The Real Estate Settlement Procedures Act provides powerful consumer protections when it comes to home loans. It establishes limits, requires lenders to be transparent when it comes to fees and expenses, and requires the borrower to be fully informed as to the costs of a home loan. FHA borrowers and conventional loan applicants alike are protected under RESPA.
There are many protections, rules and requirements under RESPA, but one particular part of the act applies to escrow accounts for real estate loans. According to the FHA official site, “Section 10 of the Real Estate Settlement Procedures Act (RESPA) limits the amount of money a lender may require the borrower to hold in an escrow account for payment of taxes, insurance, etc. RESPA also requires the lender to provide initial and annual escrow account statements.”
There are RESPA rules for escrow accounts because it’s another area where transparency is required in order for the borrower to fully understand how much they must pay, the circumstances under which they have to pay, and why. The FHA has published a frequently asked questions list about RESPA and escrow to give borrowers a good place to begin learning about escrow and how it relates to FHA home loans.
In spite of what some may believe–or pass along as fact–the Real Estate Settlement Procedures Act does NOT required borrowers to maintain an escrow account in order to pay property taxes or other loan-related items. The use of an escrow account is solely the lender’s decision and is not forced upon the lender by RESPA. There are regulations that govern how much the lender can require in an escrow account.
In the same way, RESPA does not require lenders to run escrow accounts with a “cushion”. According to the FHA, “The RESPA statute and regulations do not require the lender to maintain a cushion. However, since 1976 the RESPA statute has allowed lenders to maintain a cushion equal to one-sixth of the total amount of items paid out of the account, or approximately two months of escrow payments. If state law or mortgage documents allow for a lesser amount, the lesser amount prevails.”
The FHA also adds, “The accounting method generally requires borrowers to maintain lesser amount in the account than the single-item method predominately used by lenders. However, many lenders have recently increased the escrow account cushion to the maximum allowed by law.”
Why does the FHA warn about these issues? One quote from the FHA publication, FAQs About Escrow Accounts for Consumers is especially telling;
“The regulations require lenders to reduce the size of the cushion in some accounts. Unfortunately, to avoid customer disapproval, some lenders may be giving their customers the impression that the HUD regulations require them to make this increase. This is a false impression. The lender, not HUD, has chosen to increase the cushion.”
Borrowers have the right to be fully informed about their FHA home loans. That includes knowing when a requirement such as escrow is imposed on the lender by Federal law, and therefore going to be present in any transaction regardless of which lender is used, and when a requirement is a choice made by a particular lender. Borrowers who know the difference can shop more competitively between lenders and get the best loan possible.