Advancing Funds from Escrow

Posted By: pacar

Advancing Funds from Escrow - 08/29/13 02:07 PM

I'm thinking through the actual process that would be needed to advance funds from escrow to pay an existing insurance premium and need some guidance from ya'll.

So, let's say the premium is due and there is not sufficient funds in escrow to pay it. We still have to pay the premium creating an escrow shortage. There is a 'recoupment of advances' section that allows us to collect the funds from the borrower. Cool. Now let's put this in motion.

First, How are we to determine how much to advance to pay the premium? Are we required to complete a full escrow analysis and determine the 'shortage' and advance funds in to the escrow to cover the actual shortage, or just the amount that is needed to pay the premium? I guess the loan is past due, so the 'regular' escrow rules don't apply ... or do they?

Second, our loan docs contain a clause that allows us to advance principal if the loan is in default to pay for certain things. With the recoupment provision, I think this is how we would fund the escrow. Sort of like ‘robbing Peter to pay Paul’, but if we have to take funds out of escrow they have to come from somewhere.

Anyone trying to figure out the mechanics of this or am I overthinking it?
Posted By: Tesla

Re: Advancing Funds from Escrow - 09/09/13 06:05 PM

I am working through this process too, but I first have a simpler question. I believe we are required to follow 1024.17(k)(5) if we escrow and 1024.37 is optional if we choose to force place. Is that correct?

Now your questions:
How are we to determine how much to advance? I think that will be on the notice of premium document.

Are we required to complete full escrow analysis...? I read it as advance the amount needed to pay the premium. In the guide it says "you will have to advance funds through escrow. You can add this cost to the escrow balance or otherwise seek reimbursement from the consumer for the funds you advance. I don't see a requirement to do an analysis but my servicers think that would be cleaner.

I think the above statement from the guide answers your last question.
Posted By: John Burnett

Re: Advancing Funds from Escrow - 09/09/13 06:30 PM

Incorrect. If you force-place hazard insurance, you will have to follow 1024.37 after 1/10/14. Section 1024.17 is an escrow-maintenance rule, not a force-placement rule.

That said, if the loan is more than 30 days past due and there is an escrow account for insurance, 1024.17(k)(5) will apply, and it will prevent you from force-placing hazard insurance (other than mandatory flood insurance) unless you have a reasonable basis to believe either (1) that the borrower's hazard insurance has been canceled (or was not renewed) for reasons other than nonpayment of premium charges or (2) that the borrower’s property is vacant.

If under (k)(5) you can't force-place, you will have to advance funds from escrow to pay the premium, even if there aren't sufficient funds in escrow to make the payment. In other words, you'll have to advance your own funds (which you may recover from the borrower if permitted to under state law).

If you are a small servicer under 1026.41(e), you will be able to force-place the coverage without regard to (k)(5) if the amount the borrower will be charged for that coverage is less than the amount you would need to disburse from the borrower's escrow account to ensure that the borrower's hazard insurance premium charges were paid in a timely manner.

Regardless of whether .17(k)(5) applies or whether you are a small servicer, compliance with .37 is not an option; it will be required.
Posted By: Tesla

Re: Advancing Funds from Escrow - 09/09/13 06:42 PM

Thanks John!

So, if we escrow and the borrower is current, but somehow the insurance doesn't get paid (let's say they cancel it) we can follow the force placement procedures under 37. If they are 30 or more days past due, we must follow the rules under 17(k)(5) first, then if we can disqualify them (ex. policy canceled due to dangerous conditions in home or property is vacant), we can use 37 to force place.

We are considering starting force placement on non-escrowed customers and I need to be sure I am explaining 37 correctly. If we continue to not track or force place lapsed policies, 37 will not apply (except in the escrowed situation above). If we do start force placing, 37 will apply in all its glory.

Is that correct?
Posted By: John Burnett

Re: Advancing Funds from Escrow - 09/09/13 07:17 PM

.37 only applies if you decide to force-place hazard insurance (which is defined to exclude required flood insurance, but includes optional flood coverage), whether or not you have escrow on the loan. Before you force-place, if you have escrow, you have to look at 1024.17(k), and if the loan is more than 30 days past due, at .17(k)(5). Then, if you decide to force-place, follow .37 to complete the force-placement.

