Escrow Account Shortages & Deficiencies

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If you service loans with escrow accounts, you need to be aware of the CFPB’s Summer 2020 Supervisory Highlights.  It addresses permitted repayment options when there is a shortage or deficiency when you issue your annual escrow account statements.  Specifically, the CFPB has found financial institutions that are providing borrowers a repayment option that is not allowed by RESPA.

Listen to Jerod explain more

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Attention one of the findings that it was identified by the CFPB in their 2020 Supervisory Insights

Does your financial institution service loans with Escrow accounts? Hi there, this is Jerod Moyer with Banker’s Compliance Consulting. The answer is yes. What I want to do is bring to your attention one of the findings that it was identified by the CFPB in their 2020 Supervisory Insights. Now, let’s start with something right out of the gates as far as oversight. HUD used to have oversight over RESPA. They no longer do. The CFPB now owns interpretation and oversight of the RESPA regulation. So here’s their finding. Their finding was that there were financial institutions out there that were providing an option in relation to shortages and deficiencies that was not allowed per the regulation.

Let me set up a scenario. We’re going to use shortages as our example. So you do an analysis and you find out there’s a shortage in the escrow account. It’s not quite meeting your target balances, which typically would be a two-month cushion, low point. So you do this analysis and you’re looking at whether or not to try to bring it back to where it should be in your options for doing so.

Well, option number one, according to the regulation is, you can leave the shortage and just let it exist. Okay. That’s option one. Now that’s not good management of money. And I’m going to encourage you to try to get your target balance back to where it needs to be with respect to the Escrow account. So do nothing is probably not the greatest option. Okay. The second option, according to the regulation is that because this is equal to or greater than one-month’s payment that you allow the borrower to repay or bring the shorts back to where it needs to be in equal payments over a 12-month period. And you put that on your RESPA escrow statements that you’re going to send out.

Traditionally, there has been a standard third option that was provided by many financial institutions on the escrow statements, but not provided for in the regulation. And that is the option to let the borrower bring in a lump sum to keep their escrow payments the same as they have been. So they make up the shortage with a one-time payment that will increase the escrow balance and keep their escrow monthly payment exactly the same.

Well, the CFPB has chimed in, and again, as I said earlier, they now have ownership of the regulation and interpretation. And they have said that is going too far. That lump sum option that many provide is not part of the regulation and they’ve been citing financial institutions for doing so. So that’s something you’re going to want to check into before you do your next analysis to see if you are to going too far in the eyes of the CFPB.

And you might say, “I’m not regulated by the CFPB.” Well, that matters, but it doesn’t in this case, in my opinion, because whatever they interpret the rules to be likely trickles down to your prudential regulator, be it the FDC, the OCC, the Federal Reserve, the NCA, whoever it may be, the CFPB is interpretation likely eventually reaches them and you will be held to that standard. So something to go check into with respect to the analysis in your accounts when there’s a shortage or a deficiency in the options that you provide to the borrower.


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