First issue: I wouldn't refuse the deposit either, but you don't have to reanalyze the account until the next annual analysis. I assume your system kicked up their monthly payment to make up for the shortage. With the additional (late) deposit, you'll have a surplus next year.
Second issue: 1024.17(i)(4)(iii) states:
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.
A loan payoff statement is simply an annual escrow statement without a new projection. The annual escrow statement must include the following: [§1024.17(i)(1)]
a. An account history, reflecting the activity in the escrow account during the account computation year;
b. A projection of the activity in the account for the next year; this would not be included in the payoff statement
c. The amount of the borrower’s current monthly mortgage payment and the portion of the monthly payment going into the escrow account;
d. The amount of the past year’s monthly mortgage payment and the portion of the monthly payment that went into the escrow account;
e. The total amount paid into the escrow account during the past computation year;
f. The total amount paid out of the escrow account during the same period for taxes, insurance, and other charges (as separately identified);
g. The balance in the escrow account at the end of the period;
h. An explanation of how any surplus is being handled by the servicer; this is what your monitoring team is referencing
i. An explanation of how any shortage or deficiency is to be paid by the borrower; and,this would not be applicable
j. If applicable, the reason(s) why the estimated low monthly balance was not reached, as indicated by noting differences between the most recent account history and last year’s projection.
The models HUD provided contain many errors. For instance, I bet your K-1 example also doesn't separately identify the total paid out for taxes (see f above). HUD pulled the appendixes in 1997 (I believe, but it's been over 20 years). The rules about loan payoffs also changed in 2014. My point is you can't look at a rescinded model from 1995 for guidance on this. Sorry.