The Department of Housing and Urban Development (HUD) has issued a reminder that warns approved lenders and servicers that in accordance with Code of Federal Regulations Title 24 202.5(d), escrow funds shall not be used for any purpose other than for which they were received. This notice reminds Lenders and Mortgagees to segregate escrow commitment deposits, work completion deposits, and all periodic payments received under loans or insured mortgages on account of ground rents, taxes, assessments, and insurance charges or premiums. Lenders or Mortgagees must deposit such funds with one or more financial institutions in a special account or accounts that are fully insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration, except as otherwise provided in writing by the Secretary of HUD.
Accordingly, escrow funds cannot be used to reduce the principal amount of a loan, including applying escrow funds to the outstanding balance of an existing loan in the payoff amount. In addition, not later than 30 days after an existing loan is paid off, the lender or mortgagee holding escrow funds must reimburse the borrower the full amount held in escrow.
