Trouble Understanding Citi's Escrow Analysis: Help Me, WalletPop!

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Q. CitiFinancial sent me an escrow analysis that shows they paid my taxes in August 2010. However, Cook County, Ill., where I live, has not even issued the tax bills yet. Citi's flawed analysis leads to a higher monthly mortgage payment of about $30 per month, beginning in November. They have not been helpful in resolving this issue: First they didn't understand what my issue was (customer service to somewhere overseas); then they sent a letter saying they paid the taxes and their analysis was correct, then they sent a letter saying I have two different balances for my escrow account – an actual balance and the estimated balance with the taxes deducted as of the date they ran their analysis.
So I sent the most recent (and third) fax to them stating:

"I am in receipt of your most recent correspondence. As you have not paid my taxes, then you cannot have deducted them from my escrow account. There is no way there are 2 different balances for the same escrow account as you stated. I will continue to pay the current monthly amount for the coming year until you send a revised and correct Escrow Account Statement for 2010-2011."

Please help. Citi has my money; hasn't paid my taxes; is earning interest on my escrow account; and wants to charge me a higher monthly mortgage payment for the coming year because they can't do simple math – or they are doing tricky math and make more money off me. I'm already looking around to refinance with a different company as Citi pulls this crap every year. I wonder how many other people they do this to?
Fran Bruder

A. Fran, this took a little digging, but I think I've figured out what's going on here, and it's essentially a misunderstanding about how escrow works. First of all, I want to clear one thing up right off the bat – Mark Rodgers, the director of public affairs for the company, tells me that in Illinois, neither the servicer nor the customer earns interest on the money in an escrow account. So they're not trying to make a buck here.

What they are trying to do is keep their records organized, and that can be difficult when counties are late issuing tax bills, as is the case here. But let's start at the beginning: Your escrow account holds money that Citi can use to pay the taxes and insurance on your home. You pay a little bit into escrow each month, and when those bills come in, Citi writes the check on your behalf so you don't have to deal with it. What that means is that they need to have a little cushion in that escrow account, because these costs can fluctuate. What they charge to you, for escrow, is based on the payments they made last year. So say last year, your taxes and insurance came to $1,000. That's what they'd charge you this year in escrow. But say when they get this year's bills, they came to $1,500. They'd still pay them for you, but then they need to take $500 out of the cushion you've built up in your escrow account to pay themselves back. They then need to rebuild that cushion, so you need to pay a little more in escrow. Generally, they'll average the extra amount you owe them over a year, so you might pay just a few extra dollars a month.

Citi couldn't speak to me about your account specifically because of privacy rules, but my guess is that's where that extra $30 a month comes in. At some point, your taxes or insurance probably went up, and they had to readjust. And it works both ways – if they charged you $1,500 in escrow based on last year's amounts, and this year they only had to pay out $1,000, you'd get the refund. "For anything over $10, we either refund it or divide it up every month, and that's what your payment is reduced by," explains Rodgers.

The other issue that seems to be at play here has to do with your county issuing tax bills late. Citi pays the bill when it comes, even if it's late. So say your county typically issues tax bills in August (which I believe is actually true of Cook County), but this year, they're behind schedule. Citi doesn't know when the bill is going to come in, but to ensure that they have the money set aside, they'll deduct the amount they've projected is going to be due from your escrow analysis for the month that the tax bill is generally due. That means your escrow analysis will show a projected payment – and thus your account balance will be less that amount – but the bank doesn't actually issue the check until they receive the bill from your county. It's confusing, so think of it this way: If you have a set amount of money in your checking account, and you're budgeting for a big expense at the end of the month, you might mentally subtract that amount when looking at your account balance. That's essentially what Citi does when property tax bills come in late. Then, when they do issue the check, it is retroactive back to the date the bill should have been due – so in your case, August – not when it was actually paid.

Whew! This is a complicated topic, but I hope this cleared up your confusion.

Consumer Ally problem solver Jean Chatzky is the "Today Show" financial adviser, a longtime financial journalist and best-selling author.
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