Randy's right. Here's the regulatory proof:
Creditors may “net†escrow balances against loan payoffs.
Commentary to §1024.34(b)(1):
AND
http://www.respanews.com/Media/MediaManager/HUD_FAQs_General.pdf (#39)
Question: If the borrower's escrow account includes a surplus greater than $50 which HUD's rules require be refunded, may the servicer credit the surplus directly to the principal, rather than refund the surplus to the borrower?
Answer: No. However, the servicer may inform the borrower in the information accompanying the return of the surplus that the borrower may elect to use the refund to reduce principal or have it credited against the next year's escrow payments.