Escrow Account Information & Laws

by Kristie Lorette, Demand Media
How escrow accounts for real estate transactions are governed by the law.


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In a real estate transaction, an escrow account is a holding account for money transactions that take place during the buying and selling of a property. A third party is responsible for the escrow account during a buy and sale transaction. Once the mortgage is established, an escrow account holds the taxes and insurance money collected by the mortgage company from the borrower in order to pay the taxes and insurance on the property. The main law that governs escrow accounts is the Real Estate Settlement Procedures Act of 1974 (RESPA).

Itemized Closing Cost Statement

According to RESPA, a mortgage borrower must receive an itemized statement that details the closing costs for the real estate transaction. The purpose of the itemized statement is to educate borrowers on the fees they are paying and to ensure that they are not being charged excessive fees or paying any type of referral fees, which is prohibited by the law. The law protects the consumer from paying excessive fees by allowing the buyer of a property to choose the title company. The title company often holds the escrow account in addition to providing the title search service.


RESPA requires lenders to provide disclosures that pertain to the escrow account before, during and after the purchase of the property. When the property buyer submits a mortgage application, the lender is required to provide two disclosures: a booklet that describes third-party settlement services, such as the holder of the escrow account holder, and a good-faith estimate, which is the itemized estimate of the closing costs. Before the real estate transaction reaches the closing table, a Controlled Business Arrangement (CBA) disclosure must be provided to the buyer if someone involved in the real estate transaction has referred the buyer to an escrow holder or the closing company for the transaction. The disclosure describes the relationship that exists between the referrer and the company that was referred. After the transaction closes, RESPA requires the buyer to receive an Initial Escrow Statement, an itemized estimate of taxes, insurance and any other charges paid out of the escrow account during the first year of the mortgage. The Initial Escrow Statement also lists any cushion amount required to be held in the escrow account and must be received by the borrower within 45 days of the closing date.

Annual Statement

An amendment made to RESPA in 1990 requires mortgage lenders to provide an annual escrow statement to mortgage borrowers. The annual escrow account statement must be itemized and must contain a summary of any payments made from the escrow account during the year. If a shortage or surplus of funds was in the escrow account after taxes and insurance payments were made, the statement must show this as well.

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