We have some borrowers who are late on their property taxes by more than 2 years. Our CLO wants to set-up a reserve account and pay 1 year of back taxes, funded by the Bank and added to the principal balance of the loan. The funds credited to pay for taxes will also be charged interest.

Is this acceptable under state law? It is NOT a RESPA covered transaction.

Under what authority are you establishing the escrow account, and what does it say about the arrangement?