RESPA COMPLIANCE FOR SERVICING LOANS WITH IMPOUND/ESCROW ACCOUNTS
Lender often wants borrowers, in addition to making payments for principal and interest to pay additional sums to satisfy other obligations that become due or payable. The most common is impounding payments for property taxes and premiums for fire or other insurance. If property taxes are not paid on time, they will create a super-priority lien against the secured property and impair the security for holders of deeds of trust.
Escrow accounts are far from simple as they may be required or restricted by an array of state and federal laws and regulations. In addition, when the escrow account is held a servicer operating under a CA real estate broker’s license, the escrow account is likely to be subject to statutes and DRE regulations relating to broker trust accounts. The primary federal law regulation to escrow accounts is the Real Estate Settlement Procedures Act (“RESPA”) and its related regulations in Regulation X (Reg X at 24 CFR§ 3500.17) The problem for lenders or brokers is the additional costs and time required to service these escrow accounts and the potential liability that goes with them. On the other hand, lenders reap the benefit of having funds in the escrow account to use to pay taxes and insurance premiums on the secured property as they become due.
Escrow accounts can be estabished based upon the following: Required by State or Federal Law, required by the lender as a condition of the loan, and not required by lender but offered to borrower on a voluntary basis
Recent Amendments to TILA and Regulation Z Require Impound Account for Section 35 Loans. It is likely that almost all private money loans (which tend to be fixed rate, but higher interest rate loan) made or arranged by mortgage brokers and secured by the borrower’s principal dwelling will be Section 35 loans.
When “servicing” a RESPA covered loan, real estate brokers will be a “servicer” under RESPA. Generally, a “servicer” means the person responsible for servicing of a loan including the person who makes or holds a loan, if such person also services the loan. “Servicing” means receiving any scheduled periodic payments from a borrower pursuant to the terms of any loan, including amounts for escrow account and making the payments of principal and interest and such other payments with respect to the amounts received from the borrower as may be required. (12 U.S.C. § 2605(i)(3).)
RESPA does not mandate escrow accounts for “federally related loans” but instead, it regulates them and requires certain disclosures (i.e., initial and annual escrow statements)
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 subject to the limitations in §3500.17(1)(i) and the amount of the borrower’s periodic payments into the escrow account subject to the limitations of §3500.17 (C)(1)(ii)(i.e., charges during the life of the loan).
For each escrow account the servicer must conduct an escrow account analysis at the completion of the escrow account computation year to determine the borrowers’ monthly escrow account payments for the next computation year
In conducting the escrow account analysis, the servicer must estimate the disbursement amounts according to §3500.17(c(7)
The servicer must use a date on or before the deadline to avoid a penalty and comply with any other requirements of §3500.17(k).
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, including payment of deficiencies from the servicer’s general account 12 U.S.C. § 2605(g))and;
Upon completing an escrow account analysis, the servicer must prepare and submit an annual escrow account statement to the borrower, as set forth in §3500.17(i).