Wednesday, December 26, 2018

Handling Escrow on Your Loans – 3 of 3


Special Situations

Check out part 1 – The Rules for Lenders and part 2 – How to do Escrow in Moneylender

Now that we know how to determine the periodic escrow amount and what the allowed amounts are, let’s talk about some situations that commonly come up over the life of a loan in the real world.

Pre-Funding the Escrow Account on a New Loan

Loans are originated at all times of the year, and property taxes and insurance premiums can be due at various times of the year, too.  Sometimes the loan is opened and the property taxes are due almost immediately.  When this happens, it is common and appropriate to require a deposit to the escrow account as part of the loan closing.  Although a lawyer or escrow company will usually figure out the numbers, you can easily determine a reasonable deposit amount yourself.

Taking the amount to be paid in the future as the “expense”, the deposit amount is the expense minus 1/12th of the expense for each month from when the loan closes to the month when the expense will be paid.  You can add up to 1/6th of the expense to this number so there will be a little money left in the escrow account in the month when the expense is paid.  If the expense is $120, to be paid in three months, the deposit would be $120 – ($120/12 * 3 months) = $90.  It could be as much as $110 to leave $20 in the account after the expense is paid.  If there are multiple expenses in different months, do the math separately for each expense and add the resulting deposits together.

To record the escrow deposit in Moneylender, enter a payment for the deposit amount on the loan origination date and set the Payment Type to Escrow Only.

Refunding the Escrow Balance at Closing

When a loan is paid off, the balance in the escrow account will need to be returned to the borrower.  This always takes the form of a disbursement from the escrow account to the borrower in the amount of the entire escrow balance.  In Moneylender, when you close a loan, this disbursement will be created for you automatically as part of the closing process on the step where you address the escrow balance.  You can optionally create the disbursement manually from the escrow account on the Settings tab.

Absorbing the Escrow Balance when Charging off a Bad Loan

Escrow funds are legally protected, and lenders are not allowed to apply money in the escrow account toward the loan balance without the borrower’s express permission.  If the loan has gone bad and you are about to charge it off, send a letter to the borrower for them to sign and return that gives you permission to apply the escrow balance toward the loan.  With written authorization you can then apply the escrow balance toward the loan before writing it off.  Moneylender will give you the option to refund the escrow balance or, with the borrower’s permission apply the balance toward the loan as part of the loan closing wizard.

Adding the Escrow Balance to the Payoff Payment

If a borrower wants to use their Escrow balance as part of their payoff payment, you can do this as long as you have their permission in writing to use the escrow account toward their loan balance.  When closing a loan in Moneylender, you can select the option to apply the escrow balance to the loan (with the borrower’s express permission).  To do it manually, create a disbursement from the escrow account and add a payment for the same amount with the payment type set to Final Payment and put “From Escrow” or similar in the description.

If the borrower overpaid the payoff payment, and a refund will be issued on the loan, you can disburse the escrow to the loan and it will increase the refund amount appropriately so you don’t have to write two separate refund checks (one for the loan and one for the escrow account).

Excess Funds in the Escrow Account

It occasionally happens that property taxes or insurance premiums go down or the timing changes.  This may leave you with a minimum balance above the legally prescribed amount.  If the amount is enough to raise an eyebrow, you should refund the extra funds to the borrower.  Refund the surplus by adding a disbursement from the escrow account to the borrower.

In some cases, you might be over by a couple months’ worth of escrow deposits and you can use Moneylender’s “Suggested for Over-Funded Account” option from the escrow Adjustment Calculator to allow the borrower to slightly underpay the escrow expenses this year.  This means the per-payment escrow amount will be a little lower than it otherwise would be.  If they were $300 over this year, they might only be $200 over next year.  Doing this can help prevent large changes to the borrower’s monthly amount due as the escrow swings up and down.

Some lenders send a letter to the borrower showing the amount of the surplus and asking if they want a refund check or to apply the excess to the principal on their loan.  The borrower signs and returns the letter indicating their choice.  This gives them the option and also gives you written authorization to apply funds toward the loan if they choose that option. 

Negative Escrow Account Balances

Sometimes the lender pays an escrow expense and the amount available in the escrow account on a loan is insufficient to cover the expense.  If the borrower doesn’t pay the tax bill on time and the lender pays it for them, this could mean starting an escrow account on a loan with a negative balance, for example.  Sudden increases in property taxes or insurance premiums can also overdraw the borrower’s escrow account.  When this happens, you have two options.

