Compounding Accrued Interest in a Refi

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Question:

If a lender is doing a cash-out refinance on a residential mortgage loan, can they include the accrued interest into the new loan, or must the borrower pay those out of pocket?

Answer:

The capitalization of interest becomes a problem when you do it in order to hide a past due status. In most refinancings, the payoff of the existing loan with the lender might have some accrued interest included since the last payment on a loan was received that is not past due. I have never seen a regulator, or an external accounting firm get excited about that.