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Escrow Account & First Mortgage Payoff

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Question: 
We require that our members have an escrow account to pay their real estate taxes, homeowners insurance and PMI bills. When a member pays off his first mortgage, are we allowed to deduct the escrow balance from the payoff amount or do we have to refund the balance of the escrow account to the member? We have attended compliance seminars that advise us to refund the balance to the member however, our system is set up to deduct the escrow balance from the payoff amount.
Answer: 

Great question and one for which we do not have a lot of guidance. RESPA makes it clear that escrow money is not yours. For instance, you cannot apply the loan to a past due loan or pay fees with this money [see Section 3500.17(f)(2)(ii)].

HUD has a FAQ wherein Q&A #39 states:

Q. 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?

A. 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. There's no other guidance than this. My discussions with field examiners has indicated escrow money is never to be netted against principal. However, my opinion is this is an industry standard. As a consultant, I view hundreds of examination reports each year. Recently, I have seen this cited, but it's not common (yet).

First published on BankersOnline.com 7/13/09

First published on 07/13/2009

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