We have a loan customer that we are escrowing for insurance and taxes that is ready for analysis. The customer didn’t have a homeowner’s policy in place at application. We received the quoted price from the insurance company and sent them a check at the loan closing to put the policy in place. We received a temporary binder prior to closing showing the premium price and coverage amounts with the bank as the mortgage holder. Immediately after closing the insurance company inspected the policy and sent the check back to the customer canceling the agreement due to the fact they owned pit bulls. They have been unable to obtain standard coverage. We have a blanket mortgage protection (MP3) policy in place that covers lapses in coverage for the policies of homeowners that cancel for some reason beyond our control (lack of payment). My question is this. The monthly payment the customer has been paying includes the escrow amount for the insurance but there is no premium due. Would the bank be allowed to retain the payments for insurance received and use the funds to offset the costs of the MP3 policy or would the insurance funds go back to the customer since there is no homeowners policy for them in place?
This is a contract issue. You may do whatever your contract with the borrower allows. If your states allows you to retain the premium as an offset to the MP3 cost, then you may do so. But unless you have some pretty specifc laanguage that permits you to retain the premiums, you will need to refund the surplus to the customer when you perform the escrow account analysis.