RESPA, a set of federal laws covering real estate transactions, places rules and limits on your mortgage escrow account. Your lender takes the money you put into your escrow account each month to pay the home bills, such as your property taxes, that were made part of the account when you got your loan. If your lender isn't following the RESPA rules, you may have to take action.
A lender is allowed to require a cushion for your escrow account under federal law. The cushion is an amount above what the lender estimates you need in your account to pay all the escrow items. RESPA, known officially as the Real Estate Settlement Procedures Act, limits the cushion to one-sixth of the total of all your escrow items, which is about two months' worth of escrow payments. For example, say you have $1,500 in property taxes and pay $500 in homeowners insurance out of your escrow, for a total of $2,000. Under RESPA, your maximum cushion is about $320. If your state laws limits the cushion to $300, the lender must go with the state cap.
The lender should only require one-twelfth of the total amount necessary to pay all your annual escrow items each month plus what is needed to fund your two-month cushion. RESPA requires the lender review your escrow each year. If your account is over by more than $50, the lender has to return the cash to you within 30 days. The lender can keep overages of less than $50 and apply the amount to your escrow payments for the next year or give you the money back. If your account is short, the lender can add the shortage to the escrow payments over the next year or ask you to pay the difference.
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Escrow Account Requirements
RESPA doesn't force a lender to give you an escrow or require you to have a cushion. Your lender may make the escrow with a cushion a requirement for your mortgage, so that you can't get loan approval unless you agree to the escrow. However, your lender must follow RESPA and state laws regarding escrows if you were forced or chose to have the account as part of your mortgage.
If you think your lender is violating state or RESPA limits, you can take action. Under RESPA, borrowers have the right to make a written request to the lender about the handling of its mortgage accounts. The lender has to respond within 20 days and resolve the issue within 60 business days by either correcting the problem or giving you a written explanation of its stance. If the lender doesn't resolve the issue within 60 days, you can file a formal complaint with the RESPA Office of the U.S. Department of Housing and Urban Development.
- U.S. Department of Housing and Urban Development: About Escrow Account Cushions
- Mortgages Financing and Credit: Real Estate Settlement Procedures Act (RESPA) Escrow Account Protections and Limits (Section 10)
- U.S. Department of Housing and Urban Development: Figuring Escrow Accounts
- U.S. Department of Housing and Urban Development: What is Covered Under RESPA?
- U.S. Department of Housing and Urban Development: Dealing With Your Lender or Insurance Company?
- Mortgages Financing and Credit: Filing a RESPA Complaint