Initial escrow account statement

Key Takeaways

• The initial escrow account statement is the borrower's first itemized look at the escrow account: the monthly mortgage payment, the portion going into escrow, the taxes and insurance the servicer expects to pay during the first computation year, and the dates it expects to pay them.
• Regulation X requires the servicer to deliver it at settlement or within 45 calendar days of settlement for escrow accounts established as a condition of the loan, under 12 CFR 1024.17(g)(1). Those are calendar days, not business days.
• The cushion the servicer may hold is capped by 12 CFR 1024.17(c)(1)(ii) at no greater than one-sixth of the estimated total annual payments from the account, which works out to about two months of escrow payments.
• In Washington, WAC 208-620-905 adds servicing duties: written notice of the required reserve at least annually or on request, and notice within ten business days of any change that will alter the escrow payment amount.

What It Means

The initial escrow account statement is the itemized first-year budget for a borrower's escrow account, the account a lender or servicer uses to collect property taxes and hazard insurance along with the monthly mortgage payment and then pay those bills when they come due. The statement shows the amount of the monthly mortgage payment, the portion of that payment going into escrow, each charge the servicer reasonably anticipates paying from the account during the escrow computation year, and the anticipated disbursement date for each one.

It exists because escrow money is the borrower's money held by somebody else. Without the statement a borrower has no way to check whether the escrow line is right, whether the taxes were estimated from last year's assessment or this year's, or whether the account is holding more than it should. The statement also sets the baseline for the annual escrow account statement that follows, which is where a shortage or a surplus is identified.

Brokers do not prepare this document. It is a lender and servicer obligation, not a broker-delivered form. Buyers still ask their broker about it, usually a few weeks after Closing, when the first statement lands and the payment is not the round number they remembered from the Loan Estimate. Our walk-through of a first Washington closing covers what arrives when.

How It Works in Washington

Two rulebooks apply, and keeping them apart is most of the skill. The initial escrow account statement itself is federal. Regulation X, which implements the Real Estate Settlement Procedures Act, provides at 12 CFR 1024.17(g)(1) that the servicer shall submit an initial escrow account statement to the borrower at settlement or within 45 calendar days of settlement for escrow accounts that are established as a condition of the loan, and that the statement shall include the amount of the borrower's monthly mortgage payment and the portion of the monthly payment going into the escrow account, and shall itemize the estimated taxes, insurance premiums, and other charges that the servicer reasonably anticipates to be paid from the escrow account during the escrow account computation year and the anticipated disbursement dates of those charges. The cushion is capped by 12 CFR 1024.17(c)(1)(ii), which allows the servicer to add an amount to maintain a cushion no greater than one-sixth of the estimated total annual payments from the account. Our overview of how financing shapes a Washington sale puts that in payment terms.

Washington adds a servicing layer through the Consumer Loan Act rules. WAC 208-620-905(1)(a) requires a servicer that collects escrow amounts for insurance, taxes, or other property charges to collect and make all payments from the escrow account and, to the extent it has control, to ensure that no late penalties are assessed against the borrower. WAC 208-620-905(1)(b) requires the servicer, at least annually or upon the borrower's request, to inform the borrower in writing of the amount of reserve required in the escrow account, along with any fees the borrower will incur for not maintaining it. WAC 208-620-905(3) requires the servicer to notify the borrower within ten business days of any change, other than one caused by the regularly scheduled payment, that will change the escrow payment amount, and it names hazard insurance premiums and a change in the property's tax assessment as examples.

Do not confuse this escrow with closing escrow. In Washington the closing agent is a separately regulated business under chapter 18.44 RCW, the Escrow Agents chapter, and RCW 18.44.011 defines escrow around effecting and closing the sale, purchase, exchange, transfer, encumbrance, or lease of property through a third person. That escrow and its Trust Account rules have nothing to do with the lender's impound account for taxes and insurance.

Example

Dan and Wren close on a house in Olympia on June 12. Their principal and interest payment is $2,430. Thurston County property taxes run $6,240 a year and the homeowners policy is $1,860, so the escrow share is $675 a month ($8,100 divided by 12) and the total monthly payment is $3,105.

The servicer hands them the initial escrow account statement at the closing table. It lists the $3,105 payment, the $675 escrow portion, the two county tax installments due in April and October, the insurance renewal in June, and the cushion. Under 12 CFR 1024.17(c)(1)(ii) that cushion cannot exceed one-sixth of $8,100, which is $1,350, or roughly two months of escrow payments, so the servicer collects $1,350 at closing as the account's opening balance.

The following February the county reassesses and the annual tax bill rises to $6,900. That pushes the escrow share to $730 a month, and WAC 208-620-905(3) requires the servicer to notify Dan and Wren within ten business days of the change. Their broker's job was never to run this arithmetic. It was to say at contract time that the figure on the Closing Disclosure is an estimate that will move.

Common Mistakes and Exam Traps

• The initial escrow account statement is a RESPA and Regulation X obligation of the servicer. It is not a broker-delivered disclosure and it is not part of the purchase and sale agreement.
• The 45 day window in 12 CFR 1024.17(g)(1) runs from settlement and is measured in calendar days, not business days.
• The cushion cap is one-sixth of the estimated total annual payments from the account, which is about two months. Three months and one-twelfth are the usual distractors.
• The closing escrow held by a Washington escrow agent under chapter 18.44 RCW and the lender's escrow account for taxes and insurance are different accounts under different rules. Exam items use the single word escrow for both.