Loan closes in October, 1st payment is due December, and taxes are due in December yet taxes are paid @ closing. Should the initial escrow disclosure NOT reflect taxes since these will not be due again until December of the next year?

Yes, sometimes it happens. What we end up doing is explaining to the borrower that we will be re-analyzing the account effective the January payment so that we can start collecting for the disbursement for the following year. This may result in a shortage in the account and additional funds may be required to be deposited in the the account. We give the borrower the choice to make the deposit or spread the shortage over the next 12 month.

Your escrow analysis year begins when the first payment is due. My question is why are you collecting the taxes at closing if they aren't due before the analysis year begins?

Your initial analysis should have shown 5 / 11 monthly tax payments as your initial deposit in the escrow account (not taking into account any cushion and depending if the tax payments or semi-annual or annual).



You may want to revisit this practice. IMHO it's a violation of 3500.17 as your analysis can only include anticipated payouts for the current analysis year. You may inform the customer of the estimated shortfall and they can voluntarily pay additional funds to the escrow but your analysis or your procedures cannot compel them to do so.

Dan, ours only happens when the borrower or seller has paid taxes for the whole year so only one tax payment falls within the computation year at closing.

I posted this in another thread that David Dickerson commented on. He said it's known as Payment Shock and that doing a short year statment was ok (fine).
http://www.bankersonline.com/forum/ubbth...569#Post1367569

We have problems with this too with taxes that can be split into two payments and only one payment falls into the twelve month period following closing. Our system wants to calculate the escrow based on only half the amount of annual taxes. I'm still wrestling with my software provider about this one.

If you are changing the analysis year for your accounts then I would agree with using the short year statement but if you are only using it to make an adjustment in the payments collected for individual accounts then I would not agree. Using a short year analysis is not one of the remedies offered in .17(f)(3) to collect a shortage. Until you make the anticipated payment you do not have a deficiency or a shortage to collect.

I know a lot of FI use the short year analysis for this purpose but I will stand with my opinion that its use for this purpose is not in line with 3500.17.

We give the borrower the "payment shock" notice with the anticipated short fall and it is strictly their option if they pay it during the current year or make it up in the next year.



If only half of the taxes are being paid in the computation year then the software should be basing the escrow payments on the half year to be paid. It would not calculate the other half that will be paid in the next computation year.

Dan, the problem is that the second half of taxes are due in the 13th month. Around here, that could mean starting out the year a few thousand dollars in the hole. Do you think a 'payment shock' letter is the solution for this situation too?

If the taxes are due outside of your escrow account computation year, you should deliver the "payment shock" letter. You can only calculate the escrow for 1/2 taxes.

Thank you David.

Did a little digging and found this. Page 2 has a paragraph that outlines the verbiage for a 'payment shock' letter in case anyone else wants to see it.

The link above appears to be broken.
Does anyone have an example of a payment shock letter they'd be willing to share?
Thanks.

We have a form, but it's not available online. Below is the "meat" of it.

VOLUNTARY ADDITIONAL ESCROW PAYMENT AFFIDAVIT

The below signed mortgagor(s) is/are aware, that my monthly escrow payment has been temporarily set up at an amount less than the estimated full 1/12 of the total annual escrow disbursements. This may result in the possibility of a deficiency and/or shortage in the escrow account at the time of the next annual escrow analysis.

The reason for this escrow payment set at a lower amount is due to either the property not being assessed at its full value at the time of closing and/or the Initial Aggregate Escrow Analysis, as required by RESPA, did not include all of the annual disbursements for taxes and insurance.

In order to avoid the possibility of a substantial escrow deficiency and/or shortage and limit the increase in your monthly payment at the time of the next escrow analysis you can voluntarily deposit additional funds into your escrow account.

Please check one:

_________ The additional amount of escrow funds I voluntarily want included in my monthly payment is:


__________ $___________________ (Amount recommended by lender)
__________ $___________________ (Amount requested by borrower)

_________ I do not wish to make additional deposits to my escrow account. I realize that my escrow payment, which is included in my monthly mortgage payment, may increase substantially when the account is re-analyzed. In addition, if there is a deficit and/or shortage in the escrow account when the account is re-analyzed, I/We agree to remit to the lender the entire deficit and/or shortage in accordance with the lender’s written notification.

With the voluntary escrow payment, my monthly payment (principal, interest and escrow) will be $_________________________.


[Signature lines and dates]

Thank you SO much, David!

If I can prevail upon you with one more question.
The ability to make voluntary payments does not have to be offered to the borrower, correct? We can just notify them they'll be short and why.

From 1024.17(a):

. . . A Public Guidance Document entitled “Consumer Disclosure for Voluntary Escrow Account Payments” provides a model disclosure format that originators and servicers are encouraged, but not required, to provide to consumers when the originator or servicer anticipates a substantial increase in disbursements from the escrow account after the first year of the loan. The disclosures in that model format may be combined with or included in the Initial Escrow Account Statement required in §1024.17(g). . .

David- I attended the All About Escrow webinar that was presented in July and I wanted to verify that the Voluntary Additional Escrow payment form from our packet is available for our usage.

It is my understanding that this form is used in instances when we know that the payment is going to be larger than it was previously and we want to avoid payment shock (such as new constructions).

Under the idea of “only inflowing what we know we are going to outflow for” we escrow based on the previous year's billing. We can then estimate what we believe the customer’s bill will be and have them sign this form to increase their monthly payments. This would avoid a big violation which could occur by mandating the customer pay into their escrow account on an estimated amount.

However, I noticed that the form only addresses the monthly payment amount- the additional amount that the customer is going to pay every month but not the difference in the escrow start-up. There can be quite a difference in the start-up amounts which I am assuming would be viewed the same way- we are requiring the customer to pay in more than we know we are going to pay out.

What is the thought on this? Thanks!

Absolutely!


You can't mandate customers pay in (starting balance or monthly payments) any more than what is needed to make the outflow payments during the next year. I suppose you could ask for a voluntary higher starting balance rather than a voluntary, higher monthly payment, but I've never seen it. The form I provided during the webinar was based on one HUD designed. They only addressed higher monthly payments, so I did the same. I think their reasoning is that this is "kinder" to the borrower than asking for it all upfront.

Thanks for you time! I appreciate your help.