For a 1st lien loan which requires escrow for flood insurance premiums, what does the REG require when we charge off the loan? Do we REFUND the customers balance in escrow? Can you please point me to the appropriate citation to support an action in this scenario?

If I understand correctly, you are charging off the loan, but there's money left in the escrow account. That's unusual because most people that don't make their P&I payments, don't make their escrow payments.

I can tell you that the Flood regulations refer to RESPA for how to escrow and how to handle the annual analysis, deficiencies, etc.. RESPA defaults to state law by indicating you need to follow your loan contract (which should be following your state law) when it comes to deficiencies. Thus, I would say, refer to your loan contract or seek legal advice with someone that knows your state laws. I don't think there is anything in the Flood regulations or RESPA rules that will help you with this issue.