RESPA question for compliance stud

Compliance examiners are here, and we are getting a violation over how the initial escrow deposits are disclosed on the HUDI. Upon reading the reg myself, I think that my method may have been unorthodox, but not techinically in violation - and the examimer cannot follow my point. So this is for the ultimate compliance stud to issue an opinion.

My disclosure read (simplified):
Hazard insurance - 2 mo x $75 = $150
Taxes - 4 mo x $100 = $400
PMI - 0 mo x $5 = $0
Less agg. adj. - = -$50
(net initial deposit) = $500

The examiner says it should be:
Hazard insurance - 3 mo x $75 = $225
Taxes - 6 mo x $100 = $600
PMI - 2 mo x $5 = $10
Less agg. adj. - = -$235
(net initial deposit) = $500

The reason that he says it should be his version is because in step 2, I am using a 2 month cushion to determine the aggregate adjustment and that essentially means that I am collecting a 2 month cushion for PMI (as well as the other items escrowed for). However, the reg appears to read to me that the procedure is 1) use single item accounting for the individual items -- and it appears that you are free to choose any cushion for each item so long as it is not more than 2 months; then 2) analyze using the aggregate method to come up with an adjustment that ensures you have no more than a 2 month cushion in aggregate. The examiner insists that because I am using a 2 month cushion in aggregate, that means I am actually collecting a 2 month cushion for PMI that I am not disclosing. I don't think that is what the reg actually says.

Opinions please?

James

I don't have an answer to your question, but I'm bumping this up since we also do not collect cushion for PMI. Hopefully David or someone equally as knowledgable in escrows will see this!

To properly answer your question, we need to know the amount of the payments. You can also use our Escrow Analysis program, found at our website:
http://www.bankerscompliance.com/compliance-resources/free-downloads.htm

There is only one way to calculate escrow reserves (using the aggregate accounting method). You are free to use a 2 month cushion on some items (taxes and insurance) and 0 cushion on others (PMI). There is no requirement to use the same cushion for all escrowed items.

Dave, you are exactly the compliance stud that I was hoping would see my question. I am being cited for a systemic violation because I did not allocate and itemize 2 months of reserve for PMI on the HUD1. I have made the arguement that I am not allocating two months of reserve for PMI, but the examiner insists that since I am choosing two months of reserves for the aggregate portion of the analysis I am therefore choosing two months of reserves for each individual item -- including PMI. Your last paragraph is exactly what I am telling the examiner but he doesn't see where I am coming from.

James (formerly from Valentine)

Can the examiner give you a citation?

As long as I don't exceed 1/6th of the estimated annual disbursement I can reserve any amount I want.

(5) Cushion. For postrule accounts, the cushion shall be no greater than one- sixth (1/6) of the estimated total annual disbursements from the escrow account using aggregate analysis accounting.


BTW, the tool David furnishes, for free, is an excellent tool. We have been using it for some time.

Whew!! Thanks David and Dan (and another thank you to David for the spreadsheet - I use it all the time!)

I just about panicked since we have the examiners coming in 2 weeks - good luck James!

OK - we are really getting down to the core of the hair now. I have pulled Dave's tool off of his website, and put my case into it. Dave's tool has an inherit assumption built into it also -- that I do not find in the text of the reg (appoligies Dave in the unlikely event I turn out to be correct). Dave's tool assumes that the sum of the cushions for all individual items in the escrow using single item accounting IS the exact dollar amount of the cushion to be used for the aggregate analysis part of the process. i.e. - if I select a 1 month cushion for hazard insurance in step 1 ($75) then my cushion for the aggregate analysis is $75. However, 1/6 of the total being paid out of the escrow account in my example is actually $360 -- and I think that the text of the reg would allow me to use this $360 as my selected cushion for step 2 of the process. (in my analysis above, I selected 1 month for hazard insurance, and 0 months for both PMI and taxes)

James

After re-reading this I think I see where the examiner is coming from. You are taking a cushion of 1/6 of the total estimated escrow items to be paid out, which includes the PMI premium, therefore you are taking a 1/6 cushion for the PMI premium since it is included in the "total" estimated pay out and you are to disclose that reserve per the instructions in Appendix A for that line item.

Although I can reserve any amount I want as long as I don't exceed 1/6 I do have to show what I am reserving for. Therefore if I'm not going to reserve for PMI then the PMI should not be included in calculating my reserve.

But I am free to reserve 0 for PMI, 1 for insurance and 2 for taxes if that is what I want to do. I do not have to reserve 2 across the board.

I am going to have to change my position and side with the examiner.

David???

James - good to hear from you again.

Here's what I understand:
You have a $0 cushion for PMI but your total cushion is 1/6 (2 months) of the total paid in (everything - taxes, insurance). If that's true, I don't believe this is OK. In effect, you have more than a 2 month cushion on the taxes and insurance.

Single item accounting requires that you look at each item separately. When you do that you can't have more than 2 months cushion on any 1 item. Aggregate accounting looks at all of the items at once, but you can't change your cushion amount from how you had it on the PMI.

Let me know if I'm not understanding you correctly James.

Cushion in aggregate is 2 months of everything paid in and out. In my single item analysis (step 1) for the case in question, I used a 1 month cushion for insurance, and 0 months for taxes and PMI.
But...read the text of the reg --- states essentially - step 1) using single item accounting, figure initial deposit using no more than a 2 month cushion on any individual item - then step 2) using aggregate accounting, make a negative adjustment so that your aggregate cushion is no more than 2 months. again, nowhere does it state that the aggregate cushion is the sum of the individual item cushions or that it has any relationship whatsoever.

James

James, I see your point, but I disagree. You are correct the single item analysis instructions limit you to a 2 month cushion on any one item []§3500.17(d)(2)(C)]. I'm not reading RESPA thoroughly to try to prove you wrong, but I disagree this is the intent of RESPA. The point of the aggregate analysis is that you list everything (just like you did with the single item analysis) and take the difference between it's total and the sum of the single item analyses.

If we use your logic, you could use a 0 cushion on every single item analysis and then use a 2 month cushion on the aggregate analysis. This would really throw things off.

I challenge you to find one escrow calculator that will meet your understanding. You indicated you were using ours and it didn't match up to your understanding. The FDIC also has a calculator & I believe the FRB has another. I don't believe any of these will allow you to change the cushion as you indicate.

You've got an argument, but I believe it misses the point of the law. There are many places in RESPA that aren't spelled out well. You have to read the preambles and other guidance that has been issued. You can continue to debate this with your examiners, but my professional opinion is to give it up.

Done. Thanks for your review. I do know when to quit. And btw - ARTA Lending software will allow this to happen. And I'm sure that they will say 'user error', but if there are calculators widely available, I would say they are behind the pack by not implementing a more rigorous routine in ARTA.

James