In one sentence
An account a servicer holds in trust for others, keeping borrower payments and escrowed funds separate from the servicer's own money.
The longer version
Servicers collect principal, interest, taxes, insurance, and reserves that belong to investors or borrowers rather than to the servicer. Those funds sit in custodial accounts, and the separation is a compliance requirement rather than an accounting preference.
Examiners test the reconciliation. They look for whether the account balances tie to the underlying obligations, whether remittances went out on schedule, and whether any commingling occurred. The reconciliation record, not the account itself, is what gets asked for.
Common questions
- What money sits in a custodial account?
- Borrower payments awaiting remittance to investors, plus escrowed tax, insurance, and reserve funds. None of it belongs to the servicer.
- How often is a custodial account reconciled?
- Monthly is standard practice, and the reconciliation is documented because it is a routine exam request.
- What is commingling?
- Holding custodial funds together with the servicer's operating money. It is a finding in an exam even when no funds are misapplied, because the separation itself is the control.
Keep reading