Trust accounts sometimes called Escrow accounts, are for money paid by the homeowners for future payment of property taxes, homeowners insurance, flood insurance, homeowner association fees and sometimes a maintenance saving account.
Trust/Escrow funds do not belong to the covenant partner. They are held in trust on behalf of the homeowner and can only be used for those purposes agreed to with the homeowner, typically for the payment of insurance premiums and property taxes. The use of a trust/escrow account assures that adequate homeowners insurance is maintain and taxes paid in a timely fashion.
Each state has their own set of laws about Trust Accounting (also known as Escrow Accounting in some states) and it is up to the Board of Directors and the Treasurer or Finance Committee to be familiar with the rules of the state that govern their service area. The Board of Directors has fiduciary responsibility for the funds to ensure that they are only used to pay expenses agreed upon by the homeowner and in a timely manner.
Covenant partners who originate mortgages in an aggregate amount of $1 million or more per year are required by law to follow the Real Estate Settlement Procedures Act (RESPA). They should consult with an attorney or CPA to make sure they are in compliance with this law.
Due to changes in property taxes and insurance rates, trust funds must be monitored closely and the homeowners payments need to be periodically adjusted to make sure that there are adequate funds in the account to pay the bills and taxes on time.
The Fuller Center for Housing encourages their covenant partners to work closely with a CPA or an attorney to make sure their accounts are set up properly and there is adequate reporting and monitoring by the board.
Some covenant partners have chosen to avoid the liabilities and reporting requirements involved with mortgage collection and trust account management and employ an insured and bonded third-party service to take on this liability.
Some Basic Rules of Trust Accounting
The reconciliation allows the covenant partner to discover errors and discrepancies such as a deposit into a wrong account, earnest money checks that have been dishonored, or irregularities in the account. The board treasurer is responsible for oversight of the escrow reconciliation and reports to the full board of directors.
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