If you escrow, you will perforce be tracking policies.
Posted By: Tesla

Re: Advancing Funds from Escrow - 09/09/13 07:22 PM

OK, I think we are saying the same thing. Thanks!
Posted By: John Burnett

Re: Advancing Funds from Escrow - 09/09/13 07:46 PM

Yes, I agree, Tesla.
Posted By: Compliance Poster

Re: Advancing Funds from Escrow - 01/22/14 10:54 PM

Following the above, if a servicer must force-place because the insurance was canceled, as permitted under (k)(5)(ii),or a small servicer is able to force-place due to the exception, are the 45-day notice requirements of 1024.37 required?

Or even further, are the annual notice requirements of 1024.37 for existing force-placed policies required if currently being paid out of the escrow account?
Posted By: John Burnett

Re: Advancing Funds from Escrow - 01/23/14 01:25 PM

First, there is no exception from the 1024.37 notice requirements for force-placement for small servicers.

And there's a disconnect between force-placement and payments from escrow. If you are escrowing for insurance, force-placement should not be a concern, should it?
Posted By: Compliance Poster

Re: Advancing Funds from Escrow - 01/23/14 04:14 PM

Thank you for your response, but I must not have worded my questions very well. There isn’t an exemption on the notice requirements for small services. However, there may be a situation in which force-place is required during the time an escrow is established, such as if the borrower cancels the policy. In those cases, are you saying we would still need to provide the 45-day notice under .37 if the bank advances the funds from the escrow to pay the force-placed insurance?
Posted By: rlcarey

Re: Advancing Funds from Escrow - 01/23/14 04:48 PM

In those cases, are you saying we would still need to provide the 45-day notice under .37 if the bank advances the funds from the escrow to pay the force-placed insurance?

Yes
Posted By: Tesla

Re: Advancing Funds from Escrow - 10/12/18 08:15 PM

Reviving this. frown

If we are talking property taxes (not hazard insurance) and the bank advances money to pay the taxes because the escrow account is short or deficient, how is your financial institution advancing and recouping those funds?

For example, does your FI have a special account it advances funds from and then when the borrower repays, the funds are applied to that account (so it is completely outside of the escrow account) OR does your FI advance the funds from a special account and deposit into the borrower's escrow, pay out of the escrow and then when the borrower repays, the escrow account has an overage - how do you refund the overage and repay the bank? OR - do you something completely different?
Posted By: rlcarey

Re: Advancing Funds from Escrow - 10/12/18 09:14 PM

Depends on your loan servicing system. Most just allow individual escrow accounts to go negative. Your escrow accounts as a whole should flow to your GL - not individually.
Posted By: Tesla

Re: Advancing Funds from Escrow - 10/12/18 09:36 PM

Thanks Randy - but they are advancing on the loan (increasing the principal) to pay the escrow shortage/deficiency. I don't think that is right, but I am struggling to find something that says you can't do that. Am I just crazy?
Posted By: rlcarey

Re: Advancing Funds from Escrow - 10/13/18 12:48 PM

On a loan that is more than 30 days past due, or on one that is less?
Posted By: Tesla

Re: Advancing Funds from Escrow - 10/13/18 01:23 PM

30 or more days past due.
Posted By: rlcarey

Re: Advancing Funds from Escrow - 10/13/18 08:48 PM

Then you are outside of the RESPA funding requirements and anything that you do would have to be supported by your loan agreement and allowed under State law. Get with your legal counsel to see what specifically is supported.
Posted By: Tesla

Re: Advancing Funds from Escrow - 10/14/18 01:50 PM

OK, thanks again. The mortgage just says something blanket like "we can do whatever to protect our interest in the property" and that is what the line of business is using to support their position, but I will run it by counsel.
Posted By: Tanders922

Re: Advancing Funds from Escrow - 10/22/19 03:50 PM

I am still confused, if the borrower is 30 or more days past due, what is our obligation to pay escrow prem? Do we treat the borrower any differently due to the account being 30 or more days past due? If not, what is the point of the regulation calling out 30 or more delinquency?
Posted By: Diane Dean

Re: Advancing Funds from Escrow - 11/05/19 04:09 PM

If you have an escrow account and the borrower is more than 30 days past due, the regulation allows you to get force-placed insurance if you're "unable" to pay from the escrow account. In other words, you're still expected to pay from the escrow unless the insurance was canceled (other than for nonpayment) or the property is vacant. Small servicers also have the "benefit" of being able to get force-placed insurance if the costs is less than the amount needed to pay the borrower's premium.

If the borrower's payment is not more than 30 days past due, you need to make timely payments from the escrow account. There's no allowance for being "unable" to pay from the escrow account.