• Banks are required to follow certain procedures for recording escrow account information.keyboard image by Monika Forysiak from Fotolia.com
  
  An escrow account is an account set up by a bank that is used to collect and hold money every month from a borrower. A bank is required to follow standard accounting procedures when collecting this money. The bank is also required to use this money to make payments for the borrower for future expenses, including property taxes, homeowner's insurance and mortgage insurance.
  
  

Laws

• In 1934, the federal government began mandating rules on escrow accounts. All FHA-insured mortgages were required to have an escrow account set up by the lending institution extending the loan. This law was established to protect banks and consumers by making it easier to save money to pay for taxes and insurance. In 1974, the Real Estate Settlement Procedures Act (RESPA) was enacted. The federal government stepped in and began governing escrow account procedures.
  
  

Bank Rules

• RESPA governs the maximum balance an escrow account should have. Calculations are made by a bank to find the closest amount possible when estimating. All taxes and insurance amounts are added, then divided by twelve. This number reflects the amount a consumer will pay each month toward their escrow account. When banks receive this money, it's considered a liability for the bank. The amount collected each month is recorded in an accounts payable account to reflect this liability. The entry made is a debit to cash and a credit to accounts payable. The lending institution is required to send an annual statement to the customer reflecting all activity in his escrow account.
  
  

Bank Procedures

• The lending institution is required to pay all payments due by their due dates as long as the customer's loan is in good standing. Every six months the bank reviews the escrow account, and if there's more than $50 extra in the account, the money must be returned to the customer. If this happens, the customer's accounts payable account is debited and the bank credits cash. If the bank calculates that the customer's escrow account is going to be insufficient for future payments, the bank must notify the customer and request additional funds. The bank also has the option to increase the customer's monthly escrow payment amount. When the bank pays the customer's taxes and insurance, they debit the accounts payable account and credit cash.