[belandis]

We are a servicer for Freddie Mac and have a customer that has recently paid off their mortgage loan. The customer currently has an escrow balance in excess of $3,000. However, the customer also has a late charge balance in excess of $7,000.

The Official Interpretation to Section 1024.34(b)(1) does not prohibit a servicer from netting any remaining funds in an escrow account against the outstanding balance of the borrower’s mortgage loan.

So, our question is, can we net the escrow against the late charge balance? The Interpretation refers to “outstanding balance” and we consider the late charge balance to be an “outstanding balance”. The customer has been repeatedly notified via past due notices of the late charge balance.

[rcooper]

belandis,
I have discussed this with Jack and we recommend reviewing your contract with the borrower. As you mentioned, Regulation X addresses netting the escrow surplus against the balance of the loan. The question is – what is included in the loan balance. The answer should be determined by a contract review. If the contract states that unpaid amounts, such as late charges and force-placed insurance premiums, are added to the loan balance then netting the surplus from the escrow against the balance of the loan, which includes the unpaid late charges, should be fine. Everything depends on the wording of the contract. If the contract is not clear then you should obtain an opinion from your legal counsel.

[Author]

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