Consumer Compliance Outlook: Third Issue 2024

Top Federal Reserve System Compliance Violations in 2023 Under the Real Estate Settlement Procedures Act and Regulation X

By Consumer Compliance Outlook Staff

The Real Estate Settlement Procedures Act (RESPA),¹ as implemented by Regulation X,² is the federal consumer protection law for federally related mortgage loans.³ The protections include specifying detailed procedures for loan servicing and managing escrow accounts; requiring the disclosure of settlement costs; and prohibiting kickbacks, unearned fees, and referral fees for settlement services.⁴

COMMON REGULATION X VIOLATIONS

Violations of Regulation X were among the Federal Reserve’s top-cited compliance violations in 2023, and all of them pertained to the escrow account requirements.⁵ Although escrows are required only for certain loans,⁶ the National Mortgage Database indicates more than 80 percent of residential mortgage loans have one.⁷ Escrows benefit both the lender and the borrower by mitigating the risk of the borrower being unable to pay a large annual bill for real estate taxes, insurance premiums, and other loan obligations by having the servicer assume the responsibility for collecting the payments from the borrower and timely disbursing them to the payees. But administering escrows requires complying with the regulation’s technical requirements, which has led to violations.

The format for the common violations articles is to first list the regulatory requirements (either by quoting the verbatim text or by summarizing it) and then discuss the violations, root causes, and sound practices.

REGULATORY REQUIREMENTS

Subsequent escrow account analyses: 12 C.F.R. §1024.17(c)(3)

For each escrow account, the servicer must conduct an escrow account analysis at the completion of the escrow account computation year to determine the borrower’s monthly escrow account payments for the next computation year. … Upon completing an escrow account analysis, the servicer must prepare and submit an annual escrow account statement to the borrower.

Shortages, surpluses, and deficiencies requirements: 12 C.F.R. §1024.17(f)(1)(i)

For each escrow account, the servicer shall conduct an escrow account analysis upon establishing the escrow account and at the completion of the escrow account computation year to determine whether a surplus, shortage, or deficiency exists. Escrow account computation year is a 12-month period a servicer establishes for the escrow account beginning with the borrower’s initial payment date. The term includes each 12-month period thereafter, unless a servicer chooses to issue a short year statement in compliance with §1024.17(i)(4).

Annual Escrow Account Statement: 12 C.F.R. §1024.17(i)(1)

For each escrow account, a servicer shall submit an annual escrow account statement to the borrower within 30 days of the completion of the escrow account computation year. The servicer shall also submit to the borrower the previous year’s projection or initial escrow account statement. The servicer shall conduct an escrow account analysis before submitting an annual escrow account statement to the borrower.

The annual escrow account statement shall provide an account history, reflecting the activity in the escrow account during the escrow account computation year, and a projection of the activity in the account for the next year. Several data points for the prior escrow year must be disclosed, including the total amount paid into the escrow account during the past computation year and the total amount paid out during the same period for taxes, insurance premiums, and other charges (as separately identified).

In several instances, examiners observed institutions using an “escrow account computation year” longer than the 12-month period the regulation requires.⁸ This had a domino effect of triggering violations of other sections of the regulation that specify the 12-month period to take required actions for the escrow account:

Providing the escrow annual statement more than 30 days after the end of the escrow account computation year, without issuing a short year statement.⁹ For example, suppose the 12-month period for the escrow account computation year for a loan was from December 2023 to December 2024, but the servicer conducts escrow analyses once a year in March. Conducting the analysis in March 2025 for this loan exceeds the escrow account computation year by three months. In this situation, the servicer should provide a short year statement.

Failing to conduct an escrow surplus/deficiency analysis within 30 days of completing the escrow account computation year. Similarly, using the previous example, the servicer violated the surplus/deficiency timing rules by conducting the analysis in March 2025 when it should have been conducted within 30 days of December 2024 and by failing to refund any surplus in that same time frame.

Errors in disclosing the amounts paid in and out of the escrow account for the prior year.¹⁰ In some instances, these errors resulted from a software vendor that incorrectly interpreted a disclosure term; in other cases they occurred because staff did not understand the regulatory requirements.

