13-Month Escrow Analysis?

by Michael Shohoney January 25, 2013 06:53

One of the issues that seems to come up repeatedly here is the issue of what, we term, a 13-month escrow analysis.  Here’s the scenario; a lender is closing a loan and one of the escrow items is due sometime in the month of the first payment.  So, let’s say that the loan closes in December with a first payment due in February.  The hazard insurance premium is due in February.  Lenders, for some reason, want to collect the entire premium at closing and pay it instead of paying it out of escrow.  The reasons for this remain somewhat unclear.  Yet, they do want the item to be escrowed.

What’s the problem with this?  According to the regulations that govern escrow accounts, an initial escrow analysis can only be for one year, measured from the date of first payment (i.e. 2/1 – 1/31 in our example).  Doing what the lender is requesting, the insurance premium, since this year’s is paid, that will be part of the analysis is next year’s premium and it falls outside the one-year analysis.  This is prohibited by Section 3500.17 of Regulation X (RESPA).  Our one-sixth annual escrow analysis follows the regulation to the letter.  But, in the instance outlined above, we get inquiries on how to satisfy this.  Really, since it goes against the regulation, you can’t. 

So, what are the possible solutions?

1.       Follow the regulation and pay the item, when due, out of the escrow account.  We’re told from time to time that the lender cannot establish the account and pay out of it that quickly.  We find that very hard to believe.  This is the proper way to do it and we believe that lenders should be able to accommodate the mechanics of the regulation if they are going to require items to be escrowed.  Let’s remember that escrow accounts are there, ultimately, to protect the lender.  Therefore, they should be established in such a way that any “inconvenience” is to the lender, not the borrower.

2.       Do not escrow this item.  This probably is not a desired solution but, if the lender insists on collecting the entire amount of the item (prepay) at closing, then escrow having as part of the escrow is not feasible under current regulations.

3.       Perform a short-year analysis in the second month of the loan.  A short-year analysis is allowed to make adjustments to escrow accounts where there is an anticipated shortfall or surplus.  This item, if agreed to be escrowed at a future time, would be considered a shortfall.

Lenders need to be careful as to what they’re requiring borrowers to do.  We have gone through a rough period with a lot of lender abuses and borrower difficulties.  This is a situation where we believe that the lender must adjust their methods in order to comply with existing regulation.

As always, if you have any questions, please contact us.