Escrow Shortage After a Servicing Transfer
A mortgage servicer acquired servicing on a closed-end, first-lien, owner-occupied loan in March. The prior servicer had paid the borrower's 2024 property tax installment late, in October, because of a tax-office processing error; a $310 penalty was charged to the escrow account. In June the new servicer completed its first escrow analysis. It found a $1,450 escrow shortage and set the new monthly payment at $2,315, up from $1,980, with the shortage spread over 12 months. The borrower, who has never been delinquent, called to say she cannot afford the increase and that the tax penalty was not her fault. She also submitted a written complaint alleging the servicer miscalculated the escrow and threatened to contact the CFPB. The servicer's records show the escrow account has never fallen below the target balance in the prior 12 months except as a result of the late tax payment, and the loan is 45 days from its next tax due date.
1. Is the servicer's escrow analysis and payment increase permissible? Explain the RESPA escrow-account requirements that apply and any exception that may help the borrower.
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The increase is not automatically permissible just because a shortage exists. Under RESPA's escrow rules, the servicer must use aggregate accounting and provide an escrow account statement showing the analysis. For a shortage greater than or equal to one month's escrow payment, the servicer may require repayment over at least 12 months; for a smaller shortage, the repayment period is shorter. Here the monthly increase is $335, which over 12 months totals $4,020, far more than the stated $1,450 shortage. That inconsistency suggests the payment also reflects a tax or insurance increase, or an error. The servicer must reconcile the shortage, the target balance, and the projected disbursements before defending the payment. The $310 penalty is also suspect: if the prior servicer or tax office caused the late payment, the borrower should not bear it. The servicer should remove the penalty from the escrow calculation if it was not the borrower's obligation, then rerun the analysis. Only after correcting those items can the servicer determine whether a 12-month spread is proper. The borrower should receive a corrected statement and a clear explanation of any remaining increase.
2. How should the servicer handle the tax penalty and the borrower's complaint? Outline the error-resolution and communication steps.
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The written complaint triggers the servicer's error-resolution process. The servicer should acknowledge receipt within the required timeframe, log the complaint, and investigate the tax penalty, the escrow analysis, and the servicing transfer records. It should obtain the tax office's payment history and the prior servicer's disbursement records. If the penalty resulted from a servicer or tax-office error rather than borrower fault, the servicer should remove the $310 from the escrow account and correct any resulting shortage. The servicer should then provide a written response explaining the corrected analysis, the new payment, and the borrower's options, including paying the shortage in a lump sum or spreading it over the permitted period. It should not report the borrower as delinquent while the disputed amount is being resolved if she pays the undisputed portion. The servicer should also check whether the transfer agreement gives it indemnity from the prior servicer. Throughout, the servicer should document the investigation and avoid collection pressure until the escrow figures are confirmed.
3. What should the servicer do if it determines the prior servicer's late payment caused the shortage?
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If the prior servicer's late payment caused the shortage, the new servicer should correct the borrower's escrow account rather than pass the consequence through. That means removing the $310 penalty if it was charged to escrow, reversing any related shortage attributable to the penalty, and rerunning the escrow analysis. The servicer should then notify the borrower in writing of the corrected payment and provide a revised escrow statement. It should also pursue indemnification or reimbursement from the prior servicer under the servicing transfer agreement, but that dispute should not be funded by the borrower. If the late payment caused a tax deficiency or a risk of a second penalty, the servicer should confirm with the tax authority that the account is current and document the confirmation. The servicer should review whether the transfer files were complete and whether its own boarding process missed the prior servicer's error. Finally, it should consider whether the complaint must be reported as an error-resolution matter and whether any credit-reporting correction is needed. The borrower should receive a clear explanation of what happened and what changed.