RESPA, CFPB & You: A Focus on Escrows

Most of the times when I'm talking about RESPA, I'm referring to kickbacks and things of value that have been given in exchange for the referral of business and those types of things. This time, I want to talk about something that we don't focus really a lot on, but I think it matters. I think it will explain a few things to you guys, and that is section 10 of RESPA, which deals with escrows.

When I refinanced my home, I actually got the good faith estimate back then from my lender, then I looked at that, and that looked normal. And then, all of a sudden, I got this message from the closing company saying that I was late on my taxes. And I said, "Well, that can't be, because I have escrows." And so, I called up my servicer, and I said, "Hey, why am I late on my taxes? I pay you every single month." And they said, "Oh, well, we'll have to do a 72-hour review. Give us 72 hours. We'll let you know." And I said, "Well, why don't we do a quick review? How much of my money do you have?" And in my state, we pay every six months. And when she looked at it, they had about nine months’ worth of my money. And I said, "Oh, we just did our investigation. You actually are in violation of RESPA, and so I'm going to need that money back."

Well, they had forgotten to pay my taxes when the tax bill came, and that was hurting me.

It's a violation of RESPA. And the CFPB is finding that the more servicing exchanges and transfers we do, the more those things can get messed up.

And so just to be really clear on what a company can hold, you can actually hold one-sixth of annual payments. You're talking about two months’ worth of payment. You can hold that as cushion. So, if they have more than a two-month cushion plus what's going to be due, they would be in violation of RESPA. The other thing is they can only collect one-twelfth every month. So, every month they collect one-twelfth, which would be one payment toward your annual fee, and at the end of the year or at the end of the six months, however your state does it, they make that check payable, get those taxes covered, they start collecting again with a two-month cushion.

So, why am I telling you this? If you don't service loans, how will this help you? Really, it can help you a lot in that your borrowers, when they fund a loan with you, you want them to feel like they are part of your mortgage-lending experience, that you're part of their experience, they're part of your experience. You guys will stay together. If you guys are… the end of the year is coming up and they would receive their annual escrow statement, don't just wait for them to call you, necessarily, about, "Hey, I just got this, and it looks like my mortgage payment's going up," which we hear a lot when it's really taxes and insurance. Reach out to them.

So, look at your area. If your area is increasing in value, which a lot of our areas are, you can assume that the new assessments will come out, the taxes will go up, and the borrower is going to get a brand new payment. And not only do you not want them to think that your loan just adjusted, but you want them to understand why and what just happened.

And so, it's good for you guys to notify them. And then, if your borrower says, "I've been paying my taxes. What happened," you might have a violation of RESPA.

And the cool thing was when I brought that up with the servicer, they actually very quickly fixed it. I was able to get my refinance done. I didn't have to worry about it anymore. So, it is controlled. CFPB is watching it really closely. And when you guys are doing your aggregate adjustments when you're initially quoting on your LE, you're initially showing what their fees will be, keep in mind that your system needs to be nails at making sure that you're correct on closing date, that they're looking at your state's requirements for when the taxes are due so that you can give your borrower a really accurate amount of money that they're going to bring in, so that you're not coming back to them with a new aggregate adjustment. And maybe they were offering on a house where they have the seller paying closing costs, and now there's not enough closing costs because of that adjustment.

So, I wanted you to know why that exists, and also have enough to be able to explain to your borrowers when they call you, but also, to go ahead and reach out to your clients and let them know what's happening, especially in an appreciating market.

Additional Reading:
Do Not Call (DNC) Rules & Compliance for Loan Officers