Typically if there is a surplus (greater than $50) then the money should be given to the customers and not applied towards the payoff. If the same bank is refinancing the loan and the new loan is going to have an escrow feature, then the Bank can use the surplus towards the initial escrow deposit. How to disclosure this is address in the HUD’s RESPA FAQ’s in the HUD-1 200 Series section:
3) Q: Where should the transferred escrow balance in a refinance transaction be listed on the HUD-1?
A: The transferred escrow balance should be listed as a credit in lines 204-209 of the HUD-1.
Here is a link where HUD addresses not applying a surplus amount from the escrow account to the principal balance of the a loan:
34. Q: If the borrower’s escrow account includes a surplus greater than $50 which HUD’s rules require be refunded, may the servicer credit the surplus directly to the principal, rather than refund the surplus to the borrower?
A: No. However, the servicer may inform the borrower in the information accompanying the return of the surplus that the borrower may elect to use the refund to reduce principal or have it credited against the next year’s escrow payments.