Year-end Frequently Asked Escrow Questions
While there has not been a recent significant change to escrow requirements, it is WBA’s understanding that many banks pay taxes from escrow by December 20 every year. Around this time, many questions arise as to State and Federal requirements regarding escrow accounts. Furthermore, given the lingering impacts of the COVID-19 pandemic, many borrowers may have been, or currently are, in deferral or forbearance, resulting in insufficient escrow balances. This article presents several questions and answers to refresh banks on relevant requirements, and important considerations, regarding escrow accounts both with respect to the pandemic, and more generally.
Q1: Does Wisconsin have rules regarding disbursements from tax escrows?
A1: Yes. Wis. Stat. section 138.052(5m) governs escrow accounts required to be maintained to pay taxes or insurance in connection with consumer-purpose loans secured by a first lien real estate mortgage or equivalent security interest in the borrower’s principal dwelling. For example, the requirement applies to covered purchase money, refinance, and home equity transactions but does not apply to loans that are business or agricultural purpose, or manufactured home transactions. It also does not apply to voluntary escrow accounts. If a bank maintains a voluntary escrow account, it should ensure it has adequate documentation to evidence that fact.
For covered loans, banks must provide an escrow notice before closing giving the borrower options regarding how the bank will make payments from the amount escrowed:
Escrow agent sends a check by December 20 to the borrower for the amount held in escrow for the payment of property taxes made payable to the borrower or to the borrower and the taxing authority.
- Escrow agent pays the property taxes by December 31 if the escrow agent has received a tax statement for the property by December 20.
- Escrow agent pays the property taxes when due.
This notice is not required under section 138.052(5m) if the escrow agent’s practice is to pay the borrower the amount held in escrow for the payment of property taxes by December 20, or to send a check in the amount of the funds held in escrow for the payment of property taxes, made payable to the borrower and taxing authority.
Regardless of whether a notice under state law may not be required, banks are reminded that a voluntary agreement is still required under the Real Estate Settlement Procedures Act (RESPA) to pay property taxes annually as permitted under Wis. Stat. section 138.052(5m). See the discussion below regarding the interconnection between state and federal law.
Q2: Does RESPA have rules regarding disbursements from tax escrows?
A2: Yes. RESPA section 1024.17(k) prescribes rules that apply to escrow accounts established in connection with RESPA-covered loans to pay taxes, insurance, or other charges. If the terms of the loan require the borrower to make payments to an escrow account, the bank must make disbursements in a timely manner. A timely manner means payment by the disbursement date, so long as the loan account is not more than 30 days overdue.
If a taxing authority offers a bank a choice between annual and installment disbursements, RESPA includes additional requirements. Generally, disbursements must be made on an installment basis depending on whether the taxing authority offers a discount, or charges additional fees, for installment disbursements. In Wisconsin, where taxes may be paid in annual or installment payments, and the taxing authority does not offer a discount for payments on an annual basis nor does it impose any additional charge or fee for installment payments, the bank must make disbursements on an installment basis, unless the bank and borrower agree to another disbursement alternative.
Most property taxes in Wisconsin may be payable in two installments. If the first installment is paid by January 31, the second installment may be paid by July 31. Because no discount is available for making annual payments, and no penalty is imposed for making installment payments, RESPA requires property taxes payable in this manner to be disbursed on an installment basis, unless the borrower voluntarily agrees, in writing, to an annual disbursement.
Q3: How do the requirements under Wis. Stat section 138.052(5m) and RESPA section 1024.17 work together?
A3: RESPA preempts State law only to the extent of any inconsistency. Generally, escrows governed by section 138.052(5m) must also comply with RESPA, and banks must disburse tax escrows in installments, or as otherwise agreed to by the borrower. Thus, banks will want to consider their written agreement as to the borrower’s choice of disbursement methods, and as discussed in Q1 above, a bank may pay by December 20 by check.
As RESPA requires taxes to be disbursed in installments, and State law allows more flexibility in how taxes are paid, in order for bank to disburse money from a required escrow account, annually under the section 138.052(5m) December 20 method, RESPA requires the customer’s voluntary agreement of that option. And, while notice under section 138.052(5m) may not be required, RESPA still requires the customer’s voluntary agreement to pay by December 20; see the discussion in Q2. FIPCO’s WBA Tax Escrow Option Election form meets the requirements under Wis. Stat. 138.052(5m) and also serves as the voluntary agreement to disburse property taxes out of escrow in any method other than installments to comply with RESPA.
