[rcooper]

A question we received from a member:

We are a Federal Reserve bank and at our last exam they focused on our escrow accounts. They looked hard at our annual analysis. They did not like that some borrowers had made more than 12 pmts. in a year (said should have been a principal reduction rather than full pmt.) and that some pmts. were partial payments rather than full payments. We are struggling with how to handle this and would like to hear some discussion on this. How do other banks handle posting of partial pmts. – do they allow partial pmts. and if not, what do they do with the funds when a partial pmt. is made. Also, how do they handle more than 12 pmts. in a year?

[rcooper]

Application of payments is covered to some degree in 1026.36. The main source of guidance on the issue should be the note. It should outline whether extra or partial payments are allowed, and if so, how they will be applied. Generally extra payments should be applied to principal. Applying any portion of an extra payment to escrow is likely to result in a surplus in the escrow account, which, in turn, results in extra work to complete year-end escrow processing.

Whether the note dictates the acceptance of partial payments, the Closing Disclosure allows the lender to inform the borrower how partial payments are handled in the loan product.

If accepting partial payments, the financial institution may apply the partial payment to the loan in the posting order dictated by the note; i.e. interest, principal, escrow, fees, etc. or may hold the partial payment in an suspense account until the entire payment is received from the borrower and then apply it to the loan. In either situation, acceptance of partial payments shouldn’t result in an escrow surplus but rather a possible escrow shortage, which would be determined at annual escrow analysis.

Any additional payments or amounts made above the required payment would be applied to principal rather than to the escrow account to prevent a surplus in the escrow account. It may benefit the financial institution to discuss the possibilities of handling partial payments and/or additional payments with their core accounting software provider before making any decisions regarding handling of these payments.

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