Yes, your bank must disclose that an escrow account is required on the CD. Your bank may choose to disclose the estimated future property taxes on page 1 of the LE, but this is not required. Other than that, there is no clear place in the LE, CD or initial escrow analysis to disclose the estimated future property taxes. Consequently, these disclosures will show property taxes as “0,” “—”, or left blank, depending on the location of the disclosure.

We were surprised by this result — omitting the estimated future property taxes from most of the mortgage loan disclosures could potentially leave borrowers unprepared when their periodic payments shoot up due to the later addition of escrowed property taxes — and we submitted an inquiry to the CFPB on this point. We were contacted by a CFPB attorney who walked us through the LE and CD and confirmed that there is no clear requirement to disclose the estimated future property taxes. The CFPB attorney did emphasize that his informal guidance was not meant to suggest that the estimated future property taxes could or should be omitted when performing an underwriting and/or ability-to-repay analysis. Additional points from our discussion with the CFPB on this question are summarized below.

Regulation X — Escrow Analysis and Initial Escrow Statement

We believe that the initial escrow statement calculations should omit the estimated future property taxes. The initial escrow statement should cover only the twelve months after the first loan payment. In this case, no property taxes will be billed during that period, and the initial escrow statement necessarily will reflect that fact. Additionally, note that Regulation X would prohibit your bank from collecting amounts for estimated future property taxes in the escrow account in the first year of the loan term—collecting amounts for the estimated future property taxes would result in an account cushion exceeding the maximum cushion allowed under Regulation X, which “shall be no greater than one-sixth (1/6) of the estimated total annual payments from the escrow account.”

Regulation Z Disclosure Requirements — Loan Estimate (LE) and Closing Disclosure (CD)

The following technical discussion of the LE and CD disclosures is best read while following along in the CFPB’s sample completed LE and CD forms.

On the CD, a creditor must indicate that an escrow account will be established under “Additional Information About This Loan” (page 4 of the CD). For this loan, your bank will be maintaining an escrow account (as required by the higher-priced mortgage loan regulations) and should disclose this fact accordingly. There is no corresponding disclosure on the LE.

Disclosing the amount of property taxes on the LE and CD is tricky — we know that the borrower will not be billed for property taxes during the first year of the loan term, after which the borrower will start receiving property tax bills at the full amounts, without the benefit of the current property tax exemptions. The CFPB attorney we spoke with confirmed that there is no clear way to disclose property taxes in this situation, though it is not unusual.

If we walk through all of the locations where property taxes are disclosed on the LE and CD, there is just one opportunity to disclose the full amount of estimated property taxes — on page 1 of the LE, under the “Projected Payments” table. The headings “Estimated Escrow,” and “Estimated Taxes, Insurance & Assessments” both include line entries for estimated property taxes. The CFPB attorney we spoke with told us that a creditor could disclose full property taxes here, but is not required to. The rules providing instructions for these disclosures require the disclosed property taxes to reflect the “taxable assessed value of the real property securing the transaction after consummation.” The CFPB attorney interpreted this provision as permitting, but not requiring, a creditor to disclose the estimated future property taxes.

However, the estimated future property taxes should not be included on the CD. The rules for the same “Projected Payments” table on the CD are more stringent. On the CD, the amounts disclosed in that table are directly tied to the Regulation X escrow analysis; for the reasons discussed above, the escrow analysis would have to exclude estimated future property taxes, and consequently the CD also would have to exclude the estimated future property taxes.

The LE and CD also include disclosures of prepaid property taxes and the initial escrow payment at closing (with property taxes broken out). Here, no property taxes will be paid at closing, and they will not be included in the initial escrow payment. Consequently, the “Initial Escrow Payment at Closing” and “Prepaids” disclosures should be left blank.

The CD also includes an “Escrow Account” section on page 4, requiring the disclosure of the total escrowed costs over the first year of the loan and monthly escrow payments during the first year of the loan. The amounts disclosed here should correspond to the RESPA escrow account analysis. Again, because these amounts are tied to the RESPA escrow analysis, they necessarily must exclude the estimated future property taxes.

Unfortunately, this approach could result in sticker shock a year or two down the line, when the borrower’s escrow payments will increase as they begin to incorporate property tax payments. The CFPB attorney we spoke with suggested that Regulation Z would not prevent the bank from disclosing estimated future property taxes on a separate disclosure document, perhaps calculating the increase in periodic payments that inevitably will occur when escrowing for property taxes begins. But a separate disclosure is not required — the CFPB attorney simply wished to point it out as a way to avoid possible sticker shock.

For resources related to our guidance, please see:

• Regulation X, 12 CFR 1024.17(g)(1)(i) (“The initial escrow account statement . . . shall itemize the estimated taxes, insurance premiums, and other charges that the servicer reasonably anticipates to be paid from the escrow account during the escrow account computation year and the anticipated disbursement dates of those charges. . . .”)

• Regulation X, 12 CFR 1024.17(b) (“Escrow account computation year is a 12-month period that a servicer establishes for the escrow account beginning with the borrower’s initial payment date. The term includes each 12-month period thereafter, unless a servicer chooses to issue a short year statement under the conditions stated in § 1024.17(i)(4).”)

• Regulation X, 12 CFR 1024.17(b) (“The initial payment date is the borrower’s first payment due date to an escrow account.”)

