A loan customer who owns multiple rental homes was dropped by their hazard insurance carrier after making three claims. The customer is current on their loan and makes monthly payments into a hazard insurance escrow. We used the escrowed funds to purchase insurance for the properties. Would this be considered force-placed insurance? The premiums are covered by the funds deposited into the borrower’s escrow account, so we have not posted the fees to the account as “force-placed.” We are a small servicer.

We believe the insurance you obtained for the borrower would be considered force-placed insurance, even though you are able to pay for the premiums out of the borrower’s escrow account.

Regulation X defines force-placed insurance as “hazard insurance obtained by a servicer on behalf of the owner or assignee of a mortgage loan that insures the property securing such loan.” The insurance you purchased for the mortgaged properties meets this definition, and it does not qualify for any of the three exceptions from the definition of force-placed hazard insurance (i.e., it is not flood insurance and was not obtained by a borrower but renewed by the borrower’s servicer).

Under Regulation X, a servicer may assess a premium charge or fee related to force-placed hazard insurance when it has a reasonable basis to believe the borrower has failed to comply with the mortgage loan contract’s requirement to maintain hazard insurance. In this case, you know the borrower has not met this requirement because their insurance carrier dropped their coverage, and it does not appear that the borrower obtained insurance from a different carrier.

Although Regulation X generally prohibits servicers from purchasing force-placed insurance when a borrower has an established escrow account for hazard insurance with sufficient funds to pay premiums in a timely manner, this prohibition does not apply when the insurance was canceled for reasons other than nonpayment (with an exception for small servicers, depending on the cost of the force-placed insurance). Since your borrower’s hazard insurance was canceled due to claims being made (and not for the nonpayment of premiums), this prohibition does not apply.

For resources related to our guidance, please see:

Regulation X, 12 CFR 1024.37(a)(1) (“For the purposes of this section, the term ‘force-placed insurance’ means hazard insurance obtained by a servicer on behalf of the owner or assignee of a mortgage loan that insures the property securing such loan.”)

Regulation X, 12 CFR 1024.37(a)(2) (“The following insurance does not constitute ‘force-placed insurance’ under this section:

(i) Hazard insurance required by the Flood Disaster Protection Act of 1973.

(ii) Hazard insurance obtained by a borrower but renewed by the borrower’s servicer as described in § 1024.17(k)(1), (2), or (5).

(iii) Hazard insurance obtained by a borrower but renewed by the borrower’s servicer at its discretion, if the borrower agrees.”)

Regulation X, 12 CFR 1024.37(b) (“A servicer may not assess on a borrower a premium charge or fee related to force-placed insurance unless the servicer has a reasonable basis to believe that the borrower has failed to comply with the mortgage loan contract’s requirement to maintain hazard insurance.”)

Regulation X, 12 CFR 1024.17(k)(5)(i) (“Except as provided in paragraph (k)(5)(iii) of this section, with respect to a borrower whose mortgage payment is more than 30 days overdue, but who has established an escrow account for the payment for hazard insurance, as defined in § 1024.31, a servicer may not purchase force-placed insurance, as that term is defined in § 1024.37(a), unless a servicer is unable to disburse funds from the borrower’s escrow account to ensure that the borrower’s hazard insurance premium charges are paid in a timely manner.”)

Regulation X, 12 CFR 1024.17(k)(5)(ii)(A) (“A servicer is considered unable to disburse funds from a borrower’s escrow account to ensure that the borrower’s hazard insurance premiums are paid in a timely manner only if the servicer has a reasonable basis to believe either that the borrower’s hazard insurance has been canceled (or was not renewed) for reasons other than nonpayment of premium charges or that the borrower’s property is vacant.”)

Regulation X, 12 CFR 1024.17(k)(5)(iii) (“Notwithstanding paragraphs (k)(5)(i) and (k)(5)(ii)(B) of this section and subject to the requirements in § 1024.37, a servicer that qualifies as a small servicer pursuant to 12 CFR 1026.41(e)(4) may purchase force-placed insurance and charge the cost of that insurance to the borrower if the cost to the borrower of the force-placed insurance is less than the amount the small servicer would need to disburse from the borrower’s escrow account to ensure that the borrower’s hazard insurance premium charges were paid in a timely manner.”)

Mortgage Servicing Rules Under RESPA (Regulation X), 78 Fed. Reg. 10694, 10714 (January 10, 2014) (“The Bureau believes that a servicer should not obtain force-placed insurance when a servicer is able to make disbursements from an escrow account to maintain hazard insurance. As set forth above, unless a policy has been cancelled for reasons other than nonpayment, a borrower’s delinquency should not cause a servicer to take actions (or make omissions) that would lead to the cancellation of the borrower’s voluntary insurance policy and the potential replacement of that policy with a more expensive (and less protective) force-placed insurance policy. The Bureau acknowledges that in certain circumstances, force-placed insurance is necessary. Section 1024.17(k)(5) does not prevent a servicer from obtaining force-placed insurance, subject to the requirements in § 1024.37, when such a policy is appropriate, including, for instance, where a borrower’s hazard insurance policy has been cancelled for reasons other than non-payment. In that situation, a servicer may impose a charge on a borrower for a force-placed insurance policy consistent with the requirements in § 1024.37. However, as set forth above and in the proposal, the Bureau does not believe imposition of a charge for force-placed insurance is appropriate where a hazard insurance policy has not been cancelled and a servicer is able to disburse funds from an escrow account to maintain the borrower’s preferred hazard insurance policy in force.”)