It’s easy to ignore the annual escrow reconciliation notice the Real Estate Settlement Procedure Act (RESPA) requires mortgage servicers to send borrowers each year. Heck, I sue mortgage servicers for a living and I admit I often shove the piece aside for days before checking to see if it’s accurate. After all, the notice doesn’t look anywhere near as enticing as the Victoria’s Secret, Dick’s Sporting Goods, and various other catalogs that clog our mailboxes late in the year, but despite its innocuous appearance the notice is way more important than just about anything else you’ll receive – including that family photo holiday card from your cousin Bernice.
Here’s why the notice is so important: if it contains errors, it could cause you to default on your loan and may put you in jeopardy of losing your home to foreclosure. This holds true for homeowners who pay their taxes and insurance directly and so don’t have escrow accounts. If a servicer determines a homeowner has failed to make tax and insurance payments, they will almost certainly act to protect their collateral – also known as the house – even if the payments have been made.
I’m writing about this seemingly boring topic this month because my office has detected a substantial uptick in escrow reconciliation errors and a consequential increase in the number of homeowners who call our office for help in correcting the mistakes and saving their homes.
I’m sure none of my regular readers will be shocked to learn that the jump in reconciliation errors is directly attributable to the profiteers who control America’s home mortgage industry. The root of the problem – an unprecedented increase in the transfer of mortgage loan servicing rights from the financial institutions that originate loans to non-bank servicers that have fewer incentives to get things right. That’s dangerous because the transfer agreements alone involve the sharing of thousands of datapoints between computer systems that are often incompatible. That opens the door for myriad mistakes, including the miscalculation of tax and insurance obligations. Left uncorrected, those mistakes can put a homeowner on a fast track to default and eventually to foreclosure.
The problems related to servicing transfers are exacerbated by the growing use of third-party vendors to gather and report tax and insurance information. We’re representing a number of non-escrow account homeowners who ran into trouble because a third-party vendor erroneously reported that the homeowner’s taxes weren’t paid when, in fact, they simply weren’t due when the vendor pulled the tax records. The mistake led the servicer to needlessly create an escrow account that in turn threw the innocent homeowner into default.
Fortunately, the one positive outgrowth of the near-collapse of the world economy caused by the 2007 mortgage crisis, gives us the opportunity to restore order from chaos. Under powers granted by the Dodd-Frank Act, the Consumer Finance Protection Bureau issued regulations that clearly spell out servicer’s obligations related to escrow accounts. The rules, embodied in RESPA, require servicers to perform an annual review and calculation of escrow obligations and prohibit servicers from holding a “cushion” exceeding an amount equivalent to two month’s payments. Borrowers who identify mistakes may send a notice of error to a designated address and servicers must acknowledge receipt of the notice, respond to it, and correct errors according to RESPA’s strict timelines. Failure or refusal to correct an error creates a private right of action that makes off ending servicers subject to statutory damages and shifting attorney’s fees.
Homeowners can check the accuracy of their servicer’s calculations in three steps:
- First, determine if the tax obligation in the escrow reconciliation matches the figure listed on your county auditor or fiscal officer’s website.
- Second, make sure the insurance premium in the reconciliation notice is the same as the premium listed in the annual statement you should obtain from your insurer or insurance agent.
- Third, do the math by dividing the sum of the correct annual tax obligation and insurance premium by 12 and then multiplying that figure by 14. The answer you derive represents the appropriate amount of your escrow fund. (Don’t ask me how this works – I’m a lawyer, not a mathematician – but believe me, it’s accurate.) If the amount doesn’t match the amount listed in your reconciliation notice you should call our office immediately.
While tearing open and reviewing your annual mortgage reconciliation notice may not be as exciting as paging through the VS catalog or checking out the new exercise equipment in Dick’s, making sure your servicer got the numbers right is one way to get the new year off to a great start – and it’s a heck of a lot easier than working out. Marc Dann