I have received a large number of questions dealing with various aspects of the escrow for taxes and insurance issue. This column will attempt to highlight what lenders can do and what they cannot do in this area.

State laws differ dramatically, and you should check with your own attorney to determine what your local law permits.

The theory behind the escrow makes sense. Lenders are concerned that if you do not pay your real estate taxes or your annual insurance premium, the lender's security will be affected.

Unfortunately, while the theory makes sense, in my opinion the primary reason for wanting these escrow accounts is that lenders accumulate huge sums of money which they can use for their own benefit, without paying interest to the consumer.

Many years ago, the Congress of the United States adopted the Real Estate Settlement Procedures Act, which includes the regulation of these escrow accounts. Because of major consumer objections and concerns, Congress in 1990, amended the Act and also imposed strict reporting requirements on lenders.

It should be pointed out that this law applies to all "federally related mortgage loans." This is a very broad category, and includes loans secured by a first lien -- deed of trust or mortgage -- on residential real property including condominiums and cooperatives, and is either insured or guaranteed by a governmental agency such as the Federal Housing Administration or the Veterans Administration, or is intended to be sold by the originating lender to such secondary mortgage markets as the Federal National Mortgage Association (FannieMae) or the Federal Home Loan Mortgage Corporation (FreddieMac).

Under the law, at the initial settlement, a lender has the right to require a borrower to deposit in any escrow account to be established for the payment of taxes or insurance a sum not to exceed the amount of these actual charges, plus one-sixth of the estimated total amount of these taxes or insurance premiums.

If the taxes come due in January, and you are settling in August, your first month's payment will not become due until October. For the months of October, November and December you will make three months escrow payments. Since the lender will require a full year's payment in January, it has the right to escrow nine months at settlement, plus one-sixth of the total amount, or in other words, an additional two months' worth of escrow. These funds are to be held by the lender and paid when the taxes come due.

Basically, the same rules apply for escrow requirements after the settlement takes place on a continuing yearly basis. In other words, the lender has the right to hold two additional months escrow, on the theory that if you are delinquent in one or two of your monthly payments, the lender will still have sufficient funds by tapping into this two months' surplus.

On an annual basis, whoever services your loan must send you a statement clearly itemizing "the amount of the borrower's current monthly payment, the portion of the monthly payment being placed in the escrow account, the total amount paid into the escrow account during the period, the total amount paid out of the escrow account during the period for taxes, insurance premiums . . . (as separately identified) and the balance in the escrow account at the conclusion of the period."

This statement must be submitted to each borrower not less than once a year.

Once you receive the annual statement, you must review it carefully. Confirm with your taxing authority and with your insurance company exactly when the payment is due, and the amount of that payment. Sit down with a calculator and determine whether the lender has properly calculated the amount of the escrow. Congressional testimony has uncovered many errors made by mortgage lenders, some in favor of the borrower and others in favor of the lender.