Q4: What if a deficiency occurs before disbursement?
A4: As discussed in Q2, RESPA generally requires the bank to disburse funds in a timely manner. If a deficiency exists, the bank must still cover the amount due. Upon advancing the funds, the bank may seek repayment from the borrower after performing an escrow account analysis.
If the deficiency is less than one month’s escrow account payment, then the bank:
- May allow the deficiency to exist and do nothing to change it;
- May require the borrower to repay the deficiency within 30 days; or
- May require the borrower to repay the deficiency in 2 or more equal monthly payments.
If the deficiency is greater than or equal to 1 month’s escrow payment, the bank may allow the deficiency to exist and do nothing to change it or may require the borrower to repay the deficiency in two or more equal monthly payments.
If the borrower is not current, then the bank may recover the deficiency pursuant to the terms of the mortgage loan documents. For example, language within the WBA 428 Real Estate Mortgage states that if the escrowed funds held by bank are not sufficient to pay the escrow account items when due, bank may notify consumer in writing, and consumer shall pay bank the amount necessary to make up the deficiency in a manner described by bank or as otherwise required by applicable law.
Furthermore, for loans that are not covered by RESPA (i.e., the escrow account is not required), the bank will need to determine how the deficiency will be covered, either by the borrower, or the bank, pursuant to the terms of its agreement.
Q5: How does a payment deferral or forbearance affect escrow considerations?
A5: As a result of the pandemic, bank may have deferred or forborne payments for some of its borrowers. Bank should consider its deferral and forbearance agreements to confirm whether this deferral or forbearance included escrow payments. Even if it did not, financial distress caused by the pandemic may have resulted in more escrow shortages and deficiencies than typical. Banks should consider how they are monitoring loans for payments, and accounting for expected, and unexpected shortages. Specific attention may need to be paid to escrow balances for loans in deferral, forbearance, or modification. Banks should identify loans that will be short, and determine how the deficiency will be handled, with the above considerations in mind.
Q6: What is the escrow rate for 2022, as set by 138.052?
A6: At time of this release, the Wisconsin Department of Financial Institutions, Division of Banking, has not yet released the 2022 interest rate required to be paid on escrow accounts for residential mortgage loans subject to Wisconsin Statute Section 138.052(5). WBA will continue to monitor and will report the 2022 rate once released. Once set, the 2022 interest rate shall remain in effect through December 31, 2022.
Q7: Does 138.052 require Wisconsin banks to pay interest on escrow accounts?
A7: Not for loans originated after April 18, 2018. 2017 Wisconsin Act 340 eliminated the requirement that a financial institution pay interest on escrow accounts for residential mortgage loans originated on or after the effective date of the Act. Thus, a Wisconsin financial institution is not required by law to pay interest on any escrow account maintained in association with a loan originated on or after April 18, 2018.
Wisconsin Section 138.052 previously required financial institutions to pay interest on the balance on any required escrow accounts. As discussed above, 138.052 applies to consumer-purpose loans secured by a first lien or first lien equivalent in a 1-4 family dwelling that is used as the borrower’s principal residence. Banks must continue to pay interest on escrow accounts they required prior to the effective date of Act 340. However, for any escrow account associated with a loan originated after the effective date of Act 340, 138.052 no longer requires payment of interest. A bank should also consider the terms of its contract as to whether any payment of interest is part of the agreement.
Q8: Bank is closing loan in December for which bank will require escrow for the payment of taxes. The first mortgage payment will be February. Can bank escrow for 2020 taxes to be paid in 2021?
A8. No. RESPA’s escrow collection rules are prospective in nature. Bank should only collect for 2021 taxes to be paid either in December 2021 in a lump sum (with borrower’s permission as outlined above) or in installments. Bank should not collect for anything between December 1 and 31 because nothing is owing during that time as the bank should only be collecting for 2021 taxes. Bank should not be collecting for 2020 taxes for payment in 2021. Borrower should be on his/her own to pay 2020 taxes.