Have the borrower submit a one-time escrow deposit to bring the escrow balance to where it should be.  Moneylender’s Adjustment Calculator will recommend the deposit amount and the new per-payment charge after the deposit in situations where this happens.  The borrower is then expected to send an extra escrow-only payment to cover the shortage.  Another option is to prorate that deposit amount of the next year.  Moneylender’s escrow Adjustment Calculator will suggest a “charge with prorated deposit” for this number.

It’s up the lender if you want to require a separate deposit or just increase the monthly amount proportionally so that by this time next year the escrow account will be back on track.

Cessation of Escrow

Sometimes a borrower wants to pay their taxes and insurance directly, and the lender is comfortable allowing this to happen.  In Moneylender, send the ending date on the escrow charge prior to the first payment that will exclude the escrow amount.  When all payments with escrow are received and all escrow disbursements are paid out, create a final disbursement from the escrow account to the borrower.  You can always resume escrow on the loan later if that is desired by adding a new escrow charge and estimated disbursements.

Thanks for reading our guide on managing escrow.  If you aren’t a Moneylender user already, you should check it out.  It’s pretty much the best loan servicing software available.  At least in my opinion anyway.

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Thursday, December 20, 2018

Handling Escrow on Your Loans – 2 of 3


How to do Escrow in Moneylender

Check out part 1 of this Series – The Rules for Lenders

Moneylender can happily determine the correct amount to add to each P&I payment so your escrow balance conforms to the regulations.  Moneylender already knows the payment schedule and can determine how many payments will post to the loan in each month.  You will need to tell Moneylender when you expect to disburse money from the escrow account, and how much you expect those disbursements to be.  For tax reporting purposes, Moneylender also needs you to categorize the disbursements into Property Tax, Property Insurance, Mortgage Insurance or Other.

To do this, you select the loan, visit the settings tab on the right and click Escrow Account.  From here we see all the pertinent information including the escrow balance, upcoming disbursals, and the current and future escrow charges.  Click Manage Disbursements to add, change or confirm the money you have or will be paying out of the escrow account.  If the payment happens every month or year, be sure to set the recurring option to simplify the process of managing escrow year-after-year.

Once the disbursements are set, you can click Adjustment Calculator to run all the RESPA routines and determine the recommended settings for the upcoming 12 months on the loan.  While most lenders will adjust the escrow after the last payment from the previous year is received, you can perform an escrow analysis as often as you like, and any time during the year.  If it has been many years since you changed the escrow amount, now is the perfect time to make an adjustment.  If your loan contract includes wording for when escrow analysis is performed, be sure to follow the contract.

Click Set next to the amount that seems right to you (more about the different suggestions in Part 3 of this series).  Click the printer button next to the amount you want to use to print or send an escrow adjustment letter to your borrower.

For detailed information about how different parts of Moneylender’s escrow system work, check out the Escrow pages of the User’s Guide:

Coming up: Part 3 – Special Situations


Monday, December 17, 2018

Handling Escrow on Your Loans – 1 of 3


The Rules for Lenders

Tracking escrow on mortgage loans is a big deal, and an important part of servicing loans properly.  There are a lot of moving parts to doing it correctly.  What are the rules, how do you track the information about payments you’ve made and will make in the future, how do you decide how much to charge each month so the amount you have in the escrow account is reasonable and legal, what about sending the correct documentation to the borrower and the IRS?  Making a mistake can call into question the validity of your calculations, expose you to fees or penalties, or even put your collateral in jeopardy.

The United States government enacted the Real Estate Settlement Procedures Act (RESPA) in the mid 1970’s to help consumers understand the costs of getting a loan as well as regulate practices that were padding extra fees onto new home loans.  The law also limited how much money lenders could require from their borrowers to keep in an Escrow account.

What the law says is that your lowest balance at the end of any month in a twelve-month period on a mortgage shouldn’t be higher one sixth of the annual expenses to be disbursed.  This means a two-month cushion if all the expenses fall within a single month.  The cushion will be larger if the amounts paid out of the escrow account are scattered throughout the year.

At the beginning of each year, lenders should perform an aggregate accounting for the year using expected payments and expected disbursements from the escrow account to determine the month-end balances.  Each month, starting with the closing balance at the end of the previous month, scheduled payments from the borrower will add money to the escrow account and any disbursements will subtract money out.  After those transactions post, we have the ending balance for the month.  Repeat for each month in the twelve-month period.  That’s the “aggregate accounting” method prescribed for by RESPA.

