In conducting an Escrow Audit, I have come across a loan in which initially escrow was required but after a year or so, the escrow account was no longer required. Unfortunately, the person whom made this decision did not know there was a negative balance in the escrow.

By what means can an FI utilize to recoup the negative escrow balance? Can you now require an escrow to recoup the amount over a 12 month period and if such payments are not made, consider the loan in default?

A letter has been sent to the customer but as usual, they have failed to respond.

Is there anyone out there that may have an unofficial answer to this question? My research shows that this could be handled as a deficiency which will allow the FI to recoup the funds in a minimum of two months but what if the consumer refused to make the repayment? Can the account be held as being in default???

Unofficially, I don't think I'd turn a bank error (shouldn't a short year stmt have been run when the account was cancelled?)into a bigger problem. Why not put together a variety of options for this customer (lump sum payment, spread the deficiency over a reasonable period of time, defer it until loan payoff, etc.)and let them choose the one that works best for both of you? Perhaps have an employee call the customer to dicuss rather than relying on a letter?

"Unofficial Answer": State law may be a factor in the default question. Check your loan documents for "event of default" definition. You may be able to add the deficiency to the loan balance, since the escrow account requirement has been "waived" (I assume at the request of the borrower). You may also be able to treat repayment of the deficiency the same way you would treat repayment of the premium for a force-placed insurance policy or payment of the taxes by the FI and add an amount to the monthly payments to recoup the deficiency. Check your loan documents and your state law.