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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, D. C. 20410

August 25, 1981
OFFICE OF THE ASSISTANT SECRETARY FOR
HOUSING - FEDERAL HOUSING COMMISSIONER             IN REPLY REFER TO:
MORTGAGEE LETTER 81-28
TO:          ALL APPROVED MORTGAGEES
SUBJECT:     THE PROPER UTILIZATION OF ESCROW
             ACCOUNTS - CLARIFICATIONS
 
     The Department has become aware of an increasing number of
instances in which mortgagees are making unauthorized disbursements
from mortgagor escrow accounts.  One result of such actions is the
creation of artificial escrow "shortages" at the time of escrow
analysis.  Mortgagees are reminded that Section 25.5(c) of the
Regulations establishes that the use of escrow funds "for any purpose
other than that for which they were received" is reason for
withdrawal of mortgagee approval.
 
     Late charges, attorney's fees incurred in foreclosure actions
which are not completed, inspection fees, etc., even though their
collection may be authorized under certain circumstances, shall never
be collected by deduction from the mortgagor's escrow account.
Monies accrued for the purpose of paying anticipated taxes, special
assessments, or insurance premiums shall not be used to satisfy
mortgage delinquencies; refund overpaid Section 235 subsidies; or pay
fees for tax services (which HUD does not permit mortgagees to
collect from mortgagors under any circumstances).
 
     When the mortgagee consciously maintains a surplus of up to
one-sixth of estimated escrow requirements, that sum may not be
automatically applied to a mortgage delinquency since the excess was
accrued specifically to meet potential escrow demands.  However, if a
surplus exists as a result of an escrow analysis, and there is a
simultaneous delinquency, the surplus application to the delinquency
shall be considered as a cash refund to the mortgagor (24 CFR 203.550(b)).
 
     HUD has also been made aware of instances where funds have been
transferred from mortgagors' escrow accounts into the mortgagee's
corporate account.  Mortgagees have a fiduciary responsibility to
properly administer and disburse escrowed funds and may not convert
such funds to their own use.
 
     HUD field office staffs are being asked to pay particular
attention to indications of these practices in their future reviews
of mortgage servicing practices.  In those cases in which a company
appears to be ignoring the HUD Regulations related to the
establishment and maintenance of escrow accounts, mortgagees will be
required to make immediate restitution to the mortgagors involved.
Mortgagees which persist in the practice or prove unwilling to make
the appropriate refunds will be referred to the Mortgagee Review
Board for appropriate action.
 
                                 Sincerely,
 
                                 Philip D. Winn
                                 Assistant Secretary for
                                 Housing-Federal Housing Commissioner
 
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