An impound account is a type of escrow account managed by a lender for the purpose of collecting a borrower’s property expenses, including property taxes, title insurance payments, and H.O.A. fees that are required to maintain property ownership.
Property expenses are expensive, especially if a borrower is expected to make large annual payments. Lenders use impound accounts to divide a borrower’s annual payments (mortgage payments, taxes, insurance, H.O.A. fees, and others) into more manageable monthly payments. This increases the likelihood that a borrower will stay current on all payments and not be subject to foreclosure.
In California, it is illegal for lenders to require single family residence borrowers to have impound accounts, except in the following circumstances:
A borrower has failed to make two consecutive tax payments
The loan is a government-backed loan, such as a FHA or VA loan
When Impound Accounts Are Required
Lenders may impose impound accounts on high risk borrowers, including those with low income, bad credit, or lower down payment borrowers to offset the risk of funding loans to lower income or less credit worthy applicants.
Lenders particularly require borrowers to have impound accounts for low down payment borrowers because such borrowers have “less skin in the game” or a lower stake in the property thereby reducing the borrower’s incentive to make payments.
The California Civil Code states that a lender cannot require a borrower to pay more than the federal maximum, or to contribute more than is needed to pay off property expenses. A lender also may not create circumstances that force a borrower to fall behind on property expenses.
Lenders Are Responsible For Enforcing Impound Accounts
In the event that a lender miscalculates property expenses, it must refund the overpayment back to the borrower within 30 days.
It is a lender’s responsibility to inform a borrower of the steps required to maintain an impound account. This includes providing accurate payment deadlines so that a borrower doesn’t fall behind on property taxes or insurance payments.
Failure by a lender to adhere to the aforementioned standards may allow a borrower to bring legal suit against the lender and recover for damages.
Impound Account Requirement and Option
A lender may require the borrower to have an impound account for his or her mortgage. An impound account is an account that is created to set aside enough money to cover property expenses, including property taxes and hazard insurance. Mortgage programs that require impound accounts are more expensive because an impounded mortgage covers the cost of the actual mortgage, property taxes, and hazard insurance.
To avoid keeping track of paying property related expenses to multiple parties, borrowers also may have the option if the lender accepts to create an impound account. Rather than paying various parties at a different time, the impound account allows borrowers to pay for all costs associated with their property in one payment.
Lenders can however require some borrowers to have an impound account. This is the case if:
The loan amount is higher than 90% of the property value
The borrower has defaulted on consecutive property tax payments
A state or federal financing agency guarantees the loan
The borrower has multiple mortgages on the property that equate to higher than 80% of the property