Whose Money Is It Really?

The fourth quarter is the busiest time of the year for tax payments. Borrowers want their taxes paid by year end for tax purposes, which creates a mad rush to pay, pay, pay. The title company pays, the lender pays, the borrower pays and/or the third party pays. All of these different sources of payments could ultimately lead to refunds. Those refunds mean the servicer is faced with refunds and the time consuming task of conducting research to determine who the money belong to.

Let’s take a closer look at a few factors around refunds including what causes a refund; what effect do they have on the servicer; and what can be done to prevent them.

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There are several factors to consider when determining what causes a refund. One of the primary causes of a refund is when more than one person or entity pays taxes on the same parcel and for the same tax year; this results in a duplicate payment. In some cases, the borrowers are not educated about who is responsible for paying the tax bill. So when they receive a copy of their tax bill, they will pay it and at the same time, the lender has paid it. Therefore, the tax agency may apply the first payment received and return any payments later received. Or they may apply the additional payment to the next installment or they deposit the funds and require a refund request to get them back.

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Another scenario that could cause a refund situation is the initial set up of tax line data on an escrowed loan. Generally, tax lines are set up according to the closing documents. If the documents show that taxes will be paid at closing, then the tax line would reflect a future date to avoid a tax payment. If the line has a current date indicating the taxes are due and the servicer pays them when in fact they were paid at closing, the result is a duplicate payment and the need for a refund.

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Yet another scenario that could create an overpayment is tax exemptions that could cause a decrease in the tax amount due, especially if the tax bill was paid and it was not reflected as tax exemption, which would cause an over payment. Paying the incorrect amount based on human error when keying an amount to pay or an error with the agency reporting an incorrect amount could require a refund as well. If the incorrect amount paid is more that the tax bill, it would create an overpayment possibly resulting in a refund or the agency may choose to simply apply the overpayment to the next installment. This could create a problem for future installments if the agency does not provide a notification that funds were posted to the next installment. When the next installment is due, the full amount would be paid, again creating yet another overpayment.

While over payments may not seem like a big deal, there are some serious effects refunds have on the servicer. For example, the amount of research involved to resolve the refund is costly. The servicer must contact the agency to determine what caused the refund, duplicate payment, overpayment, etc. Then the servicer needs to verify if the intended parcel matches the borrower’s name and address. The taxing agency should be able to advise who made the payment, whether it was title company, borrower, third party, etc. And if the servicer is requesting a refund, it has to provide proof of payment. Very few agencies automatically refund overpayments. Most agencies require a refund request be provided along with proof of payment.

Other time consuming and costly activities that are often prompted by refunds are an escrow analysis of a borrower’s account and additional resources in the call centers as activity generally increases due to borrower inquiries regarding refunds.

There are ways servicers can prevent or reduce refund volume including:

>>Establishing rules with closing agents regarding the payment of taxes,

>>Reviewing tax line due dates with closing agents to ensure business rules are well documented to prevent the duplication of tax payments,

>>Conducting an audit on new orders to ensure tax lines are built correctly to avoid duplicate payments,

>>Performing root cause analysis of refunds and addressing the findings,

>>Educating borrowers to understand what tax bills they should or should not pay, and

>>Advising borrowers to always examine their property assessment.

Left uncheck, taxing authorities could take months to acknowledge duplicate payments let alone sending a refund. This could create the need for additional research on the part of the servicer and will increase customer inquiries from borrowers. Being vigilant in addressing the cause of refunds can save a company time and money as well as build confidence among borrowers.

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