Escrow Accounts

• The U.S. Department of Housing and Urban Development, or HUD, is the agency that governs RESPA, which requires that all mortgage companies establish and manage escrow accounts in accordance with this federal law. An amendment to the original act was instituted in 1990, which requires mortgage lenders to provide borrowers with an itemized statement of their escrow account on a yearly basis. This escrow account holds the taxes and insurance funds that are paid on a monthly basis by the borrower until the tax and insurance bills come due. At this time, the lender pays the tax and insurance bills on behalf of the borrower.
  
  

Significance

• RESPA was instituted as a way to protect consumers. The law accomplishes this by educating and informing borrowers at every step of the mortgage process so the borrower is aware of all of the fees they are responsible for paying and will ultimately end up in the escrow account. One way that the law protects consumers is by eliminating the paying of referral fees as part of closing costs for the mortgage. Because the borrower receives an itemized statement with closing costs, borrowers can easily identify whether they are being charged excessive or illegal fees.
  
  

Requirements

• Under RESPA, borrowers are required to receive certain disclosure statements and brochures in an effort to provide all of the information they need to make educated decisions. For the escrow account, these disclosures help to avoid excessive charges being levied on the borrower. RESPA also allows borrowers to choose their own title company. A title company is often the holder of the escrow account. A title company also performs the title search on the property, which is part of the closing costs eventually paid by the buyer, so this money is part of the funds that will deposited into the escrow account.
  
  

At Loan Application

• At the time a borrower submits a mortgage application, the lender is required by RESPA to provide the borrower with two disclosures that pertain to the closing costs that end up in the escrow account. These disclosures include a booklet describing the real estate settlement services provided by third parties, such as the escrow account holder; and a good faith estimate, which is an estimated and itemized list of the closing costs the buyer is likely to pay at the settlement.
  
  

Before Settlement

• Before the buyer attends the real estate closing, the Controlled Business Arrangement disclosure must be given to the borrower if someone in the transaction has referred them to the company holding the escrow account or managing the closing. The disclosure must describe what the relationship is between the party that referred the buyer to the company and the company that was referred.
  
  

At Settlement

• At the closing or settlement for the transaction, the buyer must be presented with an Initial Escrow Statement, which is an itemized list of the estimated taxes, insurance and any other charges that are going to be paid out of the escrow account during the first year of the mortgage. If a cushion is required in the escrow account, this is also listed in the Initial Escrow Statement. By law, if the statement is not given to the borrower at the real estate closing, then the borrower must receive it within 45 days of the closing date.
  
  

After Settlement

• Once the mortgage closes, the law then requires the lender to provide borrowers with an annual escrow dtatement. The statement must include a summary of all of the payments made from the account throughout the year. It must also contain information about any shortage or surplus of money in the escrow account after costs have been covered. The law also states that if a mortgage servicer transfers mortgage servicing, then the servicer must inform the borrower 15 days before it becomes effective and include the name, address phone numbers and effective date for the new servicer.