The credit union notified me that there was a shortage in my escrow account and increased my payments. Is this legal?

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Yes. Under the Real Estate Settlement Procedures Act (RESPA), if your credit union determines that there will be a deficiency (shortage) in your escrow account balance, they can obtain repayment for the deficiency amount. Usually, you may choose to repay the deficiency amount in one lump sum or spread the payments over a 12-month period.