RSK.IQ Question of the Week 4/25/16

Force Placing Hazard Insurance if there is An Escrow Account

Issue/Inquiry

The Bank asks how RESPA’s rules for force placing hazard insurance apply when there is an escrow account.

Response Summary

When the borrower has an escrow account for the payment of hazard insurance premiums, the servicer is prohibited from obtaining force-place insurance where it can continue the borrower’s homeowner’s insurance, even if the servicer has to advance funds to do so. If the servicer advances funds to ensure that the borrower’s hazard insurance is paid in a timely manner, it can seek repayment from the borrower for the funds advanced. Small servicers can obtain force-place hazard insurance even if there is an escrow account, so long as the force-place hazard insurance would be less expensive to the borrower than any disbursement the small servicer would have made to maintain the hazard insurance.

Response Detail

The RESPA rules on force-placing hazard insurance exclude hazard insurance obtained by the borrower but maintained by the servicer under an escrow account. 12 CFR §1024.37(a) (2) (ii). This means that the force-placed rules do not apply when an escrow account has been established for the payment of hazard insurance. Instead, the servicer must follow the rules RESPA has established for escrow accounts.

Under RESPA’s escrow account rules, when the borrower has an escrow account for the payment of hazard insurance premiums, the servicer is prohibited from obtaining force-place insurance where it can continue the borrower’s homeowner’s insurance, even if the servicer has to advance funds to do so. If the servicer advances funds to ensure that the borrower’s hazard insurance is paid in a timely manner, it can seek repayment from the borrower for the funds advanced. 12 CFR §1024.17(k)(5)(i), (ii)(C); CFPB, Summary of the Final Mortgage Servicing Rules (January 17, 2013).

If the servicer is unable to disburse funds from the borrower’s escrow account, in order to ensure that the hazard insurance premiums are paid in a timely manner, it is allowed then to force-place hazard insurance. The servicer is considered to be unable to disburse funds from the borrower’s escrow account if it has a reasonable belief that either the borrower’s hazard insurance has been canceled or was not renewed, or that the borrower’s property is vacant. 12 CFR §1024.17(k)(5)(i),(ii)(A).

A servicer is not considered “unable to disburse” funds, however, merely because there are not sufficient funds in the escrow account to pay the hazard insurance premium charges. The servicer would be required to make an advance into the escrow account and to recoup the advance from the borrower. 12 CFR §1024.17(k)(5)(ii)(B),(C).

The rule against obtaining force-placed hazard insurance in cases in which hazard insurance can be maintained through the escrow account exempts small servicers, so long as the force-placed insurance purchased by the small servicer is less expensive to a borrower than the amount of any disbursement the servicer would have made to maintain the borrower’s homeowner’s insurance through the escrow account. 12 CFR §1024.17(k)(5)(iii); CFPB, Summary of the Final Mortgage Servicing Rules (January 17, 2013).

A bank is a “small servicer” if it services 5,000 or fewer mortgage loans that it originated or which were assigned to it. However, if it services any mortgage loans it did not originate and does not own, then it is not considered a small servicer, even if it services 5,000 or fewer mortgage loans.

This entry was posted on Monday, April 25th, 2016 at 3:00 pm.

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