Escrow Cushion, Force-Placed Insurance, and a Notice of Error
Northwest Servicing handles a borrower's escrow account. Annual property taxes are $6,000 and hazard insurance is $1,800, so the monthly escrow payment is $650. The annual escrow analysis projects a low balance of $2,400 on June 30. The servicer does not send a refund. The borrower's hazard insurance lapses. On March 10 the servicer sends a notice that it will force-place insurance, and on April 1 it charges a $2,900 annual premium. No second notice is sent. The borrower obtains a new policy on April 3 and sends proof on April 5. The servicer cancels the force-placed policy on May 1 but keeps a $400 administrative fee. On April 10 the borrower sends a written notice of error disputing the escrow analysis and the force-placed charge. The servicer does not acknowledge it for 45 days. The borrower asks what rules the servicer violated and what relief is available.
1. Analyze the escrow analysis. What is the maximum cushion, and what should have happened to the projected excess?
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Annual escrow disbursements are $6,000 + $1,800 = $7,800. The maximum cushion is one-sixth of annual disbursements, or two months of escrow: $7,800 / 6 = $1,300.
The analysis projects a low balance of $2,400. That exceeds the maximum cushion by $2,400 - $1,300 = $1,100. At the annual escrow analysis, if a surplus of $50 or more exists, the servicer must refund it to the borrower within 30 days. The servicer cannot simply retain the excess in the escrow account. The monthly escrow payment should also be reviewed so that it covers the actual disbursements plus no more than the permitted cushion. The borrower is entitled to an explanation of the analysis and a refund of the excess.
2. Did the force-placed insurance comply with RESPA? What must the servicer do after receiving proof of coverage?
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No. RESPA requires a first notice at least 45 days before the servicer charges for force-placed insurance and a second notice at least 30 days before the charge. The March 10 notice for an April 1 charge gave only 22 days, and no second notice was sent. The charge therefore violated the notice requirements.
After the borrower provided proof of continuous coverage on April 5, the servicer was required to cancel the force-placed policy and refund all force-placed premiums for the period in which the borrower had coverage, within 15 days of receiving the proof. The $400 administrative fee should also be refunded if it was charged in connection with the improper force-placed coverage. The servicer should correct the account, remove any related charges, and send an updated escrow statement.
3. What are the servicer's obligations for the written notice of error, and what relief should the borrower receive?
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A written notice of error triggers RESPA error-resolution duties. The servicer must acknowledge receipt within five business days unless it corrects the error within that period, and it must complete its investigation and respond within 30 business days, with a possible 15-business-day extension if it notifies the borrower. Failing to acknowledge for 45 days violates those timelines.
The servicer should investigate both the escrow analysis and the force-placed charge, correct the escrow surplus, refund the improper force-placed premium and fee, and provide a written response with the results and any corrections. The borrower should also receive an updated escrow account statement. The servicer should ensure no adverse credit reporting or late fees result from its own errors during the review.