IBA Compliance Connection

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We have a higher-priced mortgage loan that is in foreclosure. There are not enough funds in the escrow account to pay the hazard insurance policy premiums. Do we have to keep paying the premiums? The borrower has not responded to our notices about the escrow account shortage or a request to discuss the possibility of finding a cheaper insurance policy. We qualify as a small servicer, but we typically do not force place hazard insurance because we have a blanket insurance policy to protect our collateral interest whenever a borrower’s hazard insurance policy lapses.

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No, neither federal nor state law requires your bank to continue paying the premiums or to force-place the insurance. However, you should review the terms of both your loan documents and your blanket policy to ensure that you haven’t committed to force-place insurance before making a claim against the blanket policy.

Regulation X requires your bank to make disbursements out of a required escrow account only as long as the borrower’s payment is not more than 30 days overdue. In this case, the borrower’s loan is in foreclosure, which means that the payments are more than 30 days past due. Consequently, we do not believe that you are required to continue making payments on the hazard insurance policy premiums. We spoke with a representative from the CFPB, who informally confirmed that this interpretation of the rule is correct.

For resources related to our guidance, please see:

  • Regulation X, 12 CFR 1024.17(k)(1) (“If the terms of any federally related mortgage loan require the borrower to make payments to an escrow account, the servicer must pay the disbursements in a timely manner, that is, on or before the deadline to avoid a penalty, as long as the borrower’s payment is not more than 30 days overdue.”)
  • Regulation X, 12 CFR 1024.17(k)(2) (“The servicer must advance funds to make disbursements in a timely manner as long as the borrower’s payment is not more than 30 days overdue. Upon advancing funds to pay a disbursement, the servicer may seek repayment from the borrower for the deficiency pursuant to paragraph (f) of this section.”)
  • 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.”)
  • Regulation X, Final Rule, 78 Fed. Reg 10695, 10714 (February 14, 2013) (“The Bureau is finalizing § 1024.17(k)(5) as proposed with adjustments to address pertinent issues raised by the comments. Specifically, the Bureau is not requiring that a servicer advance funds to, or disburse funds from, an escrow account to maintain hazard insurance in all circumstances. Rather, the Bureau had adjusted the requirement in § 1024.17(k)(5)(i) to provide that a servicer may not obtain force-placed insurance unless a servicer is unable to disburse funds from the borrower's escrow account to ensure that the borrower's hazard insurance is paid in a timely manner. Thus, for example, a servicer of a mortgage loan, including a HELOC, is not required to disburse funds from an escrow account to maintain a borrower's hazard insurance, so long as the servicer does not purchase force-placed insurance.”)