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Mortgage Servicing and Loan Modifications: 3.5.2.3 Aggregate Analysis

To conduct an escrow account analysis, the servicer must first estimate the amounts of the various disbursements. If the servicer knows what the charge for a particular escrow item will be in the next computation year, then that amount is to be used.588 If the charge is unknown to the servicer, the servicer may base the estimate on the charge from the preceding year, or use the preceding year’s charge as adjusted by the most recent year’s change in the Consumer Price Index.589

Mortgage Servicing and Loan Modifications: 3.5.3.2.1 General requirements

The annual escrow account statement provides the borrower with an account history, showing all of the account deposits and disbursements made during the servicer’s twelve-month computation year.618 The statement also provides a projection of the activity in the account for the next year and notifies the borrower of the amount of the borrower’s past—and new—monthly mortgage payment, including the portion of the monthly payment that is deposited in the escrow account.

Mortgage Servicing and Loan Modifications: 3.5.3.2.2 “Short year” annual escrow account statement

The annual escrow statement is generally required to be sent within thirty days of the completion of the escrow account computation year.629 However, Regulation X permits a servicer to change one escrow account computation year to another if the servicer issues a “short year” annual escrow account statement.630 The effect of a short year statement is to end the escrow account computation year for the escrow account and establish the beginning date of the new escrow account computation year.

Mortgage Servicing and Loan Modifications: 3.5.3.2.3 Exemption if account is overdue or in foreclosure, or if borrower is in bankruptcy proceeding

Despite the mandatory language found in section 2609 and the lack of any statutory exemption, HUD has provided in Regulation X that a servicer need not provide the borrower with an annual escrow statement if the borrower is more than thirty days overdue at the time the servicer conducts the escrow analysis.639 This exemption also applies when the mortgage account is in foreclosure or when the borrower is in a bankruptcy proceeding.640 If the servicer does not provide an annual account statement

Mortgage Servicing and Loan Modifications: 3.5.3.3 Delivery of Escrow Account Statements

A lender or servicer may satisfy the delivery requirement for escrow account statements by sending them to the borrower by first-class mail, postage prepaid, at the borrower’s last known address.650 One court has held that a determination of “last known address” for purposes of compliance with Regulation X includes a servicer’s actual and constructive knowledge, and therefore a servicer must exercise reasonable care and diligence in determining the correct address for the borrower.651 At a minim

Mortgage Servicing and Loan Modifications: 3.5.4.1 Generally

As part of the escrow account analysis to be conducted at the end of the twelve-month computation year, the servicer is required to determine if there is a surplus, shortage, or deficiency.653 While this determination is generally made only at year-end, a servicer may have an incentive to conduct an escrow account analysis mid-year if it has advanced funds to the borrower.

Mortgage Servicing and Loan Modifications: 3.5.4.2 Requirements for Surpluses

If the escrow analysis indicates that a surplus exists,657 the servicer is required to refund to the borrower any surplus equal to or greater than fifty dollars.658 By requiring a “refund,” the regulation does not permit a servicer to simply credit the surplus directly to principal on the loan, though the borrower may agree to use the refund in this manner.659 If the surplus is less than fifty dollars, the servicer may provide a refund to the borro

Mortgage Servicing and Loan Modifications: 3.5.4.3 Requirements for Shortages

If the escrow analysis indicates that the account has a shortage of less than one month’s escrow payment,663 the servicer has three options. It can: (1) do nothing and simply allow the shortage to exist; (2) require the borrower to repay the shortage within thirty days; or (3) require the borrower to repay the shortage in equal monthly payments over at least a twelve-month period.664

Mortgage Servicing and Loan Modifications: 3.5.4.4 Requirements for Deficiencies

In order to determine whether the deficiency requirements apply, it is necessary to distinguish between a shortage and a deficiency. Regulation X defines a deficiency as the “amount of a negative balance in an escrow account.”668 Unlike a shortage when there still remains a positive balance in the escrow account at the time of the escrow analysis (though the balance is less than originally projected), a deficiency exists when the servicer has advanced funds to cover disbursements, which in turn produces a negative balance in the account.

