NETTING AN ESCROW BALANCE AGAINST THE PAYOFF AMOUNT

Can a servicer offset the balance in an escrow account against the payoff balance quoted to the borrower? The answer depends on whether the transaction occurs today or after January 10, 2014.

Today – If the transaction occurs today, Section 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 funds. The servicer is required to conduct an escrow account analysis in conjunction with the preparation of the statement. If the account analysis shows a surplus the servicer must, within 30 days from the date of the analysis, refund the surplus to the borrower if the surplus is greater than or equal to $50. If the surplus is less than $50, the servicer may refund such amount to the borrower, or credit such amount against the next year’s escrow payments. Since there is no next year’s payment a refund is required. The regulation requires a refund; there is no discussion of netting the surplus against the amount of the payoff. Netting generally results in the same financial impact to the borrower, although with netting the use of the surplus funds occurs earlier. Some examiners cite this violation; others do not.

2014 – If the transaction occurs after January 10, 2014, new Section 1024.34(b)(1) states, “within 20 days (excluding legal public holidays, Saturdays, and Sundays) of a borrower’s payment of a mortgage loan in full, a servicer shall return to the borrower any amounts remaining in an escrow account that is within the servicer’s control.” Paragraph 34(b)(1) of the Official Interpretations states, ” Section 1024.34(b)(1) does not prohibit a servicer from netting any remaining funds in an escrow account against the outstanding balance of the borrower’s mortgage loan.” If the servicer prefers to net the amounts this is good news. For servicers that issue refunds the reduction of the time period from 90 days to 20 days is disappointing.

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