Stewart Title Guaranty Company
P. O. Box 2029 Houston, Texas 77252-2029 (800) 729-1902
|Date:||May 17, 1995|
|To:||All Issuing Offices|
NEW ESCROW ACCOUNT PROCEDURES
A series of new RESPA regulations apply to loans closed on or after May 24, 1995. These regulations relate to "escrow accounting items" such as real estate taxes, hazard insurance, mortgage insurance, credit life insurance, and assessments if the lender requires an escrow to pay those items.
REASON FOR NEW REGULATIONS
The HUD-1 and HUD-1A 1000 series lines relate to "reserves deposited with lender". The lender typically requires an escrow for items, such as taxes and insurance, that must continue to be paid in the future. Escrow reserves are customarily calculated separately for each "item", such as taxes or insurance so that the lender will have enough reserve to pay that item when due plus a "cushion" of two months of the pro rata cost of that item. This common form of calculating the escrow is called the "single items calculating method". HUD (Department of Housing and Urban Development) concluded that this long followed method has resulted in excess escrow balances with the lender. To reduce the escrow reserve, new RESPA regulations apply to loan closings commencing May 24, 1995.
DUTY OF SERVICER OF LOAN TO MAKE ESCROW ADJUSTMENT FOR HUD-1 AND HUD-1A
To reduce the escrow, RESPA now says that it is the duty of the loan "servicer" (not the settlement agent) to make an adjustment at closing to the escrow reserves. The "servicer" is the person responsible for the servicing (receiving and making the loan payments) of a loan and includes the person making or holding a loan if that person services the loan.
RESPA now says "after itemizing individual deposits in the 1000 series using single-item accounting, the servicer shall make an adjustment based on aggregate accounting. This adjustment equals the difference between the deposit required under aggregate accounting and the sum of the deposits required under single-item accounting....The adjustment will always be a negative number or zero (-0-). The settlement agent shall enter the aggregate adjustment amount on a final line (e.g. 1008) of the 1000 series of the HUD-1 or HUD-1A statement".
HUD has emphasized that the servicer, not the settlement agent, must calculate the escrow adjustment for the last line of the 1000 series.
However, you may be requested by the servicer/lender to compute the adjustment.
WHAT IS THE ESCROW ADJUSTMENT
The last line of the HUD-1 or HUD-1A 1000 series must include a negative number or zero.
The formula used to calculate the aggregate adjustment is the difference between the total sum of the individual itemized deposits in the 1000 series and the target balance in the escrow account using the "aggregate analysis". To calculate the target balance under the aggregate analysis, the servicer:
- assumes (i) that it make disbursements before the deadline to avoid a penalty
(and to take advantage of discounts if it will do so) and (ii) that the borrower
pays one-twelfth of the total annual escrow account disbursements each month
but (iii) that the borrower does not pay a deposit at closing
- adds to the escrow balance the amount just sufficient to bring the lowest
monthly escrow balance to zero
- then adds to the escrow balance (to determine the proposed total deposit or target balance) the permissible cushion (no more than two months of the borrower's escrow payments)
See examples of analysis attached to bulletin as Exhibit 1.
If the total sum of the individual itemized deposits at closing is greater than the target balance using the aggregate analysis, the adjustment is then expressed as a negative number on the last line of the 1000 series (e.g. line 1008) in order to reduce the escrow balance collected from the borrower at closing. If the total sum of the individual itemized deposits is smaller than the target balance using the aggregate analysis (highly unlikely), the adjustment is expressed as zero (-0-) on the last line of the 1000 series.
There is only one exception to this new rule: if the loan is closed between May 24, 1995 and October 27, 1997, the adjustment can be made by the servicer after closing if it requires only one month of "cushion" for each escrow item at closing. An example of the one month cushion contrasted with the aggregate accounting adjustment is attached as Exhibit 3. We believe few lenders will use this exception since they would have to make the adjustment shortly after closing.
DUTY OF SERVICER OF LOAN TO PROVIDE ESCROW ACCOUNT DISCLOSURE
The servicer must prepare an initial escrow account statement that it incorporates into the HUD-1 or HUD-1A (in the basic text or as an additional page) or that it submits to the borrower as a separate document. This initial disclosure must state the beginning escrow account balance and the cushion selected by the servicer.
An example of an initial escrow account disclosure statement is attached as Exhibit 4.
AVAILABILITY OF ESCROW ACCOUNTING SOFTWARE
The software used to calculate the aggregate accounting adjustment for the last line of the 1000 series of the HUD-1 and HUD-1A may be ordered from HUD. The diskette may be ordered by request plus $15 check to HUD USER, P.O. Box 6091, Rockville, MD 20850. The diskette may be ordered by phone at 1-800-245-2691 (use VISA or MasterCard). All inquiries should refer to "Notice FR-3255, Escrow Accounting Software".
17.04 Real Estate Settlement Procedures Act (RESPA)
(EXAMPLE OF AGGREGATE ANALYSIS)
$1,200 for school taxes (to be) disbursed October 20.
$2,400 for county taxes (to be) disbursed December 10.
$600.00 for hazard insurance (to be) disbursed next May 1.
Cushion: one-sixth of estimated annual disbursements.
Closing: May 15
First Payment: July 1
Single Item deposits: line 1001 (hazard insurance) three month at $50 a month = $ 150
line 1004 (county taxes eight months at $200 a month = $1,600
line 1006 (school taxes) ten months at $100 a month = $1,000
Initial Trial Balance
|Dec.||$350||$2,400||$1,500 (low est. bal.)|
Increase Balance to Elimate Negative Balance
Balance With a 2-month Cushion
|Aggregate Initial Balance||$2,200|
The total is $2,750 for individual itemized deposit. The difference between this amount and the aggregate analysis initial balance is $550. On line 1008 the servicer would instruct the settlement agent to put -$550.
|Dec.||$130||$1,200||-$650 ($650 + $260 (2 mo.) = $910)|