As part of its 2014 Mortgage Servicing Rules, the Consumer Financial Protection Bureau (CFPB) issued §1024.17(k) of Regulation X, which is devoted to Escrow Accounts and the requirements for disbursements made from those accounts on behalf of borrowers. The CFPB does not do anyone favors in its convoluted use of double negatives to describe the situations where a mortgage servicer is required to adhere to the timeliness requirements and force-placed insurance determinations set forth under this section. 

When an escrow account is set up pursuant to the mortgage loan documents, regularly scheduled disbursements must be made in a timely manner, defined as on or before the penalty deadline. Pursuant to §1024.17(k)(1) and §1024.17(k)(2), disbursements are required to be made timely as long as the borrower’s payment is not more than 30 days overdue. However, §1024.17(k)(5) requires that when a borrower with an escrow account established for the purposes of hazard insurance is more than 30 days past due, mortgage servicers are not permitted to force place insurance unless the servicer is unable to disburse funds out of the borrower’s escrow account in a timely manner. The inability to disburse funds is limited to situations where the hazard insurance coverage has been cancelled or not renewed for reasons beyond non-payment or when the property is deemed vacant. Below are examples provided by the CFPB of reasonable scenarios for a cancelled hazard policy outside of non-payment: 

  1. “A borrower notifies a servicer of the cancelled hazard insurance coverage, and the servicer has not received notification of other hazard insurance coverage.”  
  2. “A servicer receives a notification of cancellation or non-renewal from the borrower’s insurance company before payment is due on the borrower’s hazard insurance.”  
  3. “A servicer does not receive a payment notice by the expiration date of the borrower’s hazard insurance policy. A mortgage servicer must still disburse funds timely, even if the borrower’s established escrow account lacks sufficient funds to cover the disbursement.” 

Important note: An entity that either (a) services, together with any affiliates, 5,000 or fewer mortgage loans, for all of which the servicer (or an affiliate) is the creditor or assignee; or (b) is a Housing Finance Agency, as defined in 24 C.F.R. §266.5, (“Small Servicer” pursuant to 12 C.F.R. §1026.41(e)(4)”), may purchase force-placed insurance and recover the cost of that insurance from the borrower, if the cost to force place insurance is less than the amount to be timely disbursed from the borrower’s escrow account under the borrower’s hazard policy.

In summary, a mortgage servicer must make timely escrow disbursement of taxes on all loans that are not more than 30 days delinquent.  Timely escrow disbursement (including advances if necessary) for hazard insurance must be made regardless of delinquency, unless the hazard insurance has been cancelled for some reason other than non-payment or the property is vacant.

Practice Tips

  • Mortgage Servicers should ensure that all escrow disbursements are timely.
  • All force-placed insurance determinations should be supported by evidence of cancellation or non-renewal of the hazard insurance policy for reasons other than non-payment of the premiums. 
  • Build controls into the escrow disbursement process to ensure that all disbursements are timely and are proper given the requirements of the Regulation X §1024.17.