This Week's Q & A

Q: I recently obtained a mortgage, and the lender informed me that it is likely that the local tax bill will increase significantly next year. Anticipating what could be a large jump in the amount I am required to pay monthly to a tax escrow account, the lender suggested that I begin making larger payments this year, even though those payments will produce a larger total than will be required to make this year’s tax payment. Can the lender require me to make those extra payments? And is this a standard practice?

A: The answer is no on both counts. The lender can’t require you to make payments in excess of the actual tax liability (your escrow reserves can’t exceed an amount needed to cover two months of required payments), and the lender’s proposal is not standard practice, but it probably will become a standard option lenders offer routinely to borrowers under the circumstances you described. The concern here is the so-called “payment shock” that could result for borrowers facing a sizable, and sometimes unanticipated jump in the escrow portion of their mortgage payments from one year to the next.

The Department of Housing and Urban Development revised the rules governing escrow payments a few years ago. And those revised rules recommend (but do not require) that lenders or servicers who anticipate a large second-year jump in the required escrow disbursements disclose that prospect to consumers, and give them the option your lender offered you of making higher payments during the first year to eliminate a huge jump the following year. Again, the extra payments are voluntary; the lender can’t require you to make them. But you might want to seriously consider the possible advantages to you of doing so.

HUD also addressed another provision in the escrow rules that may be of interest to many consumers. This one focuses on the question of whether lenders are required to make property tax payments annually or in installments, if a municipality offers that option. The revised language clarifies the existing rule, which many lenders, apparently, had misinterpreted to mean that they were required to make installment payments, no matter what. In fact, the rules require lenders to make installment payments only if the total payments under the installment plan (considering any applicable discounts or service charges) are equal to or less than the annual payment, unless the borrower and the servicer both agree to another payment schedule. On the other hand, if the installment payments exceed the amount of the annual payment, the servicer may make the annual payment, but is not required to do so. The revised rules encourage lenders, but do not require them (as some consumer advocates had urged) to follow the borrower’s preference in determining the escrow payment schedule.