The Real Estate Settlement Procedures Act governs the administration of escrow accounts. RESPA is part of the United States Code of Federal Regulations and gives specific guidelines regarding any escrow overage or shortage amounts. The law mandates that escrow amounts in excess of legal requirements refund to the homeowner.
Establishment of escrow accounts occurs to pay expenses related to a mortgage such as property insurance and taxes. RESPA law requires escrow servicers to provide an annual escrow account analysis to the homeowner. This analysis typically occurs on or around the origination date of the home loan and will show any amounts that are short or over the annual requirements to pay the property expenses.
Escrow servicers have federal law limitations regarding the amounts that a borrower deposits into an escrow account. During the term of the loan, the escrow servicer may charge one-twelfth of the reasonably anticipated escrow payments plus a small cushion. Federal law limits the cushion amount an escrow servicer may use to one-sixth (double of one-twelfth) of the annual disbursements from the escrow account.
During the annual analysis, the escrow servicer estimates the amount a homeowner must pay into escrow for the upcoming year. The escrow servicer typically uses the prior year homeowners insurance premium and tax payments plus the one-sixth cushion amount to determine the upcoming year escrow estimate. RESPA requires that the escrow servicer provide a copy of the escrow analysis to the borrower.
If an escrow account analysis shows a surplus, federal law requires the escrow servicer to refund any amounts over $50 to the borrower. The escrow servicer is required to refund any surplus to the borrower within 30 days of the completed escrow analysis. If the surplus is less than $50, the escrow servicer has the option to refund the amount to the borrower or apply the surplus to the next year’s escrow amount.