Is there any guidance on how advance payments to escrow accounts should be handled? The situation is a customer who has made two advance payments of principal, Interest and escrow during this computation year. When we do the annual escrow analysis, do we back out those two advance payments? Our core system is backing out the two payments that were made in advance and lowering the beginning balance of the escrow account projection by the amount of the two payments. For example: The escrow payment for the current computation year was $50.00. The ending balance on the actual history of the escrow account is negative $100.00. Our core system is backing off the two advance payments of $50.00 each (Total $100.00) and subtracting that from the ending history balance of -$100.00. Our annual escrow projection is starting with a negative balance of $200.00. The ending balance on our history and the beginning balance on our projection do not match. Our core provider is telling us this is correct. We need to provide regulation references that indicate this is the wrong way to handle this situation if we think it is wrong.

I guess I am confused. An annual escrow analysis is usually always completed 60 days prior to the end of the current escrow analysis year. You will always assume that the scheduled payment will be made on time for the last two months.

1024.17(i)(1) Contents of annual escrow account statement. The annual escrow account statement shall provide an account history, reflecting the activity in the escrow account during the escrow account computation year, and a projection of the activity in the account for the next year. In preparing the statement, the servicer may assume scheduled payments and disbursements will be made for the final 2 months of the escrow account computation year.

If they have already made them, then there just would be no assumptions for the 2 future months. So, whether they have paid ahead by two months or they have not paid ahead by two months it makes no difference in the analysis.

For the advance payments, the customer has actually paid 14 payments during this computation year. Because of an increase in taxes and insurance in the computation year, the escrow account has a deficiency. (-100). Our core is backing out the two advance payments of $50.00 each making the escrow account deficiency -200.00. $200.00 is the amount that we are asking the customer to voluntarily pay or divide in 2 or more monthly payments for the coming escrow year. To me, we should start with the deficiency of -100.00 because that is the ending balance in the escrow account after the 12-month computation year. (which included 2 extra payments) I used the $100.00 for ease of understanding in my example. The deficiency is considerably greater and backing out the two escrow payments that were made in advance for the next computation year only makes the deficiency greater. The core is requiring me to provide regulations that states that backing out the two advance payments is incorrect.

You have a 12-month escrow analysis year. Whether you allow a borrower to pay ahead is up to you, but paying ahead has no impact on the analysis as to what the projected balance will be at the end of the current escrow year. You either project that they will be making their last two payments as scheduled or in your case, they have already made them. The analysis to determine what their required escrow payment will be in the following escrow analysis year would not be impacted either way.