III.A.1.g. Escrow (03/14/16)

Owned by Kacey Olson
Nov 21, 2018
5 min read

© HUD Single Family Housing Policy Handbook 4000.1

Included in this section are:

i. Definition
ii. Escrowing of Funds
iii. Escrow Analysis
iv. Processing Payments from Escrow Accounts
v. Use of Escrow Funds

i. Definition

An Escrow Account is a set of funds collected by the Mortgagee for payment of taxes, insurance, and other items required by the mortgage Note.

ii. Escrowing of Funds

(A) StandardThe Mortgagee must segregate escrow funds, including those funds escrowed at closing, and deposit the funds in a special custodial account characterized by the following:

  • with a financial institution whose accounts are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA);
  • that does not limit the Mortgagee’s access to funds, require an advance notice of withdrawal, or require the payment of a withdrawal penalty; and
  • that clearly identifies the type of funds being held in that account.

Mortgagees utilizing a Trust Clearing Account must withdraw the portion that is to be applied to escrows within 48 hours of the deposit and must transfer the portion to the escrow account for the Borrower’s Mortgage.

Mortgagees are not prohibited from holding escrow funds for all types of Mortgages in a single bank account; however, the Mortgagee must not commingle escrow funds, even temporarily, with funds used for the Mortgagee’s general operating purposes.

(B) Interest on EscrowsHUD regulations neither forbid nor require that escrow accounts earn interest.However, if escrow funds are invested, the Mortgagee must pass on to the Borrower the net income derived from the investment in accordance with the following:

  • The Mortgagee must make investments and payments in compliance with state and federal agency requirements governing the handling and payment of interest earned on a Borrower’s escrow account.
  • The Mortgagee may only deduct the actual cost of administering the interest-bearing account before passing on to the Borrower the net earnings from the investment of their funds.
  • The Mortgagee may not charge the Borrower expenses for maintaining the interest-bearing escrow account in an amount exceeding the gross interest earned from investing the funds in that account.

(C) Required DocumentationThe Mortgagee must retain documentation of its holding of all escrow funds on deposit.

iii. Escrow Analysis

The Mortgagee must perform analysis, at least annually, of the escrow account to provide for adequate collections to pay escrow bills when due without creating excessive surpluses. The Mortgagee must begin these analyses no later than the end of the second year of the life of the Mortgage.

The Mortgagee must retain any escrow surplus discovered when performing the annual escrow account analysis for a Delinquent Mortgage pursuant to the terms of the mortgage documents and federal law and regulation, including RESPA.

iv. Processing Payments from Escrow Accounts

When making payments from escrow accounts, Mortgagees must:

  • send payment directly to the billing agency or the taxing authority, or as otherwise directed by state or local law;
  • request a bill from the billing agency if a bill has not been received within a reasonable amount of time before the payment due date;
  • contact the Borrower, if necessary, to obtain the bill or the information needed to pay such bills if a bill is not received within a reasonable amount of time before the known payment due date; and
  • make Disbursements as bills become payable, even if making the payment requires advancing corporate funds when the escrow deposits are inadequate to meet these obligations.

The Mortgagee may contract with a tax service organization to manage the payment of taxes.

(A) Timeliness of Payments from Escrow Accounts

(1) StandardThe Mortgagee must ensure that all Disbursements are made as bills become payable.If the Mortgagee fails to timely disburse escrow proceeds, the Mortgagee is prohibited from passing on to the Borrower any penalties resulting from the late payments unless:

  • the late payment was the result of the Borrower’s error or omission; and
  • the Mortgagee attempted to obtain the billing information from the Borrower, billing agency, or the taxing authority in sufficient time to enable it to timely make the Disbursement.

(2) Required DocumentationThe Mortgagee must document in its servicing file its efforts to obtain the billing information from the Borrower, billing agency, or the taxing authority.

(B) Payment of Insurance Premiums

(1) Long-term Policies

(a) DefinitionLong-term Policies are those insurance policies with terms of greater than one year.

(b) StandardThe Mortgagee may not reject a long-term policy if the carrier and amount are otherwise acceptable to the Mortgagee.

(c) Collecting Funds for Renewal PremiumsThe Mortgagee may collect funds for renewal premiums on long-term policies in the following ways:

  • For renewal with the same policy term: The Mortgagee may immediately begin collecting a monthly amount calculated to make funds available 30 Days before the policy expires; or
  • For renewal with a one-year term: The Mortgagee may defer collection of monthly escrows until 13 months before the expiration date of the policy then begin monthly collection of 1/12th of the renewal premium for a policy providing similar coverage.

The Mortgagee may require a Borrower wishing to renew for a longer term to make a lump sum deposit to escrow for the additional amount required to pay the renewal premium with the Mortgagee 30 Days before the expiration date of the present policy. If the additional deposit is not made, the Mortgagee may renew the policy for one year and continue to escrow as for a one-year policy

(2) Optional Policies

(a) StandardThe Mortgagee may advance corporate funds when the escrow deposits are inadequate to meet obligations for payment of premiums for optional insurance coverage, but the Mortgagee must not charge against the escrow account any funds for these advances.

(i) Personal Property and Personal Liability InsuranceThe Mortgagee must only escrow for the payment of Personal Property and personal liability insurance coverage premiums if:

  • the Borrower has obtained Personal Property and personal liability insurance coverage not directly related to the mortgaged Property; and
  • the premiums are combined with dwelling insurance in one insurance premium payment.

(ii) Life Insurance and Disability InsuranceMortgagees may not deposit premiums for life or disability insurance coverage in the same bank accounts as other escrow payments.The Mortgagee must maintain separate records for these life or disability insurance coverage payments.HUD does not require Mortgagees to itemize the Borrower’s monthly contribution for life or disability coverage on payment coupons.

(b) Required DocumentationThe Mortgagee must note on the initial and annual escrow statements any Borrower's discretionary payment made as part of a monthly Mortgage Payment for optional policies.

(3) Insurance Protecting Only the MortgageeThe Mortgagee must not charge the Borrower any part of the cost of insurance coverage that does not benefit the Borrower.

v. Use of Escrow Funds

The Mortgagee must only use escrow funds for the purpose for which they were collected.

The Mortgagee must never deduct amounts from a Borrower’s escrow account to pay the following:

  • penalties for late payments not directly resulting from the Borrower’s error or omission;
  • attorney’s fees incurred in foreclosure actions that are not completed;
  • inspection fees; and
  • mortgage Delinquencies or refunds of overpaid subsidy.