During our last examination we were cited for collecting more than allowed in our effort to avoid payment shock for next year's taxes on newly constructed homes. A recommendation made by the examiner was to obtain a voluntary increase in escrow payment affadavit from the borrower. How is this possible and when should this be presented to the borrower, at closing? How does this impact our previously provided disclosures? It's nice when the examiners give suggestions; however, there was no guidance provided. Any help will be greatly appreciated.

Let's start with the fact that your examiners were dead wrong in their criticism:

1024.17(c)(7) Servicer estimates of disbursement amounts. To conduct an escrow account analysis, the servicer shall estimate the amount of escrow account items to be disbursed. If the servicer knows the charge for an escrow item in the next computation year, then the servicer shall use that amount in estimating disbursement amounts. If the charge is unknown to the servicer, the servicer may base the estimate on the preceding year's charge, or the preceding year's charge as modified by an amount not exceeding the most recent year's change in the national Consumer Price Index for all urban consumers (CPI, all items). In cases of unassessed new construction, the servicer may base an estimate on the assessment of comparable residential property in the market area.

Whether the examiners were wrong or not depends how IMSHY's bank is estimating the taxes. Do they base and document their estimate on comparable properties or do they do like some banks do and just pull a number out of the air? Do they give the "payment shock" notice?

If they base their estimates on comparable properties then I agree, there is no cause for criticism, but if they are using random numbers with no basis for how that number was determined then they do need to standardize their procedures and the examiners are right to critize such a procedure IMO.

This is specific to new construction loans only. We estimate and disclose based on the current tax assessment which does not inlcude the improvements.

1.During our last examination we were cited for collecting more than allowed in our effort to avoid payment shock for next year's taxes on newly constructed homes.

2.This is specific to new construction loans only. We estimate and disclose based on the current tax assessment which does not inlcude the improvements.

These two statements counter one another - don't they??? Now I don't understand the issue.

I see a conflict in those two statements, too. So what exactly is the question being raised?

Payment shock can occur on construction and on purchase loans.

Construction Example: Borrower purchases a lot for $10,000 in 2013. Seller was owner of record on January 1, 2013, and seller's taxable value was $5,000. Pretend construction proceeded with no problems and permanent financing closed in 2013. The 2013 taxes will be $500 based on seller's taxable value. On January 1, 2014, Borrower is now the owner of record and the taxable value is $240,000. November 2014 taxes will $2,400. Payment Shock will occur at next escrow analysis!

In order to be in compliance we have to set up escrow for the 2013 taxes of $500. Examiners consider it a hardship for Lender to require Borrower to pay a starting balance and monthly escrow based on $2,400 tax bill when we know or estimate the next tax bill will only be $500.

However, if Borrower gets the required Payment Shock Notice and chooses to sign a Voluntary Payment to Escrow Agreement that results in an excess, the examiners are satisfied.

Excess funds still have to be returned to Borrower and it is their choice whether or not to redeposit into Escrow account.

Can you send me a copy of the suggested Payment Shock Notice verbiage that you are using? I would really appreciate you sharing this information.

Here is a link from the HUD website to the Federal Register from January 1998 that discusses payment shock and Voluntary Escrow - scroll to the end of the document for the Public Guidance Document language:
http://www.hud.gov/offices/hsg/ramh/res/escrow3.pdf

Some forms vendors include the language on the initial escrow agreement with a block to be checked if it applies. Did not find any samples for the actual Voluntary agreement. Our legal prepared a form for use a few years ago (which I cannot share) but we are unable to allow this option as our system will automatically refund any excess funds deposited into escrow. That may be a consideration as to whether you can offer this or not.

Perfect. Thanks so much Raquel!