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May lenders permit borrowers to make special payments to make up a shortage in an escrow account?

Section 1024.17(f)(3) of Regulation X (Real Estate Settlement Procedures Act), addresses what lenders may do to make up a shortage in an escrow account, for example, due to increased taxes or insurance. However, the regulation does not indicate whether lenders may permit borrowers who wish to keep their monthly payment the same to make special payments to make up a shortage. May lenders do so?

Nothing in the escrow provisions of Regulation X prohibit a servicer from accepting additional escrow payments a borrower makes voluntarily. The regulation does put limits on how much a servicer can require a borrower to deposit into escrow. Those limits are found in §1024.17(c). Those limits do not apply when the borrower wants to make extra payments. Of course, the lender would still be required to perform the escrow account analysis at the completion of each escrow account computation year (see §1024.17(f)), and if that analysis showed a surplus greater than or equal to $50, the lender would have to refund the surplus. The lender should be sure that it has standard operating procedures relating to the analysis and the surplus as well as procedures in place to ensure that the extra payments will be applied to the escrow account and not to principal. (November 2018)

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