(1) Subject to section 39-3.5-105 (2), all funds in excess of those permitted to be held by the federal "Real Estate Settlement Procedures Act of 1974", 12 U.S.C. sec. 2601 et seq., as amended from time to time, and any rules promulgated to implement that federal law, as amended from time to time, held in escrow for the payment of ad valorem taxes on property under any deed of trust, mortgage, or other agreement encumbering or pertaining to real property located in this state shall be refunded to the property owner at the time and in the manner required by the federal law and rules. This subsection (1) applies whether or not the federal law and rules would apply to the deed of trust, mortgage, or other agreement in the absence of this subsection (1).

(2) Payments into such escrow accounts for the payment of ad valorem taxes due in subsequent years shall be adjusted annually, based upon the amount of taxes paid on the subject property for the preceding year, but if such person reasonably believes that substantial improvements have been made to such property, which improvements were not included within the previous year's assessment, a reasonable estimate of the taxes for such subsequent years may be used as a basis for establishing the payments for such escrow account.

(2.5) The amount of payments into such escrow accounts for the payment of ad valorem taxes due in subsequent years shall be increased only upon official notification of an increase in the amount of taxes levied on such property. Such amounts shall not be increased based solely upon notification of an increase in the valuation for assessment of such property.

(3) Any person willfully failing to make a refund in violation of subsection (1) of this section for any whole month or more shall be liable for interest at a rate of six percent per annum and an equal amount as penalty.