Compliance Blog

Written by Jennifer Aguilar, NAFCU Regulatory Compliance Counsel

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

Surpluses

A surplus exists when the amount in the escrow account exceeds the estimated amount necessary to cover the disbursements from the escrow account for the rest of the escrow year. If the escrow analysis reveals a surplus, section 1024.17(f)(2) provides servicers with two options, depending on the amount of the surplus:

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

The loan agreement may state which option applies so servicers will want to review that as well. The rules outlined in section 1024.17(f)(2) apply only if the borrower is current at the time of the analysis – the servicer receives the payment within 30 days of the due date. If the borrower is not current, then the servicer may keep the surplus according to the terms of the loan agreement.

If the servicer refunds the surplus, the rule does not prescribe any particular method for making the refund. Servicers may want to review the loan agreement to determine whether it requires a particular method, such as a check mailed to the borrower or deposited directly into the borrower’s account. However the servicer handles the surplus must be disclosed on the annual escrow statement under section 1024.17(i)(1)(vi).

Deficiencies

A deficiency exists when there is a negative balance in the escrow account. If the escrow analysis confirms a deficiency, section 1024.17(f)(4) provides servicers with several options, depending on the amount of the deficiency:

• Deficiency is less than one month’s escrow payment:
  • Do nothing,
  • Require the borrower to repay the amount within 30 days, or
  • Require the borrower to repay the amount in 2 or more equal payments.
• Deficiency is one month’s escrow payment or more:
  • Do nothing, or
  • Require the borrower to repay the amount in 2 or more equal payments.

The loan agreement may impose specific repayment requirements on the borrower so servicers will want to review that as well. The rules outlined in section 1024.17(f)(4) apply only if the borrower is current at the time of the analysis – the servicer receives the payment within 30 days of the due date. If the borrower is not current, then the servicer may require the borrower to repay the deficiency according to the terms of the loan agreement.

As the rule does not require the deficiency to be repaid at all, servicers have quite a bit of flexibility in determining how long to allow the borrower to repay the deficiency. If the servicer permits more than one payment to repay the deficiency, the rule requires only that the payments be equal. Most servicers put a 12-month maximum repayment on a deficiency. This likely has to do with calculating the next escrow year’s payments or the operational challenges with calculating multi-year escrow payments. Other considerations may be the amount of the deficiency and the financial status of the borrower. Ultimately, it will be up to the servicer to determine how long to allow the borrower to repay a deficiency. Whatever determination the servicer makes, it must disclose how the deficiency is to be repaid in the annual escrow statement under to section 1024.17(i)(1)(vii).