tax impound account abuse?

Question

Our lender is impounding money for our property tax bill on our new condo. I've been checking up on them, and was recently astounded when they told us they would not be paying our supplemental tax bill (the difference between the old tax bill and new one based on purchase price of the condo). They have the money already in the impound account!
Isn't this extremely unethical? We would like to cancel this tax impound account immediately, but I've read it is very difficult. If they are being unethical can I take them to small claims court?

Dion DePaoli · Answer

Does the lender or servicer who administers the escrow account charge the borrower a fee for such?  NO.  
	
	In some states the lender/servicer can place the funds into an interest bearing account and the state forces that interest earned to be paid to the borrower and some states do not mandate the lender/servicer to give that earned interest to the borrower so they can retain it.  
	
	Administrative fees are charged from the mortgage servicer to the mortgagee (lender).  That fee is usually not directly passed on to the borrower outright.  That is, there is not one interest rate for un-escrowed loans and a higher rate for escrowed loans.  However, intuitively, some high LTV loan programs do take this additional administrative cost into consideration and it is expressed in rate.  Again, the borrower does not see it expressed as a fee directly charged to them.
	
	But the short answer is NO, as a borrower you should not be paying 'on top' of what you owe for taxes and insurance into the impound account.

Account Closed · Answer

@Dion DePaoli , @Jon Holdman ,

and @loretta steele

Hopefully you have an answer to this... when the buyer opts for lender to impound tax, is that tax amount (and/or insurance -assuming that's an option) charged interest with the rest of the house purchase?

Dion DePaoli · Answer

First pull out your mortgage documents and read them related to your escrow account.  Your lender has the capacity to hold a cushion.  That cushion is described in your loan documents and governed by state law.

Here is some guidance from HUD:  http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/res/respafaq#TEM

If you believe you are correct and the servicer is not compliant you should start a paper trail of complaint per RESPA Section 6.  Under Section 6 of RESPA, borrowers who have a problem with the servicing of their loan (including escrow account questions), should contact their loan servicer in writing, outlining the nature of their complaint. The servicer must acknowledge the complaint in writing within 20 business days of receipt of the complaint. Within 60 business days the servicer must resolve the complaint by correcting the account or giving a statement of the reasons for its position. Until the complaint is resolved, borrowers should continue to make the servicer's required payment. Borrowers may bring a lawsuit for violations of Section 6 within three years and may obtain actual damages, as well as additional damages, if there is a pattern of noncompliance.

Jon Holdman · Answer

See if there is some way for you to dispute the account balance and request a new analysis.  Normally that's done once a year, on about the anniversary date of your mortgage.  If you have excess money in the account, they will send you a check.  But there may be a way to request an analysis at any time.

Mark Hu · Answer

The general opinion here seems to be that I have it wrong. But I still want to point out:
They presently are impounding enough money from us to pay the supplemental tax bill, and next year's tax bill with plenty left over. The spouse and I have gone over this very carefully.
They also specifically stated they would have paid the full tax bill for this year if it had come on time! (nonsense)
The county was sending all the tax bills to the lender. I would not have received the supplemental tax bill if I had not specifically requested they send it to me.
We paid 30% down payment and had good credit, and they still stuck us with this impound account. I just hadn't had time to look into removing it until now.
Of course we will pay the tax bill, and will consider what is being said here, but we still have our doubts about what is going on.

Dion DePaoli · Answer

No Mark, Jon understood you just fine.  You didn't follow him all the way.  Your tax escrow is a future payment collected now along the way.  So what they are currently collecting for is next years bill not last years bill.  (same with insurance, as you already have a policy and they have to renew it next year)  That is in a sense what your servicer is telling you.  They can not pay the current shortfall which is in the past and then have enough money to pay the up coming bill.  In your mortgage you agreed to cure any shortfalls in taxes and insurance.  There is nothing unethical or illegal or wrong about what they are doing.

Escrow accounts get scrutinized by regulatory officials at mortgage servicers often.  More often what you hear on the "street" is just borrowers not fully understanding what is happening opposed to the servicer doing something illegal or unethical.

The advice given is the right advice, pay it and move on.  This is not uncommon.

Depending on the type of loan you have there are guidelines for being eligible to remove the escrow requirement.  You will find this information in your loan documents which also covers the lender's responsibility for escrow accounting and disbursements.

Mark Hu · Answer

I believe I am being misunderstood here. The lender actually is collecting enough money to pay for the older tax bill AND the supplemental tax bill. We both calculated 1.25% of the purchase price, that is what they are collecting, that is what the supplemental tax bill adds up to.
What we were told is they will not pay the supplemental tax bill because the assessment came 7 months after the purchase! So they paid the old tax bill, and refuse to pay the supplemental tax bill, although they are holding enough money to pay for it. They said they would eventually refund the money we are still putting into the impound account. I can't believe they told us that

Jon Holdman · Answer

You've already posted about this once.  In your previous thread you were told you would be responsible for this extra tax bill.  Now you are.  Surprise!

First year escrow accounts are always incorrect.  Has they properly accounted for the excess they would have 1) wanted a larger escrow amount up front, and 2) been making you pay more all along.  They didn't, so now its your out-of-pocket expense.

Once a year they will do an analysis of your escrow balance.  They will project forward one year and show the current payments you're making into the account and the expected payments they have to make out of the account.  They will compute the lowest balance expected for the year.  In CA, the required minimum is zero.  So, if the projected low is more than zero, they will send you a check for that amount and will leave your payments the same for the upcoming year.  If the project low is negative, they will either want an immediate payment or they will increase your payments for the coming year.  Or, they may offer you some combination where you can pay part of the shortage and also increase your payments.

On a new loan, it often takes several years before the escrow payments settle down.  The insurance part is straightforward, because you give then 14 months payments and they immediately pay out 12 months for the new policy.  Taxes are troublesome.  They typically collect only a few months taxes at closing, but they may have to pay a payment relatively soon.  Or, they may go a long time without paying.  So, you may get a bill for a shortage or you may get a check for the overage.  The next year it will be flipped and you'll get a bill if you got a check the previous year and vice versa.  After a few years it gets about right.  Of course, the escrow payments will go up over time because both the taxes and insurance go up over time.

The only abuse here is they get to hold onto your money for a while before paying it out.  Here is CO, the minimum allowed is not zero, but some higher figure.  Two months escrow or some such.  So they always have money in your account.  But you still owe all these taxes.  All that money has to come out of your pocket.  Best to just accept this and move along.

Lenders will sometimes let you avoid these escrow accounts.  But they will charge you a slightly higher interest rate.

Michael D. · Answer

This kind of stuff comes up all the time, and I don't think you should worry about it.

They're probably only impounding enough to pay the regular tax bill, not the supplemental as well.

In any case, they always true up at the end of the year. If there's any extra money they will send it to you (I've had this happen a lot of times), and if you're short they'll ask you to send in extra or pay a higher amount each month.

Not everybody likes them for various reasons, but I think impound account save me a lot of hassle.

tax impound account abuse?

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