How to Audit an Annual Escrow Disclosure Statement

A mortgage lender may add property tax and hazard insurance to a borrowers monthly mortgage payments. The borrower pays the additional amount in 12 equal installments, which the lender deposits into an escrow account. The lender draws money from the escrow account to pay the tax and insurance on the borrower's behalf. The lender must issue an annual statement to the borrower that shows how the lender handled the escrow money. The lender must also verify that it handled the money properly. It may fulfill this requirement by hiring a third-party expert to conduct an escrow statement audit. Although a borrower doesn't have access to the bank's records, she can approximate an audit of her own by reviewing her statement and contacting her lender with any concerns.

Instructions

Prepare to conduct an aggregate analysis to reconcile the account. An aggregate analysis looks at the whole account, rather than line items, to determine how much the borrower must pay into the account and how much is to be disbursed from the account.

Create a running balance. List each anticipated disbursement from the account for the 12 months the escrow statement covers. Divide the total disbursements by 12 to determine the monthly payment. List each month's payment and each month's disbursements, as well as the account balance after each month's activity.

Add enough to the first month's balance to bring the lowest balance to $0. For example, for an account opened in January, if the beginning balance is $0 and a disbursement brings the lowest monthly balance to -$500 in April, add $500 to January's balance and refigure each subsequent month's balance accordingly. April's balance will be $0.

Compute the cushion amount the lender requires. The amount can be as much as two escrow payments under federal law, but state law may cap the cushion at less. Add the cushion amount to the monthly balances.

Compare the trial running balance to the actual account balance for the final month of the statement. If the actual balance is more than the trial running balance for that month, the account has a surplus. If the actual balance is less, the account has a shortage. If the lender must use its own funds to pay a disbursement, the account is deficient.

Review the account history shown on the statement. Verify the activity noted in the history, including each payment into the account; each item paid from the account, itemized to show the purpose of the payment and the entity to which it was paid; beginning and ending account balances; and the amount of the monthly mortgage payment and the portion applied to escrow.

Review the projections of the coming year's disbursements based on the analysis of the previous year's activity. Verify that the statement shows the funding requirements and the lowest balance; the amount of the mortgage payment and how much of the payment will be applied to escrow; and an explanation of how a surplus, shortage or deficiency will be handled.

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