An Escrow Account is a set of funds collected by the Mortgagee for payment of taxes, insurance, and other items required by the mortgage Note.
The Mortgagee must segregate escrow funds, including those funds escrowed at closing, and deposit the funds in a special custodial account characterized by the following:
- with a financial institution whose accounts are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA);
- that does not limit the Mortgagee’s access to funds, require an advance notice of withdrawal, or require the payment of a withdrawal penalty; and
- that clearly identifies the type of funds being held in that account; and
- the Mortgagee may maintain a “cushion” that does not exceed what is acceptable under Real Estate Settlement Procedures Act (RESPA) regulations.
Mortgagees utilizing a Trust Clearing Account must withdraw the portion that is to be applied to escrows within 48 hours of the deposit and must transfer the portion to the escrow account for the Borrower’s Mortgage.
Mortgagees are not prohibited from holding escrow funds for all types of Mortgages in a single bank account; however, the Mortgagee must not commingle escrow funds, even temporarily, with funds used for the Mortgagee’s general operating purposes.
HUD regulations neither forbid nor require that escrow accounts earn interest. However, if escrow funds are invested, the Mortgagee must pass on to the Borrower the net income derived from the investment in accordance with the following:
- The Mortgagee must make investments and payments in compliance with state and federal agency requirements governing the handling and payment of interest earned on a Borrower’s escrow account.
- The Mortgagee may only deduct the actual cost of administering the interest-bearing account before passing on to the Borrower the net earnings from the investment of their funds.
- The Mortgagee may not charge the Borrower expenses for maintaining the interest-bearing escrow account in an amount exceeding the gross interest earned from investing the funds in that account.
The Mortgagee must require that the total Borrower Mortgage Payment includes escrow funds to provide for payment of property charges in accordance with 24 CFR § 203.23, the security instrument, and applicable law. Items to be escrowed include:
- real estate taxes;
- special assessments, including any assessments related to a Property Assessed Clean Energy (PACE) obligation;
- hazard insurance required by the Mortgagee;
- flood insurance as applicable;
- FHA Mortgage Insurance Premium;
- Ground Rent, if any;
- other items which can attain priority over the Security Instrument as a lien or encumbrance on the Property, other than condominium or Homeowners’ Association (HOA) fees.
The Mortgagee must retain documentation of its holding of all escrow funds on deposit.
For policy information see:
- Handbook 4000.1 III.A.1.g.i. and III.A.1.g.ii. available at: https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh