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Late Escrow Payment

Question: What are the RESPA implications if the creditor makes a late payment from an escrow account and because the payment was late, the insurer increases the price of insurance? Does the lender have any liability? If so, for how long?

Answer: The lender or servicer has an obligation to make payments from escrow to obtain a discount or avoid a penalty, whichever is earlier. In your example, the late payment resulted in the borrower/insured facing an increased insurance bill. Clearly, the increase is the direct result of the lender or servicer's behavior.

RESPA does not contain a specific definition of penalty. However, payment of an increased insurance bill would be considered a penalty - and a fairly severe one - by most consumers. Thus, the lender or servicer responsible for making the late payment should consider themselves liable for paying the increased portion of the insurance bill just as the lender would have to pay a specific penalty for late payment.

Any creditor managing an escrow account for a mortgage customer should realize that the creditor is acting as a trustee of sorts for the borrower. The funds belong to the borrower. The creditor has specific obligations to manage the borrower's escrow funds in the interests of the borrower.Copyright © 2004 Compliance Action. Originally appeared in Compliance Action, Vol. 9, No. 10, 10/04

First published on 10/01/2004

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