For most borrowers, their mortgage is their largest monthly expense, and escrowed items account for about one-third of their payment. Increases in the cost of these escrowed items can strain borrower budgets and impact their relationship with you, their lender, if conversations surrounding escrow are not handled properly.
Lenders don’t have control over escrow costs, but you can take charge of how you manage and communicate the analysis process. The following tips will help your organization navigate annual escrow analysis, meet your compliance obligations, and communicate effectively with borrowers.
1. Understand The Key Drivers of Escrow Changes
Before your staff communicates with borrowers, they need to understand the items that are escrowed, and the reasons these amounts can change each year. Consider internal training to establish a baseline of knowledge and include these common factors that cause borrower payments to change.
Increases in escrow payments are generally caused by:
- Higher Insurance Premiums. Insurance costs could rise due to inflation, increases to the property value, or a change to the property’s risk.
- Rising Property Taxes. Reassessments of property value or changes to the millage rates set by local governments can change property tax amounts.
- Prior Year Shortages. If the previous year’s escrow collections fell short of actual disbursements, the shortage may be collected the following year.
Decreases in escrow payments are generally caused by:
- Lower Insurance Premiums. It is rare for an insurer to proactively reduce premiums, but homeowners may lower their escrow amounts when they switch to a new provider, change their coverage, qualify for new discounts, or bundle their policies.
- Elimination of PMI. Borrowers may see lower escrow amounts when their loan-to-value ratio improves, and they no longer owe private mortgage insurance.
- Reduced Property Taxes. While rare, local governments can lower property taxes. Borrowers could also see lower escrow amounts if they qualify for new tax exemptions.
Consider internal documentation that details these reasons to provide robust knowledge for customer service staff. You may also benefit from communicating these possibilities to borrowers to proactively address their questions.
2. Communicate The Options for Surpluses and Shortages
Regulatory requirements, such as the Real Estate Settlement Procedures Act [RESPA], govern how your organization handles escrow surpluses and shortages. Adhering to these rules is non-negotiable for compliance.
First, you must send an annual escrow statement to the borrower within 30 days of the completion of the escrow analysis. The statement must clearly outline the previous year’s account activity and projections for the upcoming year.
Based on the analysis, you should implement procedures for handling surpluses or shortages. RESPA requires you to issue a refund if the surplus is over $50 and the borrower is current on their payments. If the borrower is delinquent or the surplus is under $50, you can credit the escrow account.
Shortages are often more difficult to manage and have a greater potential to impact borrower relationships if they are not communicated effectively. Ensure staff clearly understand the internal procedures for handling these cases and can discuss the options with borrowers.
The standard option for collecting a shortage is to spread the amount over a 12-month period and add the prorated amount to the borrower’s payment. Alternatively, borrowers can opt to pay the shortage as a lump sum.
3. Adjust Processes for Special Portfolios
Loans for affordable housing or other specialized programs with payment-sensitive borrowers may require a more flexible approach. These borrowers are less likely to anticipate annual payment fluctuations and often have less flexibility in their monthly budget, so longer repayment plans may be necessary.
You may also benefit from proactive communication with these borrowers, including targeted educational materials in advance of the analysis. This helps control the narrative, prepare borrowers for upcoming changes, and build trust.
4. Empower Borrowers to Lower Their Escrow Payments
You can also provide additional information to your borrowers to help them potentially lower their escrow payments. This approach requires more effort for your marketing or customer service teams, but it also builds trust and goodwill with customers.
Some tips you can share with borrowers through proactive outreach include:
- Seek Property Tax Exemptions. Encourage borrowers to contact their local tax assessor’s office to ensure they are receiving all available exemptions. Many people are unaware of discounts such as homestead exemptions, senior citizen and disability discounts, veterans’ discounts, and agricultural property relief. In some cases, homeowners can even qualify for retroactive tax relief.
- Shop For Insurance Savings. Encourage borrowers to re-shop their homeowners or flood insurance annually and consider multi-policy discounts. They can also consider a higher deductible plan to lower their premium. In high-risk areas, you can share resources about state-backed insurance programs, such as FAIR plans, which may be more affordable than commercial coverage.
It can also be helpful to tell borrowers about mid-year recalculations, if you plan to offer them. This can provide immediate financial relief if borrowers are successful in lowering their tax or insurance liabilities.
5. Streamline Internal Operations
Efficient internal processes are the key to a smooth escrow analysis cycle that complies with regulations. By revisiting and streamlining these processes, you can minimize errors, proactively address potential compliance issues, and ensure staff are engaged.
System Audits
The escrow analysis is only as accurate as the inputs you provide, so a critical first step in streamlining your process is a thorough system audit. Start by validating that tax and insurance disbursements were correctly scheduled and executed for the previous year. An issue in this area could lead to a borrower shortage, late penalty, and reputational harm.
Vendor Collaboration
Coordination with tax and insurance vendors is essential. Establish clear protocols for receiving timely and accurate billing data from them to ensure your organization makes required payments on time.
Consider Batch Timing
A staggered approach to escrow analysis can help keep the workload for your staff stable. It can also help prevent an influx of seasonal work and allow for more thorough quality control.
Invest in Staff Training
Your customer-facing staff are the direct point of contact for borrowers, so they need to be prepared to answer questions and receive feedback on your processes. Consider implementing role-playing exercises to simulate tough conversations and providing plenty of internal resources to support your employees.
6. Consider A Partnership to Reduce Internal Workload
Annual escrow account analysis and subsequent borrower communication is complex and labor-intensive. It can put seasonal strain on your staff and divert resources from your core business. Fortunately, a strategic partnership with an experienced loan servicer can reduce your workload.
By outsourcing servicing tasks such as escrow analysis, your organization can maintain compliance with regulations while preserving borrower relationships. A servicer with deep experience is well-versed in communicating tough topics, providing knowledgeable support, and promoting a positive borrower relationship – all of which strengthens your brand and mitigates risk.
Loan Servicing from AmeriNat Reduces Work for Lenders
At AmeriNat, we offer loan servicing solutions that take the stressful, labor-intensive tasks off lender’s plates – like escrow analysis. Our friendly, knowledgeable borrower support specialists are well-versed in communicating difficult topics to borrowers and preserving the relationship with their lender.
Our modern solutions are tailored to your needs and supported by our capable team of professionals that align themselves with your goals. To learn more about loan servicing with AmeriNat, contact a member of our team today.
