Escrow Administration glossary of terms & definitions

Escrow Administration glossary of terms & definitions:

• Escrow Account: Escrow account means any account that a servicer establishes or controls on behalf of a borrower to pay taxes, insurance premiums, or other charges with respect to a loan, including charges that the borrower and servicer have voluntarily agreed that the servicer should collect and pay.  The definition encompasses any account established for this purpose, including a “trust account”, “reserve account”, “impound account”, or any other term.  The term escrow account excludes any account that is under the borrower’s total control.
• Establishing an Escrow Account: Before establishing an escrow account, the servicer shall conduct an escrow account analysis to determine the amount the borrower shall deposit into the account.  After conducting the escrow account analysis, the servicer shall submit an initial escrow account statement to the borrower within 45 calendar days of establishment of the escrow account.
• Record Retention: A servicer must retain the records of an escrow account for a period of five years after the servicer last serviced the account. The records must include payments to the account, disbursements from the account, and all escrow account statements.  The records may be stored on electronic media.
• Permissible Charges: Throughout the life of an escrow account, the servicer may charge the borrower a monthly sum equal to one-twelfth (1/12) of the total annual escrow payments which the servicer reasonably anticipates paying from the account.
• Aggregate Accounting: It’s the accounting method the servicer must use when conducting an escrow account analysis.  The servicer must compute the sufficiency of escrow account funds by analyzing the account as a whole. Under aggregate accounting rules, the servicer must use ‘month-end’ accounting. This means, that the timing of disbursements and payments within the month is irrelevant.
• Annual Escrow Account Disclosure Statement: For each escrow account, a servicer shall submit an annual escrow account statement to the borrower within 30 days of the completion of the escrow account computation year. The servicer shall also submit to the borrower the previous year’s projection or initial escrow account statement.  The servicer shall conduct an escrow account analysis before submitting an annual escrow account statement to the borrower.
  • Furthermore, the annual escrow statement shall provide an account history, reflecting the activity in the escrow account during the escrow account computation year, and a projection of the activity in the account for the next year.  In preparing the statement, the servicer may assume scheduled payments and disbursements will be made for the final 2 months of the escrow account computation year.
• Short Year Statements: A servicer may issue a “short-year” annual escrow statement to a borrower at any time to change the escrow account computation year to another.  The effect of issuing a short year statement is to end the prior computation year and establish the beginning date of a new computation year.  Short year statements must be delivered to the borrower within 60 days of the end of the short year.
  • Transfer of Servicing.  Upon the transfer of servicing, the old servicer shall submit a short year statement to the borrower within 60 days of the effective date of the transfer.
  • Loan Payoff.  If a borrower pays off the loan during the escrow account computation year, the servicer shall submit a short year statement to the borrower within 60 days after receiving the pay-off funds.
• Cushion: Cushion means funds that a servicer may require a borrower to pay into an escrow account to cover unanticipated disbursements or disbursements made before the borrower’s payments are available in the account.  The cushion amount shall not be greater than 1/6 of the estimated total annual disbursements from the escrow account or a lesser amount specified by State law or the loan document.
• Estimating Annual Disbursements: To conduct an escrow account analysis, the servicer shall estimate the amount of escrow account items to be disbursed. If the charge is known, the servicer shall use that amount; otherwise the servicer may base the estimate on the preceding year’s charge or the preceding year’s charge increased in proportion to the increase in the Consumer Price Index (CPI) since the date of the last escrow analysis.
• Timely Payments: The servicer shall pay the disbursements in a timely manner, that is, by the disbursement date, so long as the borrower’s payment is not more than 30 days overdue.  In calculating the disbursement date, the servicer shall use a date on or before the earlier of the deadline to take advantage of discounts, if available, or the deadline to avoid a penalty.
• Discretionary Payments: Any borrower’s discretionary payment such as credit life or disability insurance made as part of a mortgage payment should be noted on the annual escrow statement. Discretionary payments are not part of the escrow account unless the payment is required by the lender.
• Surpluses: A surplus is the amount by which the current escrow account balance exceeds the required maximum cushion.  If an escrow account analysis discloses a surplus, the servicer shall, within 30 days from the date of the analysis, refund the surplus to the borrower if the surplus is greater than or equal to $50.  If the surplus is less than $50, the servicer may refund the amount to the borrower, or credit such amount against the next year’s escrow payments. If the borrower is 30 days late or more, the servicer may retain the surplus in the escrow account pursuant to the terms of the loan documents.
• Shortages: A shortage is an amount by which a current escrow account balance falls short of the required cushion amount. If an escrow account analysis discloses a shortage of less than one month’s escrow account payment, then the servicer has three possible courses of action:
  • Do nothing.
  • Require the borrower to repay the shortage within 30 days.
  • Require the borrower to repay the shortage amount over a 12-month period.
• If an escrow account analysis discloses a shortage that is greater than or equal to one month’s escrow account payment, then the servicer has two possible courses of action:
  • Do nothing.
  • Require the borrower to repay the shortage amount over a 12-month period.
• Deficiency: A deficiency is the amount of a negative balance in the escrow account.  If a servicer advances funds for a borrower, then the servicer must perform an escrow account analysis before seeking repayment of the deficiency. If an escrow account analysis confirms a deficiency, the servicer may require the borrower to pay additional monthly deposits to the account to eliminate the deficiency.
• If the deficiency is less than one month’s escrow account payment, then the servicer has three possible courses of action:
  • Do nothing.
  • Require the borrower to repay the deficiency within 30 days.
  • Require the borrower to repay the deficiency in 2 or more equal monthly payments.
• If the deficiency is greater than or equal to one month’s escrow account payment, then the servicer has two possible courses of action:
  • Do nothing.
  • Require the borrower to repay the deficiency in 2 or more equal monthly payments.