We are in the process of purchasing a loan that is secured by an apartment complex, whereby the borrower had requested impounds for taxs & insurance (was optional not required). Concurently with the sale/assignment to our bank we want to notify the borrower that we do not offer this service and refund any remaining funds in the escrow account to them with instructions that they are responsible for payment of these items. Also does the selling bank need to ensure that the tax installment that was due 12/10/12 (late 2/10/13) is paid. We are anticipating this happening the last week of March (yep, I just got wind of today) so any input is appreciated.

Assuming this is a loan purchase (not a participation purchase) being sold to you servicing released; and assuming it is being sold to you without recourse, then you may have to stand in the shoes of the selling bank for any escrow errors they have made.
The ability to end the escrow arrangement may be subject to the loan covenants. Would it be wise to have bank counsel review these?