A two-part question related to escrow funding amounts and the requirements of 1024.17.

Please consider the following situation for a new First Mortgage.
First Payment Date - 1/1/2025
Tax Disbursements are made in November and February
February 2025 has already been paid at the closing..

When determining the proper escrow account opening balance and the monthly payment into the escrow account does the fact that the second disbursement of taxes is outside the computation year have an affect on what can be collected? 1024.17(c)(1)(ii) limits the monthly charge to one-twelfth of the "total annual escrow payment which the servicer reasonably anticipates paying from the account". Does the total annual refer to the computation year? If so, it would seem that the lender could only collect sufficient funds initially and monthly to pay for half of the taxes which seems incorrect but I can't find specific references.

According to 1024.17(C)(7), "if the servicer knows the charge for an escrow item in the next computation year, then the servicer shall use that amount in estimating disbursement amounts. If the charge is unknown to the servicer, the servicer may base the estimate on the preceding year's charge, or the preceding year's charge as modified by an amount not exceeding the most recent year's change in the national Consumer Price Index for all urban consumers (CPI, all items)."

Occasionally, a property could have taxes that are far lower than what the lender would reasonably estimate will be in effect in the future. For example, properties in California subject to Prop 13 can have taxes change by large amounts when the property changes hands. Annual taxes increasing from $4000 to $14000 is not unreasonable. Does the paragraph above prevent the lender from funding the escrow account using the much higher amount that is now estimated? Would the lender be limited to estimated tax payments equal to the previous charge ($4000) plus a change related to CPI? If so, the escrow account could end up extremely underfunded.

I have to assume that the lender can use estimated disbursement dates outside the computation year and reasonably estimated tax increases based on the property value and local tax rate to determine accurate funding of the account. But the sections above as well as the definitions of the computation year, target balance, etc. seem to indicate otherwise.

Thank you for your help.

When determining the proper escrow account opening balance and the monthly payment into the escrow account does the fact that the second disbursement of taxes is outside the computation year have an affect on what can be collected?

Yes. You can only collect based on what it expected to be paid out during the computation year.

Would the lender be limited to estimated tax payments equal to the previous charge ($4000) plus a change related to CPI?

If the charge is unknown to the servicer, the servicer may base the estimate on the preceding year's charge, or the preceding year's charge as modified by an amount not exceeding the most recent year's change in the national Consumer Price Index for all urban consumers (CPI, all items). In cases of unassessed new construction, the servicer may base an estimate on the assessment of comparable residential property in the market area.

This speaks specifically to unassessed new construction. If the property has been assessed and the taxes increase based on the property transfer then I do not see any guidance allowing you to guess (estimate) the tax increase based on comparable properties. So, I would have to advise the analysis would have to be based on the current taxes plus the CPI.

One could however make a risk assessment for what the potential citations or CMPs for improper escrow analysis and consumer harm would be to the bank.

I have to assume that the lender can use estimated disbursement dates outside the computation year and reasonably estimated tax increases based on the property value and local tax rate to determine accurate funding of the account. But the sections above as well as the definitions of the computation year, target balance, etc. seem to indicate otherwise.

The initial or annual analysis has to be based on what is expected to be paid out during the computation year being analized.


I can't locate it and I don't remember if it was a CFPB or the FDIC supervisory high-light issue that spoke to improper escrow analysis was one common violation they have been noting and it spoke specifically to collecting more than what should be collected. Maybe someone else can recall the publication.

Just a side note that I forgot to add - one could always estimate the increase and ask the consumer if they would like to voluntarily pay the estimated increase. But the actual analysis could not take that into consideration.