Refi and bank closure question

[FrugalFish]

Here's a refi scenario I'm trying to find the answer to. I hope someone can offer some insight.

I understand that the money is not transferred until 3 days after closing a loan.

What happens in this scenario: someone is refinancing through a bank, using that bank's escrow service on the loan, and paying closing costs out of pocket. The day after closing the loan, the bank is shut down by FDIC- what happens to the loan?

Is the funding completed?

If not, does the borrower get their closing costs back from escrow?

DH and I are in line for a refi and with all the scary bank talk of late, I started wondering about such things- any ideas?

[boosami]

If you've closed, you will be held to the loan. If the bank fails any time after closing, your payments will simply be received by the assuming bank, or the FDIC if your loan has not been purchased by another bank. Unless the bank fails before the closing, you have nothing to worry about.

[FrugalFish]

Thanks for answering.

Actually, in thinking about it, it's more about what happens in the days between signing and closing. If the bank fails then, the funding would not go through, would it? But even if the title company is an indirect subsidiary of the bank, the closing costs I put into escrow would be returned to me- is that right?

[Uneventoast]

Yes, if the bank fails between the loan application and closing on the loan those funds will be returned to you because the bank has not allocated any funds to your mortgage at that point. It is only on the closing day that the funds are allocated for you. That is why you have to pay interest on two loans for three days during the rescission period. Just another government requirement that had an unintended consequence.

[FrugalFish]

Thank you for the response.

That the bank owns the title company got me wondering how the title company would be affected if the bank were closed- and in turn how that would affect funds held in escrow.

I figured that since the money is essentially held in trust that there must be regulation protecting the borrower from losing those funds in such an event.