Escrow accounts are complicated! They aren’t always easy for customers to understand, and they can be just as confusing for a financial institution to administer. There are a lot of rules to follow and calculations that need to be accurate. In some cases, despite all of this, an escrow account can experience a deficiency, which means at some point the account goes negative. So, what are you required to do in those situations?
Jerod explains more in the video.
Let's talk about deficiencies. So what makes a deficiency different than a shortage? The shortage means we still have money in the escrow account, it's just we go lower than the two-month cushion as far as the balance. A deficiency means at some point in time during the trial running or the running balance for the year, month to month, we actually have a negative dollar amount for a certain amount of time as our month-end balance in our escrow account. And so we go in the red. That means the financial institution is funding the escrow account for a certain amount of time, which is not a good use of money. So how do you do this? How do you get the money back and get things going back in the right direction? You've got to do your analysis. Letter C one.
Now, this is another area where maybe it makes sense to utilize a short year's notice. So maybe you don't want to wait eight months to get back out of the red and you want the borrower to start paying in to bring that account up out of the red immediately. The way to do that is to do a short-year analysis, and reanalyze the account with numbers that hopefully make it move out of the red if you will. So that's another area where that short-year statement makes sense.
So what are your options when you have a deficiency? Well, it's a lot like the other option that we talked about when it was a shortage. You can let it be, which again, isn't good management of money. The repayment, if it's less than one month's payment, you can require them to pay the shortages in 30 days, or two or more equal payments up to 12 months. If it's greater than are equal to one month's payment, your only option is to collect it in two or more equal monthly payments, up to 12 months. And that would be letter B two.
Published
2023/01/23