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RESPA caps the escrow cushion at two months of escrow payments and requires an annual escrow statement within 45 days of the end of the computation year.
- Shortages and surpluses are resolved through the analysis.
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An escrow account collects taxes and insurance monthly so the borrower is not facing a large annual bill. RESPA governs how much can be held.
The cushion
A servicer may hold a cushion of no more than two months of escrow payments, under 12 CFR 1024.17(c)(1)(ii).
The cushion is a buffer against a bill arriving higher than projected. Two months is the ceiling, and a servicer holding more must return the excess.
The annual analysis
Once a year the servicer reviews what was collected against what was paid and projects the year ahead. The statement is due within 45 days of the end of the computation year.
| Outcome | What happens |
|---|---|
| Surplus | Returned to the borrower or credited, depending on size |
| Shortage | Collected over the coming year, or paid as a lump sum |
| Deficiency | The account is negative and is repaid on a defined schedule |
A shortage means the balance is below the target. A deficiency means it is negative. The exam distinguishes them and so should you.
Why payments change
This is what an originator explains most often. A borrower on a fixed-rate loan sees their payment rise and assumes the rate moved.
It did not. Taxes or insurance rose, the escrow analysis picked it up, and the escrow portion of the payment increased. Principal and interest are unchanged.
Escrow waivers
A lender may permit a borrower to pay taxes and insurance directly, usually at a lower loan-to-value and at the lender's discretion.
Some loan types require escrow regardless. Higher-priced mortgage loans carry a mandatory escrow requirement under Regulation Z.
Calculate the cushion as one-sixth of annual disbursements
Regulation X states the maximum as one-sixth of estimated total annual escrow disbursements. With $3,600 of expected annual tax and insurance payments, the maximum cushion is $3,600 ÷ 6 = $600. Monthly deposits of one-twelfth equal $300, so the same cap is two monthly escrow payments. The cap is not mandatory: a servicer may use a smaller cushion or none, and the loan documents or state law may set a lower limit.
Do not confuse the cushion with a shortage or deficiency. The cushion is a reserve included in the account target. A shortage is a balance below the target; a deficiency is a negative balance. The annual escrow analysis can reveal either condition, and separate rules govern collection or refunds.
Common questions
What is the escrow cushion limit?
Two months of escrow payments, under 12 CFR 1024.17(c)(1)(ii).
When is the annual escrow statement due?
Within 45 days of the end of the escrow computation year.
What is the difference between a shortage and a deficiency?
A shortage means the balance is below target. A deficiency means it is negative.
Why did my payment go up on a fixed-rate loan?
Usually because taxes or insurance rose and the escrow analysis adjusted that portion. Principal and interest are unchanged.
Can escrow be waived?
Often, at the lender's discretion and usually at a lower loan-to-value. Higher-priced mortgage loans require escrow under Regulation Z.