I am need of guidance on a couple of items related to the Escrow Cancellation Notice requirements pursuant to 1026.20.
In my situation, the affected transactions are not the result of a payoff but the closing of the escrow account during the term of the loan. I know there are HPML and flood ins. considerations when deciding to close the escrow or permitting a consumer to close the escrow. My questions are related only to closing under permitted conditions.

1 - I do not see that this type of closure requires a 1024.17 short year statement. Is that correct?

2 - If there is a surplus at the time of closing, I do not see where the funds can be deposited to a deposit account. My understanding is that a check needs to be mailed. Is that correct?

Thank you all for your input!!

1. Anytime you close an escrow account, you owe the borrower a Loan Pay-Off Statement (in effect, a short year statement without a new projection).
If a borrower pays off a mortgage loan during the escrow account computation year, the servicer shall submit a short year statement to the borrower within 60 days after receiving the pay-off fund. [1024.17(i)(4)(iii)]

2. If there is a positive balance, you must pay it to the borrower within 20 days. §1024.34(b)(1)

David, I've been mulling this over and while I agree with your comment based on intent and best practice I haven't convinced myself a short year statement is required by 1024.17. The mortgage loan was not paid off and the servicing was not transferred. They just agreed to cancel the escrow account and I don't see where 1024.17 directly addresses that situation.

As long as they follow the notification requirements in 1026.20 for escrow cancellations do you still think the short year statement is required since a loan payoff or servicing transfer was not involved?

One thing I've been debating in my head is once they cancel the escrow account does that in effect end the computation year thus triggering the annual analysis?

I see your point Dan. In my "keep it simple" mentality, I have a mental note that says "anytime you close out an escrow account, provide a loan payoff (short year) statement." However, I agree that it isn't technically triggered if the loan continues without the escrow account. I don't think this is the intention, but a technical loophole.

One way or another, I think you've got to get the borrowers a statement showing historical and the old projection information. As you question - does this trigger an annual analysis - which is really what a loan payoff statement is (without a new projection)? Also, if you didn't provide a loan payoff statement now, would you owe the borrowers one later when the loan is actually paid off? If so, it could be very difficult (impossible) to provide the information years later.

In summary, Dan's right that a loan payoff statement is not technically triggered if an escrow account is closed, but Iyou may need to later anyway. I'm going with the path of least resistance and simply providing it now.

I'm going with the path of least resistance and simply providing it now.

I agree.

I'll add one additional comment. The computation year is defined as:

Escrow account computation year is a 12-month period that a servicer establishes for the escrow account beginning with the borrower's initial payment date. The term includes each 12-month period thereafter, unless a servicer chooses to issue a short year statement under the conditions stated in §1024.17(i)(4).

So, since the escrow account was in existence during the computation year I could see an argument you would have to provide the annual analysis and statement for the 4, 6, 7 or ever how many months the escrow was opened during the computation year.

Since there does not appear to be any direct guidance for this situation I support David's "path of least resistance".

Thank you both. I agree, I think just cutting a short year statement is the easiest. Thank you for pointing out.

As to the second part of my question -

Our operations department wants to deposit any surplus into the customer's deposit account. I am against this and want a check mailed. One of my concerns is that if the loan is a joint loan and the deposit account is not titled as a joint account, we would not be giving both parties access to the funds. Also, if there happened to be other joint owners, they would be getting the benefit of money that is not rightfully theirs. Plus a check would just be a cleaner paper trail.

Your guidance is appreciated!!!

I can't disagree with anything you've said. However, it is acceptable to deposit the remaining balance (surplus) in to the borrower's deposit account. I believe most borrowers have an account with the same ownership. In those cases, it's much easier to issue the remaining balance (surplus) by simply making a deposit to the account. I agree that the borrower(s) and the account owner(s) should be the same. If not, mail a check.

Thank you, David!

The part of RESPA you cited seems to be specific to when a loan is paid off. What about when the closure is not associated with a loan payoff? You think the same principle applies?

This is a different topic.