To answer your first question, the CFPB rules may limit your ability to force-place hazard insurance. To answer your second question, we do not believe that those rules require you to maintain or force-place hazard insurance for the borrower (other than flood insurance, when required) — meaning that you could, theoretically, rely solely on your institution’s mortgage protection insurance.
If your institution wants the property to continue being protected by hazard insurance, the CFPB rules limit your ability to force place that insurance. For loans that are more than 30 days past due, the CFPB rules prohibit servicers from force-placing insurance unless: (1) the property is vacant, (2) the borrower has failed to renew the hazard insurance, or (3) the borrower has cancelled the hazard insurance. 12 CFR 1024.17(k)(5).
Based on your question, it appears that none of these exceptions have been triggered; in other words, the borrower has stopped paying the hazard insurance premiums without canceling the policy, and the policy is not up for renewal. In this case, assuming you want the borrower’s policy to continue, the CFPB rules require you to make the premium payments from the borrower’s escrow account. Even if the borrower’s escrow account is empty, the CFPB rules require you to advance funds through that account (essentially creating a negative escrow fund balance) for paying the premiums, after which you must seek repayment from the borrower. 12 CFR 1024.17(k)(5)(ii)(C).
There is an exception from this requirement for “small servicers,” but only if the cost of the force-placed insurance is less than the cost of the borrower’s hazard insurance premiums, and even small servicers must follow the notice and other requirements for force-placed insurance in 12 CFR 1024.37. A “small servicer” is an institution that, together with its affiliates, services 5,000 or fewer mortgage loans as of January 1st of the current year (provided that the institution or an affiliate owns or originated all of the mortgage loans it services). 12 CFR 1026.41(e)(4).
Whether you choose to protect your interests by maintaining hazard insurance or by relying on your mortgage protection insurance is a business decision for your institution. Note, however, that both Fannie Mae (in its Selling Guide) and Freddie Mac (in its Seller/Servicer Guide, Chapter 58) require sellers to ensure that mortgaged properties are protected by adequate hazard insurance.