We have a loan that is in past due status. There are funds in the escrow acct to make the loan current. The borrower has agreed to allow us to use those funds to make the loan current.

I think we need to have the borrower sign something authorizing us to do this....do you agree? And, is there anything else we need to consider?

You should hand the borrower a check and then have the check endorsed or deposited and payment made to the loan account.

The decision may not be the borrower's to make...or yours either.

Mortgage escrow accounts aren’t merely deposit accounts, they’re special purpose accounts the use for which is defined under governing loan documents, local law and, perhaps, certain agency regs. Unless formally released from the duty, the mortgagor is contractually obligated to contribute to the escrow account. The escrow holder (you) is obligated to use those finds for intended purpose.

Using RESPA as a tool, you may, if you want, analyze the account and refund any excess esrowals to the mortgagor ahead of scheduled analysis if you want to go to that trouble. However, unless your loan documents or your lawyer says otherwise, I recommend you only use those funds for the purpose for which they are collected and no other. Your responsibility is to assure sufficient funds on deposit to pay required items at any given time. Do that. Your lawyer can explain duty to escrow accounts under local law and your potential liability for not fulfilling that duty. Be sure and explain to the lawyer your reason for asking.

I would side more with Filo on this. Not only because the escrow has a specific purpose, but because I would view this as robbing Peter to pay Paul. It is like extending the loan to cover up a past due problem. What will you do when the escrow payment comes due and you don't have enough in the account? (I am making assumptions here. If there is an overage, I'd re-calc, refund as David noted, and get the payment.) When I was over Loan Ops, it pained me to pay escrows in the hole and essentially make interest free loans.

Again, my issue is that you are hurting yourself if there is enough escrow for either your payment, or what the money was intended for. Short of the customer getting a bonus or planning to win the lottery, what is the plan to then pay the escrow shortage?

Keep in mind if the account is 30 days or more past due there is no obligation to disburse for the payment of the escrow items until the account becomes current. Then as Andy and Filo references where will your funds come from to pay the escrow items once the account is current?

If by paying the account current with the escrow funds, and the taxes and/or insurance is due now you are obligated to pay the escrow items whether the funds are in the escrow account or not.

As Andy alludes too, you need to work out a long term solution to the borrower's payment problems, not a short term resolution.

If you do decide to do this then follow David's suggestion. But be sure you reference your loan and security agreements as to the validity of doing so.