Topic:
MORTGAGE LOANS; ESCROW ACCOUNTS;
Location:
MORTGAGES;
Scope:
Federal laws/regulations;

OLR Research Report


OLR RESEARCH REPORT

December 7, 1998

 

98-R-1480

MAXIMUM AMOUNT OF MORTGAGE ESCROW ACCOUNT

 
 

By: Kevin E. McCarthy, Principal Analyst

You asked what the maximum amount is that a lender can hold in a homeowner's mortgage escrow account.

The federal Real Estate Settlement Procedures Act (RESPA) governs such accounts. Under 12 U.S.C. 2609, a lender can require a homeowner t make a monthly deposit equal to one-twelfth of the estimated amount needed to pay taxes, insurance premiums, and other charges on the home for the next 12 months. It can also require that the escrow provide a cushion of up to two months worth of payments, that is, an additional one-sixth of the annual amount. Thus, if the estimated annual property tax for a house is $3,600 and the insurance and other charges amount to $1,200, the bank can require a monthly escrow payment of $400 ($3,600 plus $1,200 divided by 12). It can also require that an additional amount of up to $800 be kept in the escrow account at all times as a cushion. RESPA also requires lenders to provide homeowners with a statement itemizing taxes, insurance payments, and other charges when establishing an escrow account. Lenders must provide an annual statement regarding the account during the term of the mortgage.

According to Bill Nahas, the Director of the Consumer Credit Division of the state Banking Department, the purpose of the cushion is to provide the lender with funds to cover an unanticipated increase in taxes, insurance, or other charges. He notes that some lenders do not require a cushion, some only require an amount equal to one month's charges, and some require two months. He also notes that the amount of cushion required may change if the bank sells the mortgage to another lender, as commonly occurs in the industry.

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