The IRS requires lenders to send in Form 1098 - Mortgage Interest Statement for all mortgages with $600 or more in interest (including most types of fees) by the end of February if filing on paper, and by April 1st if filing electronically.  Paper forms must be printed onto official IRS Form 1098 (the red copies) for Filing with the IRS.  Lenders are also required to send copies of form 1098 to their borrowers.  The borrower copies can be substitute forms and are acceptable as long as they have the corresponding information listed in an understandable way.


Up next: Part 2 of the Series – How to do Escrow in Moneylender

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Sunday, December 16, 2018

Setting a Precedent



Disclaimer: I am not an attorney, none of the ideas here should be considered legal advice.

I had a call from a customer a few weeks back where they wanted payments not to pay fees, but rather to pay interest and principal first.  The borrower was paying only the principal and interest payment, and was consistently late.  The customer was thinking that at some point the fees would eventually get paid through some kind of supplemental payment or maybe sit there until payoff.  They said they had seen that banks will do it that way, having a payment affect the principal and interest first and then pay the late fee.

I brought up a few reasons why we should let Moneylender apply the payment to the fees first, then interest then principal.

Banks will almost always foreclose on a first mortgage after 90 days.  I have plenty of customers that service their loans with Moneylender Professional that will start foreclosure within days of hitting a 90-day delinquency.  Legally, that’s what lenders are allowed to do, and if the real estate market is declining, or a lender had any reason to suspect that the property might lose value over time, this is the only sound course of action.  Foreclosing in these circumstances actually protects the borrower from piling up delinquent debt as the collateral asset loses value.  If sold at peak value, the surplus beyond the loan’s payoff goes to the borrower.

However, many lenders like my friend on the phone will work with a borrower to avoid foreclosure and set up very lenient reinstatement terms on the loan well past the 90 day mark.  If you fall into this category, be sure to put the reinstatement terms into writing and have the borrower sign it.  If you will not be exercising your right to foreclose at 90 days into default, but still want to collect the late fees, be up front that you are collecting the late fees.  If the late fees make the borrower appear even more delinquent because they haven’t paid them, it only further punctuates the borrowers need to change their payment strategy or reassess their debt.

Avoid having to explain the large accrued fees balance at the time of payoff.  Especially if the borrower has been paying on time for a couple years after the late fees piled up.  I’m a big advocate of clearly communicating the status and expectations on the loan at all times.  The balance regularly shown to the borrower should closely represent the actual payoff balance.  No surprise balances in the thousands of dollars lingering on the loan to pop up when the borrower thinks they’re ready to pay and close the loan.

Sets a precedent that might be interpreted as waiving the late fees.  If you accept a payment without the late fee, and the amount due on the loan for next month doesn’t include the late fee, you have essentially waived the late fee.  Most late fee clauses state that the late fee is due and payable immediately after the grace period ends.  If you make the late fee not collectable, you are ignoring that part of your contract and possibly setting yourself up to have to waive late fees later.
Always let your borrower know about the timeliness and sufficiency of payments, especially at the outset of underpayment, will help the borrower set their priorities correctly so the loan doesn’t become a non-performing burden to the lender.  Stick to the terms of the contract to avoid confusion or expectation creep.

Your loan is itself an asset.  It loses its value if the borrower underpays and falls behind.  Like a home requires maintenance to keep its value, ensuring your borrowers are receiving consistent and clear communication can only help your loans remain at full value and keep your revenue from the loan consistent.  You don't want the debt to go bad and become uncollectable!

Moneylender’s mechanisms to apply payments are designed to apply the payments as fairly as possible, but also in a way that will be thoroughly enforceable and collectable.  Once your loan’s terms are configured in Moneylender, it will apply payments such that you can easily demonstrate what you collected and how you rightfully credited it toward the borrower’s accounts.  Moneylender customers have gone through audits, lawsuits and foreclosures to the satisfaction of judges, auditors, and lenders alike.

Thursday, December 13, 2018

The Farmer Who Could Understand Animals


I am a huge fan of the book The Richest Man in Babylon.  I buy half a dozen copies at a time and give them to my friends when the subject of money comes up.   I’ve participated in and run book studies.  It’s such a simple and pointed book that is as fun to read as it is instructional.  There’s one part of the book that I retell to people often, and it applies quite well to any lenders that might make lenient repayment terms with borrowers that are getting behind.

I’ll tell the story here (although the version printed in the book is much better).  In the book, this parable is told from a seasoned moneylender to a spear maker.  The spear maker had recently been given a gift of 50 gold pieces from the king as a reward for presenting a new design for the spears of the royal guard.  The spear maker was beseeched by his family and friends for loans day and night.  Unsure what to do, and not wanting to lose his gold and good fortune, he asked the moneylender for advice…


There was a certain farmer who was able to understand the animals when they talked to each other.  Each night the farmer would linger in the barnyard after the day’s work was done to listen.  One night he heard this conversation between the Ox and the Ass.

