According to RESPA (3500.17(f)(2)(i)),

If an escrow account analysis discloses a surplus, the servicer shall, within 30 days from the date of the analysis, refund the surplus to the borrower if the surplus is greater than or equal to $50. If the surplus is less than $50, the servicer may refund such amount to the borrower, or credit such amount against the next year’s escrow payments.

My question is, does the bank have the right to deduct any outstanding late charges from the surplus before sending it to the customer or crediting it against the next year’s escrow payments.

Any advice would be greatly appreciated!

If the account is not past due you have no authority to hold the surplus or apply it toward other charges without the expressed permission of the borrower.