How to tell if lender is overcharging escrow account

Federal law imposes maximum limits on financial cushion

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Nov. 28, 2012

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Federal law imposes maximum limits on financial cushion

Benny Kass
Inman News®

DEAR BENNY: I own a house worth approximately $400,000. The current mortgage is $25,000. A company in Florida took over the mortgage about six months ago. The mortgage company handles the tax and insurance payments through an escrow account. Given the current schedule of payments, the account has had a positive balance during all of 2012 and will average at least a $1,000 balance during the 12 months. The mortgage company wants to double the escrow payments so that the minimum balance is $1,000, the maximum is $3,000 and the average account balance is $2,000.

What, short of paying off the mortgage, are my options? Can the mortgage company legally demand such payments? I have owned a number of homes, vacation homes and rental homes over the years and never experienced anything this outrageous. --John

DEAR JOHN. The great majority of residential mortgage loans in the United States are "federally related." This means that they are either insured by or purchased by a federal agency or an organization such as Fannie Mae or Freddie Mac. And all such federally related mortgages are covered under the Real Estate Settlement Procedures Act (RESPA).

Section 10 of RESPA controls the amount of money a lender may require to be held in escrow for the payment of real estate taxes and hazard insurance. And contrary to what lenders may tell you, federal law does not require lenders to escrow.

Under RESPA, a lender may not require borrowers to pay monthly more than one-twelfth of the total amount of all escrows calculated for one year. However, lenders are permitted to maintain a cushion equal to one-sixth of the total amount of items paid out on a yearly basis. In other words, to ensure that lenders will have sufficient funds to timely pay the real estate taxes (or the insurance), the law does allow a cushion of two months per year.

In your case, without doing the math, it appears that you are overcharged. If your lender is not prepared to refund you the excess, I suggest that you complain to your nearest HUD office.

DEAR BENNY: I am selling my home, and it is under contract. However, I will not be able to personally attend the closing, since a business trip requires me to be out of the country. What options do I have? I don't want to lose the sale. --Jordan

DEAR JORDAN: There are a number of options. First, contact the settlement company (or title attorney or escrow company) where the closing will take place. They should be able to prepare the deed and other papers that you will have to sign, in advance of closing, so that you can sign before you leave for your trip.

However, things don't always go smoothly at house closings, and besides, you will have to sign the settlement statement (called a HUD-1), which typically is not available until just before the settlement date.

Accordingly, you should also sign a power of attorney. This is a document whereby you, as principal, give authority to someone you know and name to act on your behalf. That person, usually referred to as your "attorney in fact," will have full authority to sign any and all legal documents as if you were physically present.

There are a number of different powers of attorney. There is a specific power, one that is limited in scope: "I give my daughter, Jane, the power only to sign the settlement documents but not to negotiate the settlement check."

There is a general power of attorney, whereby Jane has absolute authority to do everything on your behalf.

There are durable powers of attorney, which, in my opinion, everyone should have. This enables your attorney in fact to step into your shoes if and when you are physically (or mentally) not capable of handling your own affairs. For example, if you have a stroke, who will sign checks to pay your mortgage?

Your durable power can be drafted to take effect on the date you sign and have it notarized, or it can take effect at a later date on specific situations, such as when two doctors certify that you are incapacitated. This is called a "springing power of attorney."

State laws differ on the form requirements for powers of attorney. So make sure that your form complies with your state law. Your attorney or the title (escrow) company can assist you with this.

DEAR BENNY: My sister and I inherited our parent's family home a couple of years ago. It is free and clear of any mortgage, and even though my sister now lives in the house (rent-free), we have both contributed equally for upkeep, real estate taxes and insurance.

I want to sell, but my sister wants to keep the house. I offered to let her buy me out, but she does not have sufficient moneys for this. What suggestions do you have to resolve this for both of us? --Karl

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