Our bank generally does not require consumers to set up an escrow account for a residential mortgage loan unless required by law. We have agreed to terminate an escrow account at the request of a borrower who voluntarily escrows funds for real estate taxes. Are we required to pay the escrow balance to the borrower after terminating the account? The borrower mentioned that they need the funds for a vacation, and we are concerned they will not be able to pay their property tax bill due next month. If the borrower is delinquent in paying their tax bill, our loan terms give us the right to require that an escrow account be reinstated.

Jun 9, 2023

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We recommend reviewing your loan terms and any escrow account agreement the borrower may have signed. If your agreement does not expressly grant your bank the right to retain the escrow account balance after the escrow is terminated, we recommend refunding the balance — as your failure to do so may be deemed an unfair, deceptive, or abusive act or practice, or even conversion of your customer’s funds.

Regulation X requires a mortgage servicer to return any amounts remaining in an escrow account within twenty days of a borrower’s payment of a mortgage loan in full, but it does not cover situations in which an escrow account is terminated before the mortgage loan is paid off. Consequently, we believe the terms of your agreement with your borrower will dictate how you should proceed. If you do not have an express right to retain escrow funds or use them to set-off an existing deficiency (if any), we believe you must return the escrow funds to the borrower after terminating their escrow account. Of course, if your customer does fail to pay their upcoming property tax bill, you would be within your rights to then reinstate the escrow account.

Also, if you do not return the escrow funds, there is a risk this could be viewed as an unfair, deceptive, or abusive act or practice, as your customer may claim that they believed that the escrow account was voluntary and that you would return the balance to them if they opted to terminate it.

For resources related to our guidance, please see:

Regulation X, 12 CFR 1024.34(b)(1) (“Except as provided in paragraph (b)(2) of this section, within 20 days (excluding legal public holidays, Saturdays, and Sundays) of a borrower's payment of a mortgage loan in full, a servicer shall return to the borrower any amounts remaining in an escrow account that is within the servicer's control.”)

Consumer Financial Protection Act of 2010, 12 USC 5536(a) (“It shall be unlawful for (1) any covered person or service provider . . . (B) to engage in any unfair, deceptive, or abusive act or practice.”)

CFPB Supervision and Examination Manual, UDAAP Section (“The standard for unfairness in the Dodd-Frank Act is that an act or practice is unfair when: (1) It causes or is likely to cause substantial injury to consumers; (2) The injury is not reasonably avoidable by consumers; and (3) The injury is not outweighed by countervailing benefits to consumers or to competition.”)

CFPB Supervision and Examination Manual, UDAAP Section (“An abusive act or practice: . . . Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service or . . . [t]akes unreasonable advantage of:

A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;

The inability of the consumer to protect its interests in selecting or using a consumer financial product or service; or

The reasonable reliance by the consumer on a covered person to act in the interests of the consumer.”)

CFPB Supervision and Examination Manual, UDAAP Section (“A representation, omission, act, or practice is deceptive when (1) The representation, omission, act, or practice misleads or is likely to mislead the consumer; (2) The consumer’s interpretation of the representation, omission, act, or practice is reasonable under the circumstances; and (3) The misleading representation, omission, act, or practice is material.”)