The Department published a new rule in the Federal Register in January 1998. The rule clarifies what a lender should do when a taxing jurisdiction offers a choice of payment on an installment basis or an annual basis.
If there is a discount to the consumer when disbursing on an annual basis or there is an additional charge for disbursing on an installment basis, the lender may disburse on an annual basis. Otherwise, the lender should disburse tax payments on an installment basis. The borrower and the lender may mutually agree to another disbursement basis or date.
The Department encourages lenders to follow the preference of the borrower.
What steps should I take if the lender does not pay my hazard insurance on time or at all and my insurance is canceled?
Lenders are required by Section 6 to make escrow account disbursements on time. If a lender fails to do so, a borrower may bring a private law suit under this Section. Therefore, if you incur any damages due to the lender's negligence, you may wish to consult an attorney.
You should also contact your lender immediately and send a copy of the bill. Some lenders list a special address and/or FAX number for insurance and tax bills. Keep checking with the insurance company to make certain the bill is paid. You may wish to pay the insurance company directly to avoid cancellation of your policy and then seek a refund from your lender. Keep copies of all your correspondence and payments. If you incur any damages due to the lender's negligence, you may wish to consult an attorney.
I got a notice that my hazard insurance has been canceled. My lender force-placed hazard insurance with a different company and it costs a lot more. Can a lender do this?
As long as your mortgage payment is not more than 30 days late, Section 6 of RESPA requires the lender to make escrow payments, for taxes, insurance, etc., in a timely manner. You should write to your lender and complain. If your lender does not refund the difference or otherwise resolve your complaint satisfactorily, you may wish to file a complaint with HUD or the Consumer Protection Office of your State Attorney General's Office. You may also wish to consult an attorney.
What steps should I take if I think the lender is requiring too much money in my escrow account?
First, figure out the maximum amount RESPA allows to be required in your escrow account from the example. If you still believe your lender is requiring too much money, you should contact your lender for an explanation.Section 6 of RESPA provides that borrowers may make a "qualified written request" to the lender concerning the servicing of their loan account. The request should not be included with the monthly mortgage payment. The lender must acknowledge the complaint within 20 business days and must resolve the complaint within 60 business days. If you do not get a satisfactory answer from the lender, you may wish to file a complaint with HUD. You should continue to make your mortgage payment during this time.
PMI (Private Mortgage Insurance). RESPA has no jurisdiction over the lender's decision to require PMI. Nor does it have any jurisdiction over the lender's decision to cancel PMI. (The PMI Act provides information regarding cancellation of PMI.)
PMI Act Information
On July 29, 1999, the new Homeowner's Protection Act of 1998, also known as the PMI Act, regarding the cancellation of PMI takes effect. Private Mortgage Insurance (PMI) is required by lenders when a loan is originated and closed without a 20 percent down payment. This insurance protects the lender from default losses in the event a loan becomes delinquent. The PMI Act will enable homeowners with new loans originated after July 29, 1999 and who meet specified requirements to have their PMI canceled.
The law provides 2 situations in which borrower paid PMI may be cancel - it can be automatic or by request. Lender-paid PMI is excluded from these mandates, but requires an up front disclosure to the borrower about lender-paid PMI.
The 2 cancellation situations are:
Automatic. In general, when the homeowner's equity position reaches 22 percent of the original value of the property, the mortgage servicer must automatically cancel the PMI. The borrower must be current in making payments for automatic cancellation to apply.
Different requirements exist for "high risk mortgage loans, as defined by government-sponsored entities (i.e. Fannie Mae and Freddie Mac). CONTACT YOUR MORTGAGE LENDER IF YOU FIT THIS CATEGORY.
By Request. Homeowners can request cancellation of the PMI when their equity position reaches 20 percent of the original value of the property, if they meet certain criteria. CONTACT YOUR MORTGAGE LENDER FOR ITS CRITERIA LIST.
PLEASE BE ADVISED: HUD's Department of Consumer and Regulatory Affairs and the RESPA Division has no enforcement authority pertaining to the new PMI Act. Inquiries should be presented to your lender using the Qualified Written Request format. Under Section 6 of RESPA, lenders must acknowledge and take corrective action toward resolving questions that you raise in your Qualified Written Request.
To complain about a lender who does not comply with the PMI Act, please contact the appropriate federal regulator.
Sample Written Complaint to Lender
The following is a sample qualified written request from you, the borrower, to a lender. Use this format to address complaints under the Real Estate Settlement Procedures Act (RESPA). Be sure to read more about RESPA, and your rights under this Act, elsewhere on the RESPA site.
Attention Customer Service:
Subject: [Your loan number]
[Names on loan documents]
[Property and/or mailing address]
This is a "qualified written request" under Section 6 of the Real Estate
Settlement Procedures Act (RESPA).
I am writing because:
Describe the issue or the question you have and/or what action you believe the
lender should take.
Attach copies of any related written materials.
Describe any conversations with customer service regarding the issue and to whom
you spoke.
Describe any previous steps you have taken or attempts to resolve the issue.
List a day time telephone number in case a customer service representative
wishes to contact you.
I understand that under Section 6 of RESPA you are required to acknowledge my
request within 20 business days and must try to resolve the issue within 60
business days.
Sincerely,
[Your name]