• Regulation X, 12 CFR 1024.17(c)(1)(i) (“A lender or servicer (hereafter servicer) shall not require a borrower to deposit into any escrow account, created in connection with a federally related mortgage loan, more than the following amounts: (i) Charges at settlement or upon creation of an escrow account. At the time a servicer creates an escrow account for a borrower, the servicer may charge the borrower an amount sufficient to pay the charges respecting the mortgaged property, such as taxes and insurance, which are attributable to the period from the date such payment(s) were last paid until the initial payment date. . . . In addition, the servicer may charge the borrower a cushion that shall be no greater than one-sixth (1/6) of the estimated total annual payments from the escrow account.”)

• Regulation Z, 12 CFR 1026.38(l)(7) — Closing Disclosure, Additional Information About This Loan (Requirement to disclose “a statement of whether the creditor has established or will establish, at or before consummation, an escrow account in connection with the transaction for the costs that will be paid using escrow account funds described in paragraph (l)(7)(i)(A)(1) of this section.”)

• Regulation Z, 12 CFR 1026.35(b)(1) — Prohibited Acts or Practices in Connection with Higher-Priced Mortgage Loans (“Except as provided in paragraph (b)(2) of this section, a creditor may not extend a higher-priced mortgage loan secured by a first lien on a consumer’s principal dwelling unless an escrow account is established before consummation for payment of property taxes and premiums for mortgage-related insurance required by the creditor . . . .”)

• Regulation Z, 12 CFR 1026.37(c)(2)(iii) — Loan Estimate, Projected Payments Table (Requirement to disclose Estimated Escrow with “[t]he amount payable into an escrow account to pay some or all of the charges described in paragraph (c)(4)(ii), as applicable, labeled ‘Escrow,’ together with a statement that the amount disclosed can increase over time.”)

• Regulation Z, 12 CFR 1026.37(c)(4) — Loan Estimate, Projected Payments Table (Requirement to disclose Estimated Taxes, Insurance & Assessments.)

• Regulation Z, 12 CFR 1026.37(c)(5) — Loan Estimate, Projected Payments Table (“For purposes of paragraphs (c)(2)(iii) and (c)(4)(ii) of this section, estimated property taxes and homeowner’s insurance shall reflect: (i) The taxable assessed value of the real property securing the transaction after consummation . . . .”)

• Regulation Z, 12 CFR 1026.38(c)(1)(i) — Closing Disclosure, Projected Payments Table (Requirement to disclose the escrow information required by Section 37(c)(4) [see above], based on “the escrow account analysis described in Regulation X, 12 CFR 1024.17; . . .”)

• Regulation Z, 12 CFR 1026.37(g)(3)(iii) — Loan Estimate, Initial Escrow Payment at Closing (Requirement to disclose “the amount escrowed per month, the number of months covered by an escrowed amount collected at consummation, and the total amount to be paid into the escrow account by the consumer at consummation for property taxes, labeled ‘Property Taxes ___ per month for ___ mo.’”)

• Official Interpretations, Paragraph 37(g)(3), Comment 1 (“ . . . If an item described in § 1026.37(g)(3)(i) through (iii) is not charged to the consumer, the monthly payment amount and time period used in the labels are left blank.”)

• Regulation Z, 12 CFR 1026.38(g)(3) — Closing Disclosure, Initial Escrow Payment at Closing (Requirement to disclose the items described in § 1026.37(g)(3) (see above).)

• Regulation Z, 12 CFR 1026.37(g)(2)(iv) — Loan Estimate, Prepaids (Requirement to disclose “ . . .  the total dollar amount to be paid by the consumer at consummation for [property] taxes, labeled ‘Property Taxes (___ months).”)

• Official Interpretations, Paragraph 37(g)(2), Comment 3 (“ . . . If an amount for a labeled item is not charged to the consumer, the time period, daily amount, and percentage used in the labels are left blank.”)

• Regulation Z, 12 CFR 1026.38(g)(2) — Closing Disclosure, Prepaids (Requirement to disclose the items described in § 1026.37(g)(2) (see above).)

• Regulation Z, 12 CFR 1026.38(c)(2) — Closing Disclosure, Projected Payments Table, Estimated Taxes, Insurance, and Assessments (Requirement to disclose the information required by paragraph (l)(7) [see below].)

• Regulation Z, 12 CFR 1026.38(l)(7) — Closing Disclosure, Escrow Account (Requirement to disclose “[t]he total amount the consumer will be required to pay into an escrow account over the first year after consummation for payment of the charges described in § 1026.37(c)(4)(ii), labeled ‘Escrowed Property Costs over Year 1’” and “[t]he amount the consumer will be required to pay into the escrow account with each periodic payment during the first year after consummation for  payment of the charges described in § 1026.37(c)(4)(ii), labeled ‘Monthly Escrow Payment,’” among other disclosures.)

• Regulation Z, 12 CFR 1026.38(l)(7)(i)(A)(5) — Closing Disclosure, Escrow Account (Requirement to disclose “[t]he total amount the consumer will be required to pay into an escrow account over the first year after consummation for payment of the charges described in § 1026.37(c)(4)(ii), labeled ‘Escrowed Property Costs over Year 1’” and “[t]he amount the consumer will be required to pay into the escrow account with each periodic payment during the first year after consummation for  payment of the charges described in § 1026.37(c)(4)(ii), labeled ‘Monthly Escrow Payment,’” among other disclosures.)