The Ox would return to the barn every night, legs tired from pulling the plow through the fields all day, his neck sore from where the bow of the plow had chafed it.  The Ass took pity upon his friend the Ox and said “I know of a way you can enjoy a day of rest, my friend.  Tomorrow when the servants come to hitch you to the plow, lay on your belly and moan so they will say you are sick and cannot do the days work.”

The next day, the servants approached the farmer and said the Ox was sick and could not pull the plow.  The farmer replied “then hitch the plow to the Ass for the work must get done.”  All day the Ass pulled the plow through the fields and when evening finally came the Ass returned to the barn, his legs tired and his neck sore where the bow had chafed it.

The Ox greeted him cheerfully, “Thank you my friend!  Because of your advice I have enjoyed a day of rest.”

“And I have ended up carrying your burden,” the Ass said bitterly.  “You should not try this again, for I head the farmer say to call for the butcher if you were sick again.”  The two were no longer friends and spoke to each other no more.


If you have a loan, and are feeling kind and generous, be careful not to let your borrowers walk all over you.  Being kind may ruin your chance of successfully collecting on your loan and your investment may be lost.  If you are going to ease the burden on your borrower, be careful you don’t end up putting the burden on yourself.

I love this book, I cannot recommend it enough.  In fact, it’s where Moneylender got its name!

Monday, December 10, 2018

For Lenders Preparing to Close Out 2018


With the calendar year coming to an end, now is the time to get your books in order and make sure you can accurately account for your lending and leasing activities for the year.  For those that service their loans and leases with Moneylender Professional, we have a few tips to make sure your records are ready for year-end accounting and reporting.


Don’t Print 1098s until 2019. 

Moneylender 3 uses the template system to provide 1098 forms for customers in the USA.  The tags for these templates use total from the previous calendar year.  That means you can’t get 2018 totals until 2019.  You can use Moneylender’s emailing capabilities to email the Substitute 1098 forms directly to your borrowers straight out of Moneylender.  You can print the substitute forms for anyone without a valid email address.

For the official IRS forms, order them from the IRS, and you can print the Data-Only flavors of the 1098 templates directly onto the official forms.  Be sure to check the alignment with the black copies first before running the red copies through the printer.  Printers can vary and you might need to tweak the positioning or template offset to get the data to align perfectly on the official forms.


Make sure loans that were closed in 2018 have zero balances and are marked closed.  

Moneylender 3 has a set of calculations to make sure closed loans always have zero balances.  Before closing any loan, make sure to mark any payments after the last due date or on the closing date a Final Payments (Payoff Payments in slightly older versions of Moneylender 3).  Marking a payment as a final payment tells Moneylender not to hold a payment until an upcoming due date but to instead apply it right away.

Then click Loan > Close Loan.  The closing routines will add or adjust the appropriate per-diem interest and give you some options for dealing with any Escrow balance and/or loan surplus balance.  If the loan was overpaid, Moneylender will help you add an appropriate principal disbursal to the loan so you can refund the overage to the borrower.

If reporting to the credit bureaus, make sure the final status of the loan, as it should be reported hereafter is properly set to match the circumstances of the loan closure.


Check out the Amount Due Ledger and Payment Distribution on your loans.  

For any loans that show that they are past due or that you think should be past due but say they’re current, Give the Amount Due Ledger (Ledger Transactions report, and then change the Account to AmountDue and click Refresh) a quick review.  When the balance of the AmountDue account is zero, that means the loan is paid current.  Look at the balance over time and see if the loan has been variously caught up and behind as you would expect it to be.  Run the Payment Distribution report on the loan and scan the interest and principal columns.  If the borrower is consistently on time, the interest should be steadily decreasing without major fluctuations, and the principal should be steadily increasing.  If there is a major disruption to those smooth numbers, is it because of a known event on the loan or is it because of an error in entry.  For example, if there’s suddenly a payment that’s all principal, you might catch where a payment was accidentally entered twice.  Or if suddenly a payment is twice the interest, either the borrower skipped a due date or a payment might not have been entered that should be.

A quick review through your accounts can make a huge difference in how smooth things will go when you prepare your taxes and other year-end reports.   If you can’t figure out why you’re seeing certain numbers in places, feel free to email or call Whitman Technological for help.