Escrow Increase But Monthly Payment Does Not

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Question:

We viewed the webinar All About Escrows the other day and today a rare question was asked. An escrow analysis was done in 2013 and escrows increased but the total monthly payment did not. There was glitch in our system and because the system recognized the increase of escrow it took a portion of the total monthly payment and applied it into the escrow account so that the correct amount was going in; however the amount being taken was being taken from what should have been going towards the principal. Can we take the amount out of the escrow account now almost a year later and put it towards the principal as it should have been and charge the shortage that would result in the escrow account to the customer over 24 month or does the bank take a loss?

Answer:

Dan Persfull

You most likely have a breach of contract for applying the payment outside the terms of the loan agreement. You need to get your attorney involved because you may have some civil liability here.

You cannot, IMO, simply apply the principal amount put in the escrow back to the account balance. IMO you will have to reconstruct the payments to make sure the proper amount of interest and principal was applied for the month based on the date of payment. Especially if these are simple interest loans.

But again you need legal counsel to make sure you handle this breach correctly. You may also want to review your processors warranty agreement if it was indeed a system glitch and not a user's error in the set-up.

Answer:

Andy Zavoina

I'm not sure I would involve counsel at this point. I would certainly advise mnagement after knowing why this happened, on how many accounts, and the size of the problem. For active loans, I would reapply the payments backdating the principal as Dan noted so the payment history reflects what your loan documents require, generally that is payment first to interest and principal and then escrows and fees. Then examine your escrow shortages. The reality to me is that you need to get the balance and interest paid correctly first. You're going to essentially make interest free escrow loans anyway when you pay the escrowed items into a negative and allow the borrower to repay that over time. I would not throw the borrowers into escrow shock demanding they bring up the balances in a short period. Since this was a bank error, I'd lean towards a year and explain that while the payment is going up, that is only beause it didn't go up this year and the bank made an interest free loan to cover them. Give them as much advance notice about the new payment as possible.

Loans that were in this batch that paid out may be another issue. Agan, reamortize the loans. You may owe them a rebate based on the amounts involved. I believe you will have to ensure no borrower was disadvantaged over this, but the bank will likely eat any loss that may have resulted, if that would be the case.