[tgerst]

We have a customer who escrows for taxes and insurance. In March of 2023, the bank received a cancellation notice for the homeowner’s insurance. The bank is listed as mortgagee, however, in July of 2022 a notice was sent to the borrower informing them that they needed to pay an additional premium of $89.10 due to losing their multi-line discount. The borrower did not pay and the bank was not notified of the cancellation until March of 2023. We contacted the insurance company and tried to get a copy of the invoice to pay it but were told by the insurance company that the borrower needed to provide a statement that no losses have occurred during the lapse in order to reinstate. At the time, we did not pursue as the bank has a blanket policy to cover our losses and the customer was not responding.

In November when the escrow analysis was done, the premium for the homeowner’s insurance was still showing in the estimate of activity for the coming year. Should we have removed it once we knew the policy was cancelled and would not be removed? I think in the past we have left those anticipated payments in there because hazard insurance is required and then the customer wouldn’t be short. However, since we did not pay anything out in 2023, in 2024 the customer had a surplus and we sent them a check. In 2024, we still showed the insurance premium in the anticipated payment for the next year. Again, it appears we should have removed and lowered the escrow payment.

Am I understanding this correctly?

Thanks.

Topic

[Kimberly Boatwright, CAMS, CRCM]

I think you are understanding this correctly. Once you knew the policy was cancelled and the bank was not going to pay that premium, I do not think you should have continued to include that specific premium as an anticipated disbursement. Continuing to carry it forward would artificially increase the escrow payment and could result in a surplus, which appears to be what happened.

The fact that hazard insurance is required does not necessarily mean you should continue using the premium from the cancelled policy. You would want to base the analysis on what you reasonably expect to pay. For example, if the borrower obtains replacement coverage or the bank force-places coverage, then that anticipated premium could be included.

Based on the facts you provided, I would question the basis for continuing to include the old premium in both the 2023 and 2024 analyses if the bank did not expect to actually make that payment.

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