Escrow accounts: the initial and annual escrow statements and the cushion limit

Escrow payments and the cushion

An escrow account holds funds for property expenses such as taxes and insurance. Before establishing it, the servicer conducts an escrow analysis. Regulation X requires aggregate accounting: analyze the account as a whole, including anticipated bills and their payment dates. [12 C.F.R. § 1024.17(c)(2)–(4)]

The regular monthly escrow amount is one-twelfth of reasonably anticipated annual escrow payments. A cushion reserves funds for unexpected disbursements or payments made before borrower deposits are available. Its federal ceiling is one-sixth of estimated annual escrow disbursements, equivalent to two months of escrow payments. It is a maximum, not a mandatory reserve; a lower limit in applicable law or the mortgage documents controls. [12 C.F.R. § 1024.17(b), (c)(1), (c)(5), (c)(8), (d)]

For estimated annual taxes and insurance of $6,000, the regular monthly amount is $6,000 ÷ 12 = $500, and the maximum cushion is $6,000 ÷ 6 = $1,000. Do not use the entire mortgage payment to calculate the cushion. Nor does the cushion cap the total account balance: money may accumulate for an upcoming bill. The initial deposit also depends on when bills and deposits occur.

Initial statement: the plan

For escrow established as a loan condition, deliver the initial statement at settlement or within 45 calendar days of settlement. For an account established after settlement that is not a loan condition, deliver it within 45 calendar days of establishment. It states the mortgage payment and escrow portion, estimated charges and payment dates, the selected cushion, and a trial running balance. [12 C.F.R. § 1024.17(g)]

Annual statement: history and next year's plan

After conducting an analysis, deliver the annual statement within 30 calendar days after the escrow computation year ends, together with the previous year's projection or initial statement. Include account history and next year's projection; current and prior monthly mortgage payments and escrow portions; total deposits; separately identified disbursements; ending balance; surplus handling; shortage or deficiency repayment; and, if applicable, why the projected low balance was not reached. [12 C.F.R. § 1024.17(b), (i)(1)]

A shortage is a balance below the target; a deficiency is a negative balance. Escrow analysis can change the required payment even when principal and interest remain unchanged. [12 C.F.R. § 1024.17(b), (c)(3)]