Unusual escrow questions. A loan is caring a substantial deficiency on the escrow account.

Could a bank cancel the escrows (after sending the required 30-day notice and not HPML), but still have an escrow payment that would recoup the negative escrow balance in the allotted time allowed to collect a deficiency? Or could a borrower request to cancel escrows with a negative balance, but still have an escrow payment? Basically, could there be an escrow payment without any anticipated disbursements until the negative escrow balance was resolved.

Or

Could a bank cancel the escrows and move a negative escrow balance to the loan balance provided the security agreement states escrows can be cancelled and any funds disbursed by the lender on behalf of the borrower used to secure the property shall bear interest at the note rate?

Thank you

Since it sounds like this loan is probably going south, I would be asking your foreclosure attorney to opine on what is the best way to protect your interests.

It's not a specific loan. We have seen a substantial increase in escrow deficiencies because of insurance premiums increasing so much. In some cases, a borrower will switch insurance companies and not bring in the refund from the old company even though they're told to do so. It results in a substantial payment increase for them at analysis and they've sometimes spent the insurance refund already on something else.

Other times we have had borrowers request to cancel escrows because they'd like a lower loan payment because they are struggling to make their payment, but the balance is negative, and we won't allow them to be cancelled until their positive. We still have to disburse funds as long as we're still escrowing for them even if they are past due which can result in the escrow balance remaining negative. If we were able to cancel the escrows but keep an escrow payment in place until the negative escrows were paid it would reduce the borrower's payments faster.

I know taxes and insurance still have to be paid, but we've had borrowers more than once ask about canceling escrows with a negative balance. I was just looking at available options for them.

I haven't looked into the specifics of RESPA regarding this, but my sense is that if the lender has agreed to have an escrow account and is collecting money from the customer, then it's the lender's responsibility to pay the taxes/insurance in a timely manner. Not sure you can separate the collecting from the paying.

But from a more practical view, generally the reason a lender will escrow is to ensure the timely payment of bills whose nonpayment could endanger your collateral/lien. If they're struggling to pay their escrow to you, then might it not be likely that they'd also struggle to pay the taxes/insurance bills directly? Then you've just got another problem.

And if you're collecting money from them but not paying the escrow, I could very easily see a customer getting confused with that--and then if a bill isn't paid some months later, they might come back at you with "what do you mean you didn't pay it--you're collecting money from me every month, aren't you?"

Sounds like a can of worms to me, but I'm not an expert.

It is very much a can of worms, and I agree, if we are escrowing, we should be paying for what we're escrowing on, which we do.

The issue is for insurance we can only pay a bill if there's a bill to pay. Unfortunately, we've had an increase in not only premium prices, but companies not-renewing policies too. We reach out to the insurance agent and customer for a new insurance bill. If we don't hear back or don't receive anything, notices start going out following force-placed insurance guidelines.

Taxes have been less of an issue. We typically will not stop escrowing for taxes unless the borrower requests it.