Throughout the term of a mortgage loan, a borrower pays monthly amounts of principal and interest to repay the debt. If the lender sets up an escrow account, the borrower also pays roughly one-twelfth of the estimated annual cost of property taxes and homeowners’ insurance with each monthly payment.
With an escrow account, the amounts for taxes and insurance go into a special account (an "escrow account," sometimes called a "trust account" or a "mortgage impound account, like in California), and the servicer pays for these items, called "escrow items," on the borrower's behalf out of that account. Borrowers sometimes also have to pay amounts for homeowners’ association (HOA) dues and private mortgage insurance into the escrow account.
But what happens if the servicer doesn't pay the insurance or property taxes on time? Who's responsible for an escrow mistake?
What Is an Example of an Escrow Account?
Here's an example of how an escrow account works. Suppose Tim's property taxes and insurance are $4,500 a year. Tim's lender insists on an escrow account. Tim then has to pay $375 each month in addition to paying principal and interest. The servicer puts the $375 into the escrow account and pays the tax and insurance bills when they're due.
Because taxes and insurance costs can change from year to year, the servicer might also require the borrower to pay extra money into the escrow account, typically two months’ worth of escrow payments. The servicer may then use this money, called an escrow “cushion,” to cover unanticipated increases in the property taxes or homeowners’ insurance.
The Servicer's Duty to Make Homeowners' Insurance and Property Tax Disbursements
Federal law requires the servicer to make the insurance and tax payments in a timely manner (that is, on or before the deadline to avoid a penalty) as long as your mortgage payment is not more than 30 days overdue. (12 C.F.R. § 1024.17). Even if you don't have enough funds in your escrow account to cover the disbursements, the servicer usually must advance funds to make the payments.
So, it's the servicer's responsibility to manage the account properly, and it's your responsibility to pay the escrow amount each month with your mortgage payment.
How to Resolve an Escrow Mistake
But even if the servicer is at fault, it's in your best interest to resolve any escrow errors immediately. If you have an escrow account as part of your mortgage loan and find out the servicer didn’t pay the property taxes or homeowners’ insurance, call your servicer immediately. If the call doesn't resolve the issue, send the servicer a "notice of error."
Under federal law, if you send your servicer a letter, officially called a "notice of error," the servicer must acknowledge receiving the notice of error within five business days. If it turns out that the servicer did forget to pay the insurance or tax bill, it must correct the error within 30 business days (or 45 days if it notifies you of the extension and the reason for the delay before the end of the initial 30-day period) and cover the cost of any penalties imposed due to the late disbursement. (12 C.F.R. § 1024.35).
You should also contact the taxing authority or your insurance carrier to inform them about the situation.
Getting Help
Servicers are usually diligent about paying property taxes and insurance bills, though mistakes can happen. If you need help correcting an error your servicer made, consider talking to an attorney or a HUD-approved housing counselor.
You may also complain to the Consumer Financial Protection Bureau (CFPB). The CFPB will send your complaint to the servicer and try to get a response, usually within 15 days.