The annual escrow analysis is the single most-audited operational artifact a servicer produces. Regulation X §1024.17 specifies the steps. The workflow below runs them in the sequence examiners and auditors expect to see.

What is the computation year, and why does it matter?

The computation year is the twelve-month period the analysis covers. §1024.17(b) defines it as the period the servicer establishes at account opening — most servicers align the computation year with the calendar year or the loan anniversary. The choice matters because every subsequent analysis runs on the same twelve-month cadence, and any change to the computation-year boundary requires a short-year analysis to reconcile.

How do you build the projection for the next twelve months?

Pull the projected annual disbursements: property tax (split into installments by county schedule), homeowners insurance (annual premium), flood insurance (if applicable), mortgage insurance (if applicable), and any other escrowed item. Plot each disbursement to the month it falls due. Add the projected monthly deposit. Compute the running balance for each month of the projection. The lowest projected month-end balance must equal the cushion under §1024.17(c)(1)(ii) — up to one-sixth of projected annual disbursements.

How do you compute the monthly escrow payment?

Sum the projected annual disbursements and divide by twelve. Add or subtract the adjustment needed to bring the lowest projected month-end balance to the target cushion. If the projection shows the lowest balance falling below cushion, increase the monthly payment by the shortage divided by twelve. If the lowest balance sits above cushion, decrease the monthly payment by the surplus divided by twelve. The aggregate method requires this single computation across all escrowed items.

How do you reconcile actual versus projected at year end?

At the end of the computation year, pull the actual escrow balance from the ledger. Compare to the projected target balance computed in the prior year’s analysis. The difference is the surplus, shortage, or deficiency. Surplus of fifty dollars or more, with the borrower current, triggers a refund check under §1024.17(f)(2). Surplus under fifty dollars or with an uncurrent borrower applies to future payments. Shortage triggers a repayment plan under §1024.17(f)(3). Deficiency triggers cure procedures under §1024.17(f)(4).

How do you produce the analysis statement for the borrower?

§1024.17(i) and Appendix E specify the format. The statement must show: the prior year’s projected disbursements and the actual disbursements, the surplus or shortage, the new monthly escrow payment, the next computation year’s projected disbursements with the month each is due, the cushion amount, and the borrower’s repayment schedule for any shortage. The statement uses the format Appendix E illustrates — most servicing systems produce a §1024.17-compliant template natively. Deliver the statement to the borrower within thirty days of completion.

What is the payment-change notice requirement?

When the analysis changes the borrower’s monthly payment, the servicer delivers the analysis statement and a payment-change notice. The notice must arrive at least fifteen days before the first changed payment is due. The fifteen-day window lets the borrower adjust the payment amount, contact the servicer with questions, or invoke a §1024.36 qualified written request if the borrower disputes the calculation.

How do you document the analysis for an examiner?

Retain four artifacts. First, the analysis worksheet showing the projection math, the cushion calculation, and the payment derivation. Second, the analysis statement delivered to the borrower. Third, the payment-change notice (if any). Fourth, the escrow ledger from the prior computation year tied to the custodial-account bank reconciliations. §1024.38(c) requires one-year retention; institutional best practice runs five to seven years.

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