Annual escrow disbursements on a file come to $7,200 for taxes and insurance together. The servicer wants to hold the largest cushion RESPA allows. Assuming neither state law nor the mortgage documents impose a lower limit, what is the maximum permitted escrow cushion?
Correct Answer
D) $1,200: the cushion may not exceed 1/6 of annual disbursements
D. The maximum permitted cushion is $1,200. Apply the one-sixth ceiling to the $7,200 estimated annual disbursements: $7,200 ÷ 6 = $1,200. Ordinary monthly escrow is $600, making this two months of escrow rather than two full loan payments. Scope and exceptions: A cushion is not mandatory, and a lower legal or contractual limit would control. The cushion calculation alone does not establish the initial deposit or every monthly target balance; aggregate escrow analysis remains necessary. Source: Section 1024.17(c)(1)(ii), (5), (8) and (d)(1) — https://www.consumerfinance.gov/rules-policy/regulations/1024/17/
Why This Is the Correct Answer
D. The maximum permitted cushion is $1,200. Apply the one-sixth ceiling to the $7,200 estimated annual disbursements: $7,200 ÷ 6 = $1,200. Ordinary monthly escrow is $600, making this two months of escrow rather than two full loan payments. Scope and exceptions: A cushion is not mandatory, and a lower legal or contractual limit would control. The cushion calculation alone does not establish the initial deposit or every monthly target balance; aggregate escrow analysis remains necessary.
Why the Other Options Are Wrong
Option A: $600: the cushion is capped at 1 month of escrow payments
One month is a permissible smaller cushion, not the maximum.
Option B: $2,400: the cushion may run to 1/3 of the annual disbursements
One-third doubles the permitted ceiling.
Option C: $1,800: a servicer may hold up to 3 months of the escrow payments
Three months exceeds the two-month equivalent.
Exam Tip
The ceiling is one-sixth of annual escrow disbursements, not annual mortgage payments.
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