REGULATORY REQUIREMENTS

Initial Escrow Account Analysis: 12 C.F.R. §1024.17(g)

The servicer shall conduct an escrow account analysis before establishing an escrow account to determine the amount the borrower shall deposit into the escrow account, subject to the limitations of §1024.17(c)(1)(i).After conducting the escrow account analysis for each escrow account, 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.

The initial escrow account 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 initial escrow account statement shall indicate the amount that the servicer selects as a cushion. The statement shall include a trial running balance for the account.

Examiners saw initial escrow account analyses that incorrectly included payments of taxes and insurance when those obligations had already been paid by the borrower at loan closing. The causes of these violations included insufficient oversight and monitoring, problems with recent system updates, and inadequate training. Additionally, examiners found increased risk of violations when institutions relied on third-party software to perform the escrow analysis.

SOUND PRACTICES TO MITIGATE COMPLIANCE RISKS

The table lists sound compliance practices examiners have observed.

Table: Sound Compliance Practices

Board and Senior Management Oversight	Provide prompt responses to employee questions Ensure that third-party service providers understand and effectively perform their compliance responsibilities Periodically verify that vendors’ calculations are correct and that vendors are implementing regulatory changes to escrow requirements
Internal Controls	Conduct a secondary review of all vendor software that generates disclosures and analyzes accounts Enhance preventative and detective controls
Consumer Complaints	Review complaints received by the institution or by the Federal Reserve Consumer Help complaint system for possible internal control weaknesses for the issues noted in this article, adjusting and strengthening processes as needed to ensure compliance
Training	Conduct regular staff training on escrow requirements and include training on the proper usage of the software platform used to generate escrow account disclosures Include training when regulatory changes or procedural weaknesses are noted
Monitoring and Audit	Conduct frequent audits of settlement statements and analyses to ensure all escrow account information is accurate Validate policies and procedures are implemented and applied correctly
Policies and Procedures	Implement detailed policies and procedures to ensure a consistent and repeatable process; considerations might include: Understanding required escrow account analyses and deadlines Ensuring disbursement of refunds or charges is timely and accurate

CONCLUDING REMARKS

Several of Regulation X’s detailed requirements for establishing and administering escrow accounts were the subject of top-cited violations in the Federal Reserve System. In some instances, examiners issued Matters Requiring Immediate Attention or Matters Requiring Attention for systemic or repeat issues involving consumer harm, underscoring the importance of complying with these requirements. This article reviewed the violations and sound practices to help mitigate the risks. Specific issues and questions about RESPA requirements should be raised with your primary regulator.

ENDNOTES

¹ 12 U.S.C. §2601 et seq.

² 12 C.F.R. Part 1024.

³ 12 C.F.R. §1024.2(b). The regulation’s broad definition applies to most residential closed-end mortgages and home equity lines of credit for one- to four-family occupancy.

⁴ See 12 C.F.R. §§1024.30–41 (servicing), § .17 (escrows), §§ .7–8 (disclosures) and § .14 (kickbacks and unearned fees).

⁵ Recent Supervisory Data for Institutions the Federal Reserve Supervises” (CCO, First Issue 2024); 12 C.F.R. §1024.17.

⁶ Escrows are legally required for first-lien Regulation Z higher-priced mortgage loans unless an exception applies (12 C.F.R. §1026.35(b)(2)) and for certain government-backed loans, such as Federal Housing Administration loans (24 C.F.R. §203.550).

⁷ The Federal Housing Finance Agency, “Recent Changes in Mortgage-Related Housing Consumption Costs: Evidence from the National Mortgage Database” (July 16, 2024) at endnote 6.

⁸ 12 C.F.R. §1024.17(b).

⁹ A short year statement allows the servicer to “change one escrow account computation year to another. By using a short year statement a servicer may adjust its production schedule or alter the escrow account computation year for the escrow account” (§1024.17(i)(4)).

¹⁰ 12 C.F.R. §1024.17(i)(1)(iii)–(iv).