Understanding Escrow Recalculation
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Real Estate Settlement Procedures Act (RESPA)
The Real Estate Settlement Procedures Act (RESPA) became effective May 24, 1995, and established a nationwide standard accounting method known as aggregate accounting for escrow accounts as well as formats and procedures for initial and annual escrow account statements.
RESPA requires an aggregate analysis on escrow accounts instead of single item analysis. The mortgage servicer may not require that funds be on deposit to cover each individual escrow item separately. Instead, the servicer can only require that the borrower deposit one-twelfth of the total anticipated annual disbursements per mortgage loan each month.
The escrow account must be reviewed on an annual basis and a statement issued to the borrower recapping the activity on the account and disclosing any changes to the monthly deposit required due to account surplus or shortage. This method of escrow analysis and recalculation requires knowing anticipated disbursement dates and amounts for each escrow item in order to calculate the lowest anticipated balance for the year. The lowest anticipated balance allows for calculation of the amount of deposits necessary to maintain a required cushion.
Cushions
A cushion can be a maximum of 1/6 of the total annual escrow amount for the loan. To calculate the maximum cushion, the system totals the amounts required for all the loan’s escrow items and divides this total amount into 1/6 increments. For example, the loan has three escrow items for $1,200, $120, and $600 which is a total annual amount of $1,920. The 1/6 amount is $320.
You can choose a cushion amount that is less than 1/6 of the total annual escrow amount. The cushion can be one or two months’ escrow deposit, a percentage of the total annual escrow amount, or a flat amount.
Current and Next Period Information
To provide an accurate analysis of the escrow share account, current and next period cushion information is required for each loan. This information appears on the Loans – Escrow Info tab. The current period information on the Loans – Escrow Info tab reflects the cushion options that are in effect for the account today. The next period information reflects the cushion options that should be applied to the next analysis period. You must provide the next period information on the Loans – Escrow Info tab. It will not be calculated for you.
In addition, current and/or next period disbursement information is required for each escrow item. This information appears on the Loan Escrow Item dialog box. The current period information on the Loan Escrow Item dialog box reflects the escrow amounts being collected from the member today. The next period information reflects the anticipated amounts required for the next analysis period. You may choose to enter the next period information yourself, or have the system calculate the amounts during escrow recalculation. The system-calculated next period information is used during escrow recalculation to determine the member’s total required escrow deposit.
For all of the calculation options, the system enters the calculated amount in the Next Period Total Amount field during escrow recalculation. During the back-office cycle prior to the effective date of the escrow recalculation, the system replaces the amount in the Current Period Total Amount field, updates the payment amount, and, if necessary, the payroll distribution.
Regulatory Bulletins
For a more detailed description of the RESPA requirements, refer to the following documents:
- Regulatory Information Bulletin Publication #94-12, December 1994
- Regulatory Information Bulletin Publication #95-04, April 1995
- Regulatory Information Bulletin Publication #95-05, May 1995
- Federal Register Volume 59 No. 206, Wednesday, October 26, 1994
- Federal Register Volume 60 No. 31, Wednesday, February 15, 1995
Escrow Recalculation Requirements
A loan must meet the following criteria to go through the recalculation process:
- The Supported check box must be selected in the Escrow Loan group box on the Loan Profiles - Additional Information tab for the loan type.
- The 465 Report must be scheduled to run daily for escrow recalculation to occur and the report to be produced. Automatic escrow recalculation occurs during the month-end back-office cycle.
- The current and next period information must be completed on the Loans – Escrow Info tab. The Next field in the Payment Analysis group box on the Loans – Escrow Info tab must specify a date two months after the date in the Next-Date field on the 465 Report Rules. For example, if the date in the Next-Date field is 123116, the date in the Next field must be February 2017.
- The current and/or next period information on the Loan Escrow Item dialog box must be completed for each escrow item.
To trigger the analysis of a specific account and automatically generate the notice, you can select C- Recalculate tonight due to corrections from the Recalculate dropdown on the Loans - Escrow Info tab for an account currently in a recalculated (R) status. Portico recalculates the escrow account in the next back office cycle. Select Y - Recalculate in next month-end back-office cycle from the Recalculate dropdown to trigger the analysis of a specific account and automatically generate the notice in the next month-end back-office cycle.
Escrow Analysis Process
The following steps occur during the escrow analysis process:
- The credit union sets up the loan’s general escrow information using the New Loan – Escrow Information tab and Loans – Escrow Info tab.
- The credit union sets up the specific information for each escrow item using the Loan Escrow Item dialog box.
- Portico uses the specifications on the 465 Report Rules and the next period information on the Loan Escrow Item dialog box to recalculate escrow accounts approximately one to two months before the first month of the next analysis period, based on the option selected in the Analysis Verification Months field on the 465 Report Rules.
- Portico prints the 465 Report. Portico prints a disclosure statement (466 Report) for each member.
- If there is an over/short amount in the member’s escrow share account, the disclosure statement displays a message stating how the necessary adjustment will be handled. Depending on the amount, the over/short information may appear on the Loan Escrow Item dialog box as escrow item zero (0).
- Portico moves the information in the next analysis period fields on the Loan Escrow Item dialog box to the current analysis period fields following the next month-end cycle. Payment amounts and payroll distributions are changed, if necessary.
Projection Table
The following table displays the month end on which the recalculation will occur and the associated analysis period for the next thirteen months.
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Analysis Verification Months = 1 | Analysis Verification Months = 2 | ||
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| Values Applied Month End |
Analysis Computation Period | Values Applied Month End |
Analysis Computation Period | |
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January 2023 |
February |
March 2023 through February 2024 |
March |
April 2023 through March 2024 |
|
February 2023 |
March |
April 2023 through March 2024 |
April |
May 2023 through April 2024 |
|
March 2023 |
April |
May 2023 through April 2024 |
May |
June 2023 through May 2024 |
|
April 2023 |
May |
June 2023 through May 2024 |
June |
July 2023 through June 2024 |
|
May 2023 |
June |
July 2023 through June 2024 |
July |
August 2023 through July 2024 |
|
June 2023 |
July |
August 2023 through July 2024 |
August |
September 2023 through August 2024 |
|
July 2023 |
August |
September 2023 through August 2024 |
September |
October 2023 through September 2024 |
|
August 2023 |
September |
October 2023 through September 2024 |
October |
November 2023 through October 2024 |
|
September 2023 |
October |
November 2023 through October 2024 |
November |
December 2023 through November 2024 |
|
October 2023 |
November |
December 2023 through November 2024 |
December |
January 2024 through December 2024 |
|
November 2023 |
December |
January 2024 through December 2024 |
January |
February 2024 through January 2024 |
|
December 2023 |
January |
February 2024 through January 2024 |
February |
March 2024 through February 2024 |
Mortgage Loans
Usually mortgage loans are monthly interest loans that have an associated escrow account. The Portico system does not have a specific flag that indicates whether or not a loan or loan type is a mortgage loan. Therefore, any loan type can be included in escrow processing if the Supported check box is selected in the Escrow Loan group box on the Loan Profiles - Additional Information tab for the loan type.
Loan Payment Recalculation
If your credit union uses the loan payment recalculation feature on loans that have associated escrow share accounts, the system will adjust the calculated loan payment amount based on the actual and effective dates of the loan payment recalculation in comparison to the actual and effective dates of the escrow recalculation.