Annual escrow disbursements are $7,200 and the servicer wants the largest cushion the rule allows. Assuming no lower state-law or contractual limit applies, what is the maximum permitted escrow cushion?
Correct Answer
C) One-sixth of $7,200, or $1,200, being 2 months of payments
C. The maximum cushion is $1,200. Multiply estimated annual escrow disbursements by one-sixth: $7,200 ÷ 6 = $1,200. Monthly escrow is $600, so the cushion equals two months of escrow—not two full mortgage payments. Scope and exceptions: A cushion is optional; lower contractual or legal limits govern when applicable. This amount is not the entire escrow balance or necessarily the initial deposit. Aggregate analysis accounts for disbursement timing, and shortage or deficiency repayment is a separate calculation. Source: Section 1024.17(c)(1), (5), (8) and (d)(1) — https://www.consumerfinance.gov/rules-policy/regulations/1024/17/
Why This Is the Correct Answer
C. The maximum cushion is $1,200. Multiply estimated annual escrow disbursements by one-sixth: $7,200 ÷ 6 = $1,200. Monthly escrow is $600, so the cushion equals two months of escrow—not two full mortgage payments. Scope and exceptions: A cushion is optional; lower contractual or legal limits govern when applicable. This amount is not the entire escrow balance or necessarily the initial deposit. Aggregate analysis accounts for disbursement timing, and shortage or deficiency repayment is a separate calculation.
Why the Other Options Are Wrong
Option A: One-twelfth of $7,200, or $600, being 1 month of payments
A $600 cushion is below the ceiling, not the maximum requested.
Option B: Any cushion the note permits, since RESPA sets no ceiling
Loan terms cannot authorize a required cushion above the regulatory ceiling.
Option D: One-quarter of $7,200, or $1,800, being 3 months of payments
Three months exceeds the permitted ceiling on these facts.
Exam Tip
Calculate the cushion from annual escrow disbursements, not principal and interest.
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