Posting my question here as the RESPA forum seems to be pretty inactive.

Question on RESPA Escrow requirements.

If the taxes due or an insurance premium amount due are more than what the borrower has available in their escrow account at the time the items are due, is the Bank required to pay these items in full creating a negative escrow balance while using bank funds to cover the escrow account deficiency? If so, what citation in RESPA addresses this? Additionally, is the Bank allowed to force advance on the loan in an amount to cover the deficiency and deposit that force advanced amount to the escrow account to help cover the item due?

1024.17(k)(2) The servicer must advance funds to make disbursements in a timely manner as long as the borrower's payment is not more than 30 days overdue. Upon advancing funds to pay a disbursement, the servicer may seek repayment from the borrower for the deficiency pursuant to paragraph (f) of this section.

Paragraph (f) covers an escrow analysis. So, no you cannot just advance the loan if the borrower is current.

Thanks for the quick response and citation Randy.

Section K (Timely Payments) is what I was looking for. Not sure why I didn't scroll all the way down in the reg.

So in section 17(k)(5) in the timely payments section, the reg addresses "timely payment of hazard insurance" with emphasis on when a bank can purchase forced placed insurance. In this section, they define when "inability to disburse" exists and does not exist... again, for the purpose of establishing when a Bank can purchase forced place insurance.

In 17(k)(5)(b), the reg states that the bank is not considered unable to disburse funds from the escrow account merely because the account contains insufficient funds. This is helpful and clearly establishes that insufficient funds in an escrow account is not enough for a bank to not disburse; however, they don't provide the same guidance for property taxes with respect to insufficient funds. This verbiage is in a section specific to hazard insurance. Also, in section 17(k)(5)(c), the reg states that the Bank may seek repayment for advances it makes to the escrow account in order to timely pay hazard insurance premium changes, but it does not state that the Bank must seek repayment pursuant to section F here. Wouldn't this provide the Bank the ability to seek repayment through an advance on the loan? What if the borrower is requesting this?

Additionally, if you're a small servicer, then you can purchase force placed insurance if the cost of the force place insurance is less than the amount needed to disburse from the borrower's escrow account to ensure that the hazard insurance premium is paid in a timely manner.

Thanks again for your input Randy!

This is all very consumer friendly. If the customer is current on their loan and their escrow account is short - that means the lender failed to properly do their escrow estimates. You are looking for loopholes where there are none. Make the payments, reanalyze the account and move on.

Thanks for the response Randy. Not looking for loopholes. The question is simply if the Bank has to cover an amount that would take the escrow account negative in order to a pay a disbursement and if so, could it advance on the loan to cover that amount? I'm still not seeing where that is expressly prohibited. The question is being asked for the benefit of the customer, not the Bank. They are requesting the loan advance for the stated purpose. Section 17(k)(5)(c) already provides that the Bank can seek repayment for advances it makes to the escrow account. Was just trying to determine if the reg expressly prohibits the Bank from doing this through a loan advance.

By the way, if an escrow account is short, that does not mean that the lender "failed" to properly estimate escrow disbursements. Escrow disbursement estimates on a new projection are based on the prior year's disbursement activity. That's standard escrow projection practice because that's the best guess and info the Bank can use to estimate disbursements for the upcoming year.

If the bank estimated disbursements based on last years activity and the account is short, it's because taxes due or a hazard insurance premium due for the upcoming year realized a significant increase well beyond what was estimated based on what was disbursed last year and by more than enough to wipe out any two month cushion added. That has nothing to do with the Bank failing to "estimate" properly. That has to do with appraisal districts increasing appraisal values and insurance companies increasing insurance premiums drastically. We don't rub our bellies and guess if appraisal values or insurance premiums are going to go up and guess by how much.... we use last years disbursement activity to estimate.

In this particular case, the insurance premium went up from 7,100 paid last year to 10,700... a 50% increase! The account just went through an analysis a few months ago which resulted in a shortage (taxes went up in the prior year) so the customer's escrow account is already behind with the borrower playing catch up through increased escrow payments.

Thanks again for your time and responses!

If this is common in your area, you may want to think about at least increasing your yearly estimates by the CPI (1024.17(c)(7)) - that might cushion the blow a little. You might also want to immediately do a short year analysis when an estimated payment is more than a certain percentage above an estimate, in order to not get the customer so far in the hole.

Since you are in Texas and these are closed-end loans and I assume most of them are secured by homestead properties, you can only advance monies on the loan for amounts that are past due, which means the loan is in technical default or you are going to create a 50(a)(6) Home Equity situation. Since if the customer is current on their loan and you are obligated as the lender to make these escrow payments under RESPA, there is no default. If the borrower needs to borrow money to make up the escrow deficit, then I think you need to consider the loan for classification, as that is the first sign that your borrower is in trouble even if the loan is still current, as it proves they have depleted all of their reserves.

Thanks for the continual feedback Randy.

Drastic property tax or insurance premium increases year over year are not common in my area. Yes, an alternative approach to estimating would be to modify last year's disbursement amount by no more than the most recent change in the CPI... but that shouldn't be necessary if you're already requiring a two-month cushion. CPI year to year changes have been 2.4, 1.8, 1.2, 4.7 and 8 percent the past 5 years.... well below what a 16.67% overall cushion would already cover to account for unanticipated increases in any disbursement item.

In my scenario, the insurance premium increased 50%! This is way more than what any two-month cushion PLUS any estimated disbursement that may have been modified/increased by the CPI could cover.

A test short year analysis is something we've already done to measure the increase in the escrow payment that accounts for the previously analyzed shortage. We now have a deficiency PLUS shortage. The customer's new escrow payment will be well more than what their P&I payment is which is why they are asking if we can advance on the loan and deposit to the escrow account to cover that deficiency.

I'll run the home equity trap by our legal concerning the loan advance.

Thanks again for the feedback Randy!