Section 6 Of The Real Estate Settlement Procedures Act
The Real Estate Settlement Procedures Act (RESPA) is a federal law that was enacted to protect consumers during the process of buying or refinancing a home. It applies to most residential real estate transactions, including the purchase of a single-family home, townhouse, condominium, or cooperative apartment. One of the most important sections of RESPA is Section 6, which governs the use of escrow accounts.
What is an Escrow Account?
An escrow account is a special account that is set up by the lender to hold funds for the payment of property taxes and homeowner's insurance. When you make your monthly mortgage payment, a portion of that payment is deposited into the escrow account. The lender then uses the funds in the escrow account to pay your property taxes and homeowner's insurance when they come due.
Why is an Escrow Account Required?
Many lenders require borrowers to have an escrow account as a condition of the loan. This is because the lender wants to ensure that the property taxes and homeowner's insurance are paid on time. If these bills are not paid, the lender's security interest in the property can be jeopardized.
How is an Escrow Account Regulated?
Section 6 of RESPA regulates the use of escrow accounts. Under this section, lenders are required to provide borrowers with an initial escrow account statement within 45 days of closing. This statement must include an itemization of the estimated taxes, insurance premiums, and other charges that will be paid from the escrow account during the first 12 months of the loan.
After the initial statement, lenders are required to provide borrowers with an annual escrow account statement. This statement must show the account balance, the amount paid into the account, and the disbursements made from the account during the previous year. The statement must also include an analysis of the account to ensure that the amount of money in the account does not exceed the allowable cushion.
What is an Allowable Cushion?
An allowable cushion is a reserve that lenders are allowed to maintain in an escrow account to cover unanticipated increases in taxes or insurance premiums. RESPA allows lenders to maintain a cushion of up to one-sixth of the total annual disbursements from the escrow account.
What Happens if There is a Shortage or Surplus in the Escrow Account?
If there is a shortage in the escrow account, the lender may require the borrower to make up the difference by increasing the monthly mortgage payment. If there is a surplus in the escrow account, the lender must either refund the excess to the borrower or apply it to future payments.
Conclusion
Section 6 of RESPA provides important protections for consumers during the home buying process. By regulating the use of escrow accounts, lenders are required to provide borrowers with accurate and transparent information about the funds that are being held in the account. This helps to ensure that property taxes and homeowner's insurance are paid on time, and that borrowers are not subjected to unexpected increases in their monthly mortgage payments.