What it means
The rule has several parts. One part limits what a lender can collect into an escrow account, which is a special account into which a borrower pays money each month for property taxes and insurance.
Another covers the servicing of the loan after it closes, including how payments are applied and how errors are fixed. A well-known feature is the ban on kickbacks and unearned fees.
A lender, real estate agent or settlement provider may not pay or accept money in return for referring business, and fees must correspond to real services. Affiliated business arrangements are allowed only if they are disclosed and not required of the borrower.
Servicing rules are also significant. A servicer must send periodic statements, respond to written requests and error notices within set times, and notify borrowers before force-placing insurance on a property.
When a borrower falls behind, the servicer must follow rules on contacting the borrower and reviewing loss mitigation options before starting foreclosure. The escrow rules protect borrowers from being asked for too much cash upfront.
A servicer may keep a cushion, but it is limited to one-sixth of the estimated total annual payments from the account, which equals two months' worth. The servicer must analyse the account each year and refund any surplus above a small threshold.
For a business, this rule matters to mortgage lenders, servicers, real estate agents, title companies and anyone who refers customers in a property deal. Referral fees and marketing arrangements are a frequent source of enforcement cases.
A compliance review of any co-marketing deal in the property sector should check the rule. Borrowers also benefit from the rule at the point of buying a home.
Before closing, lenders must give disclosures that show the loan terms and closing costs, and the rule limits the circumstances in which those costs can increase. Real estate professionals who understand these protections can explain the process better to buyers.
In practice
Real-world examples.
Example
A homebuyer's lender sets up an escrow account for taxes and insurance. After the first year the servicer analyses the account, finds a surplus and sends a refund with a statement explaining the figures.
Example
A real estate agent is offered a payment from a title company for every client she sends. The agent declines because paying for referrals is prohibited unless it is for actual services performed.
Example
A borrower who has lost income sends a written request for help to the servicer. The servicer must acknowledge it promptly and review the options, which may include a repayment plan or a loan modification.
Formula
Calculation
Maximum escrow cushion = estimated annual escrow disbursements x 1/6
A borrower's annual property taxes and insurance total $6,000, which the servicer collects at $500 per month. Maximum cushion = $6,000 x 1/6 = $1,000, which is two months of payments. If the yearly analysis then shows a surplus of $50 or more, the servicer generally must refund it to the borrower within 30 days.Case study
Seen in the real world.
Pinecrest Mortgage Servicing is an illustrative, fictional company that took over a portfolio of loans from another firm. Within weeks, borrowers began complaining that their payments were not being applied on time and that the new servicer had not responded to their written queries.
A review showed that the transfer had left some payment records incomplete. Pinecrest set up a dedicated team to answer error notices within the required periods, corrected the records and backdated late fee refunds. The illustrative lesson is that servicing is regulated as a process, and a handover of loans needs as much planning as the loans themselves.
After the cleanup, Pinecrest also published a plain-English guide for borrowers explaining how escrow works and how to send a written error notice. Complaint volumes fell, and the regulator's follow-up review noted the improvement in response times.
Watch out
Common mistakes.
- Believing that referral payments are fine if the amount is small, when payment for referrals is generally prohibited.
- Letting the escrow cushion grow without checking, when the rule caps it and requires an annual analysis.
- Ignoring borrowers' written error notices, when servicers must respond within set time limits.
Questions
People also ask.
What is an escrow account?
It is an account held by the servicer that collects money from the borrower each month and pays property taxes and insurance bills when they fall due.
Who enforces the rule?
The Consumer Financial Protection Bureau writes and enforces it, along with other agencies and state regulators.
Does the rule cover every loan?
It applies to most mortgage loans secured by residential property of one to four units, with some exemptions.
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