Escrow accounts represent accounts where money is held in trust until a transaction is completed. For example, a landlord might create an escrow account for a renter’s deposit money, to be retained in the account until the rental contract is terminated. In real estate transactions, a bank or lender might create an escrow account for holding property taxes and insurance to ensure payment. As of November of 2008, the U.S. Department of Housing and Urban Development revised earlier accounting rules for escrow accounts held by banks to reflect changes in mortgage loans. Understanding these revisions will help banks avoid the problems associated with non-compliance.
The first amendment in 2008 was to Regulation X, which applied to the Real Estate Settlement Procedures Act. According to this amendment, banks must supply a statement to the borrower whether the loan will include an escrow account. The 2008 amendments affected Regulation Z, which applied to the Truth in Lending Act, and expanded on the Regulation X amendments. The Regulation Z changes require that banks state clearly the full monthly payment that borrowers will make by including payments added to an escrow account. Escrow account payments exceed the payment for the actual loan. For instance, a loan by itself might yield monthly payments of $1,500 for the borrower. The money for the escrow account might add an extra $150 per month to this payment. Banks are now required to tell borrowers if an escrow account will be in place and what the actual payment–with escrow–will be.
To ensure compliance with escrow accounting changes, banks now have the following obligations: identify for borrowers the initial payment and all monthly payments to the escrow account, provide borrowers with an escrow account statement, review the escrow account annually to determine if any changes must be made--if, for instance, insurance costs or taxes increase or decrease--and provide the borrower with an annual escrow account statement. Banks are also required to correct any errors that are made in escrow calculations, adjust these errors and notify the borrower of changes that are made.
The amendments to the regulations created significant extra work for banks preparing mortgage loans, but they are intended to assist borrowers in making better purchasing decisions and in preventing foreclosures due to borrowers not understanding the extent of their financial responsibility. To ensure bank compliance and to assist banks in keeping up with the changes, the Federal Reserve recommends that banks establish periodic reviews of escrow accounts, develop training for escrow accounts staff members, update and review software programs that calculate escrow to make sure the calculations are correct, and create self-policing compliance reviews and audits on escrow accounts.
- bank image by Pefkos from Fotolia.com