Yes, we believe that Regulation X prohibits you from providing borrowers the option of paying an escrow account shortage greater than or equal to one month’s escrow account payment with a lump sum payment.

Regulation X provides that if an escrow account analysis discloses a shortage that is greater than or equal to one month’s escrow account payment, the servicer has two possible courses of action: (1) allow the shortage to exist and do nothing to change it or (2) require the borrower to repay the shortage in equal monthly payments over at least a twelve-month period. The servicer has the option of requiring a borrower to repay the full shortage amount within thirty days only if the shortage is less than one month’s escrow account payment.

The CFPB’s Summer 2020 Supervisory Highlights stated that annual escrow account statements that include the option of paying an escrow account shortage greater than one month’s escrow account payment as a lump sum violated Regulation X. The CFPB explained that “because the enumerated repayment options are exclusive, the servicers violated the regulatory requirements by sending disclosures that provided borrowers with repayment options that they cannot require under Regulation X.”

Accordingly, we do not believe you should be providing your borrowers the option of paying an escrow account shortage with a lump sum payment when the shortage is greater than or equal to one month’s escrow account payment.

For resources related to our guidance, please see:

• Regulation X, 12 CFR 1024.17(f)(3)(ii) (“If an escrow account analysis discloses a shortage that is greater than or equal to one month’s escrow account payment, then the servicer has two possible courses of action:

(A) The servicer may allow a shortage to exist and do nothing to change it; or

(B) The servicer may require the borrower to repay the shortage in equal monthly payments over at least a 12-month period.”)

• Regulation X, 12 CFR 1024.17(f)(3)(i) (“If an escrow account analysis discloses a shortage of less than one month’s escrow account payment, then the servicer has three possible courses of action:

(A) The servicer may allow a shortage to exist and do nothing to change it;

(B) The servicer may require the borrower to repay the shortage amount within 30 days; or

(C) The servicer may require the borrower to repay the shortage amount in equal monthly payments over at least a 12-month period.”)

• CFPB Supervisory Highlights, Mortgage Servicing, page 16 (Summer 2020) (“Examiners found that one or more servicers sent consumers annual escrow account statements which included options for repayment of shortages and deficiencies that are not enumerated in Regulation X. Specifically, for borrowers with either shortages or deficiencies equal to or greater than one month’s escrow account payment, servicers listed two options borrowers could choose for repayment: (1) equal monthly payments over a 12-month period or (2) a lump sum payment. The first option is a permitted repayment option under Regulation X, while the second option is not. Regulation X requires that annual escrow account statements include an explanation of how shortages or deficiencies are to be paid by borrowers. Because the enumerated repayment options are exclusive, the servicers violated the regulatory requirements by sending disclosures that provided borrowers with repayment options that they cannot require under Regulation X. In response to these findings, the servicers are amending their annual escrow disclosures to only include repayment options they are permitted to require under Regulation X.”)

• Regulation X, 12 CFR 1024.17(i)(1) (“The annual escrow account statement must include, at a minimum, the following . . . (vii) An explanation of how any shortage or deficiency is to be paid by the borrower.”)