The escrow analysis provisions of the Real Estate Settlement Procedures Act (RESPA) are designed to ensure all lenders are handling borrowers’ escrow accounts in the proper manner. Among other things, RESPA:
- Provides for the establishment of mortgage escrow accounts to collect 1/12 of the annual escrow disbursements, on a monthly basis, for the payment of taxes and insurance.
- Allows lenders to maintain a cushion equal to 1/6 of the estimated total annual payments. (A cushion is an amount of money held in the escrow account to prevent the account from being overdrawn when increases in disbursements occur.)
- Requires lenders to provide borrowers with an Initial Escrow Account Disclosure Statement within 45 days of closing, and an Annual Escrow Account Disclosure Statement at least once every 12 months thereafter. These statements are designed to provide information regarding the anticipated tax and insurance activity in the escrow account.
- Allows lenders to close loans using the aggregate (low-point) method. The aggregate method of mortgage escrow analysis simply means the escrow account, based on projected taxes and insurance for the next 12-month period, should at its lowest balance not exceed two times the monthly escrow payment.