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Federal Register / Vol. 86, No. 30 / Wednesday, February 17, 2021 / Rules and Regulations interpreted as applying to these upfront payments.
Affected consumers would have mortgage escrow accounts under the baseline but will not under the final rule. The potential benefits to consumers of not having mortgage escrow accounts include: 1 More budgetary flexibility, 2 interest or other earnings on capital,62 3
decreased prices passed through from decreased servicing costs, and 4
greater access to credit resulting from lower mortgage servicing costs.
Escrow accounts generally require consumers to save for infrequent liabilities, such as property tax and insurance, by making equal monthly payments. Standard economic theory predicts that many consumers may value the budgetary flexibility to manage tax and insurance payments in other ways. Even without an escrow account, those consumers who prefer to make equal monthly payments towards escrow liabilities may still do so by, for example, creating a savings account for the purpose. Other consumers who do not like this payment structure can come up with their own preferred payment plans. For example, a consumer with $100 per month in mortgage escrow payments and $100 per month in discretionary income might have to resort to taking on high-interest debt to cover an emergency $200
expense. If the same consumer were not required to make escrow payments, she could pay for the emergency expense immediately without taking on highinterest debt and still afford her property tax and insurance payments by increasing her savings for that purpose by an additional $100 the following month.
Another benefit for consumers may be the ability to invest their money and earn a return on amounts that might, depending on State regulations, be forgone when using an escrow. The Bureau does not have the data to estimate the interest consumers forgo because of escrow accounts, but numerical examples may be illustrative.
Assuming a 0 percent annual interest rate on savings, a consumer forgoes no interest because of escrow. Assuming a 5 percent annual interest rate on savings, a consumer with property tax and insurance payments of $2,500 every six months forgoes about $65 per year in interest because of escrow.
Finally, consumers may benefit from the final rule from the pass-through of 62 Some
States require the paying of interest on escrow account balances. But even in those States the consumer might be able to arrange a better return than the escrow account provides.

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lower costs incurred in servicing the loan under the final rule compared to under the baseline. The benefit to consumers will depend on whether fixed or marginal costs, or both, fall because of the final rule. Typical economic theory predicts that existing firms should pass through only decreases in marginal rather than fixed costs. The costs to servicers of providing escrow accounts for consumers are likely to be predominantly fixed rather than marginal, which may limit the pass-through of lower costs on to consumers in the form of lower prices or greater access to credit. Research also suggests that the mortgage market may not be perfectly competitive and therefore that creditors may not fully pass through reductions even in marginal costs.63 Therefore, the benefit to consumers from receiving decreased costs at origination because decreased servicing costs are passed through is likely to be small. Lower servicing costs could also benefit consumers by encouraging new originators to enter the market. New exempt originators may be better able to compete with incumbent originators and potentially provide mortgages to underserved consumers because they will not have to incur the costs of establishing and maintaining escrow accounts. They in turn could provide more credit at lower costs to consumers. However, recent research suggests that the size of this benefit may be small.64
One commenter suggested an additional benefit to consumers of not having escrow accounts. This commenter noted that some consumers with escrow accounts may erroneously believe they still have to make their property insurance or tax payments themselves. Consumers who unnecessarily make these payments may then have to spend time and effort to get their payments refunded. The commenter did not provide, and the Bureau does not have, data to quantify this benefit.
The potential costs to consumers of not having access to an escrow account include: 1 The difficulty of paying several bills instead of one, 2 a loss of a commitment and budgeting device, and 3 reduced transparency of mortgage costs potentially leading some consumers to spend more on house payments than they want, need, or can afford.
63 Jason Allen et al., The Effect of Mergers in Search Markets: Evidence from the Canadian Mortgage Industry, Am. Econ. Rev. 2013, 10410, at 336596.
64 See Alexandrov & Ang, supra note 61.

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Consumers may find it less convenient to separately pay a mortgage bill, an insurance bill, and potentially several tax bills, instead of one bill from the mortgage servicer with all required payments included. Servicers who maintain escrow accounts effectively assume the burden of tracking whom to pay, how much, and when, across multiple payees. Consumers without escrow accounts assume this burden themselves. This cost varies across consumers, and there is no current research to estimate it. An approximation may be found, however, in an estimate of around $20 per month per consumer, depending on the households income, coming from the value of paying the same bill for phone, cable television, and internet.65
The loss of escrow accounts may hurt consumers who value the budgetary predictability and commitment that escrow accounts provide. Recent research finds that many homeowners do not pay full attention to property taxes,66 and are more likely to pay property tax bills on time if sent reminders to plan for these payments.67
Other research suggests that many consumers, in order to limit their spending, prefer to pay more for income taxes than necessary through payroll deductions and receive a tax refund check from the IRS in the spring, even though consumers who do this forgo interest they could have earned on the overpaid taxes.68 This could suggest that some consumers may value mortgage escrow accounts because they provide a form of savings commitment. The Bureau recognizes that the budgeting and commitment benefits of mortgage escrow accounts vary across consumers.
These benefits will be particularly large for consumers who would otherwise miss payments or even experience foreclosure. Research suggests that a nontrivial fraction of consumers may be 65 Hongju Liu et al., Complementarities and the Demand for Home Broadband internet Services, Marketing Science, 294, 70120 Feb. 2010, https pubsonline.informs.org/doi/abs/10.1287/
mksc.1090.0551.
66 Francis Wong, Mad as Hell: Property Taxes and Financial Distress Dec. 15, 2020, available at https www.dropbox.com/sh/55dcwuztmo8bwuv/
AADfEOFVXZ8zVGzj0-Od5GCKa?dl=0.
67 Stephanie Moulton et al., Reminders to Pay Property Tax Payments: A Field Experiment of Older Adults with Reverse Mortgages Sept. 6, 2019, https papers.ssrn.com/sol3/Delivery.cfm/
SSRN_ID3445419_code1228972.pdf?abstractid=
3445419&mirid=1.
68 Michael S. Barr & Jane K. Dokko, Paying to Save: Tax Withholding and Asset Allocation Among Lowand Moderate-Income Taxpayers, Finance and Economics Discussion Series, Federal Reserve Board 2008, http www.federalreserve.gov/pubs/
feds/2008/200811/200811pap.pdf.

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