Mortgage Servicing and Loan Modifications: 3.5.5 No Fee for Account Statements

RESPA prohibits the imposition or charging of any fees to borrowers for the preparation or submission of initial and annual escrow account statements, or any statement required to be sent to borrowers under section 2609(c).676 As the statutory authority for the Regulation X requirement to send notices of shortages and deficiencies is derived from section 2609(c), a servicer should not charge a fee for such notices, even if they are sent separately from the annual escrow account statement.

Mortgage Servicing and Loan Modifications: 3.5.6.1 Generally

Section 2605(g) requires a servicer to make payments from an escrow account for taxes, insurance, and other charges “in a timely manner as such payments become due.”677 Regulation X makes this timely escrow payment requirement applicable to any “mortgage loan” that requires the borrower to make deposits into an escrow account, including subordinate-lien loans other than HELOCs.678

Mortgage Servicing and Loan Modifications: 3.5.6.2 Timely Escrow Payments

RESPA does not specify when an escrow payment is deemed to have been made in a “timely manner.” The implementing regulation states that the timely payment requirement for this section shall be governed by the timeframes and requirements contained in another Regulation X provision (12 C.F.R.

Mortgage Servicing and Loan Modifications: 3.5.6.4 Pleading Requirements

Servicer errors in making timely escrow disbursements, often blamed on computer glitches or problems related to the transfer of servicing, may result in additional costs being passed on to consumers. Rather than absorb these costs caused by their errors, servicers have been known to simply pay them out of borrower escrow accounts.

Mortgage Servicing and Loan Modifications: 3.5.7 Refund of Escrow Account Balance upon Payoff

The Dodd-Frank Act amended section 2605(g) to add a provision requiring that any balance in an escrow account at the time the loan is paid off must be “promptly returned” to the borrower within twenty business days after the loan is paid off.705 The official interpretations of Regulation X suggest that this requirement does not prohibit the servicer from “netting” any remaining funds in the escrow account against the outstanding balance of the borrower’s mortgage loan.706 Thus, rather than obtai

Mortgage Servicing and Loan Modifications: 3.5.8 Private Enforcement of Escrow Provisions

Most of the escrow requirements under RESPA are found in section 2609, rather than section 2605, and are therefore not directly enforceable under RESPA. This is because section 2609 of RESPA does not provide for an express private right of action. While a few courts have found that an implied cause of action exists for enforcement of the RESPA sections that lack an express right of action,711 the majority of courts have refused to do so.712

Mortgage Servicing and Loan Modifications: 3.6.1 Introduction

In response to numerous problems with force-placed insurance, as discussed in § 2.7, supra, Congress created new restrictions on this type of insurance in the Dodd-Frank Act by amending section 2605 of RESPA.724 The purpose of these amendments, as noted by the CFPB, is to “protect borrowers from the unwarranted force-placement of insur

Mortgage Servicing and Loan Modifications: 3.6.2 Definition of “Force-Placed Insurance”

A definition of “force-placed insurance” is provided in RESPA and Regulation X.728 The implementing regulation contains a broader definition in that it does not include the limiting language contained in the statutory definition, the phrase “when the borrower has failed to maintain or renew hazard insurance.” As explained by the CFPB, the requirements in Regulation X apply even if the borrower has maintained insurance but the servicer has, in fact, erroneously force-placed insurance.729 The term

Mortgage Servicing and Loan Modifications: 3.6.3.1 Generally

Section 2605(k)(1)(A) of RESPA prohibits a servicer from “obtaining” force-placed insurance unless the servicer has a reasonable basis to believe that the borrower has failed to comply with the mortgage loan contract’s requirements to maintain property insurance.734 A servicer cannot have a reasonable basis for “obtaining” force-placed insurance if it has failed to comply with the notice requirements set out in section 2605(l).735 Section 2605(l) provides that a servicer may no

Mortgage Servicing and Loan Modifications: 3.6.3.2 Initial Notice Requirements

Before charging the borrower any fee for force-placed insurance, the servicer must send two notices to the borrower indicating that the servicer does not have evidence of hazard insurance coverage, specifying the procedures by which the borrower may demonstrate coverage, and advising the borrower that insurance may be force-placed if proof of coverage is not provided.739 More specifically, section 1024.37(c)(1) of Regulation X provides that a servicer may not charge a borrower for force-placed insurance unless the following sequential steps h