Regulation X (12 CFR part 1024) does not stop at closing. Its servicing rules control how a servicer handles escrow, transfers, borrower complaints, insurance and delinquency, and the SAFE MLO outline expects you to know them.
Escrow accounts: limits and analysis
An escrow account is any account a servicer establishes or controls to pay taxes, insurance premiums (including flood insurance) or other charges on a federally related mortgage loan (12 CFR 1024.17(b)). Accounts under the borrower's total control are excluded.
- Monthly payment: during the life of the account, a servicer may collect one-twelfth of the total annual payments it reasonably expects to make from the account (12 CFR 1024.17(c)(1)(ii)).
- Cushion: the cushion may be no greater than one-sixth of the estimated total annual disbursements (12 CFR 1024.17(c)(5)). If the loan documents set a lower cushion, the documents control; if they allow more, Regulation X controls (12 CFR 1024.17(c)(8)).
- Aggregate accounting: servicers must use the aggregate method when analyzing the account (12 CFR 1024.17(c)(4)).
- No pre-accrual: a servicer must not require deposits ahead of the time they are needed (12 CFR 1024.17(c)(6)).
- Timely payment: the servicer must pay escrow items on or before the penalty deadline, advancing its own funds if needed, as long as the borrower's payment is not more than 30 days overdue (12 CFR 1024.17(k)(1)-(2)).
Escrow statements, shortages and surpluses
Before opening an escrow account the servicer must run an escrow analysis, and it must repeat the analysis at the end of each computation year (12 CFR 1024.17(c)(2)-(3)).
- Initial statement: delivered at settlement or within 45 calendar days of settlement for accounts required as a condition of the loan (12 CFR 1024.17(g)(1)).
- Annual statement: delivered within 30 days of the end of the computation year, with an account history and a projection for the next year (12 CFR 1024.17(i)).
- Surplus: if the borrower is current and the surplus is $50 or more, the servicer must refund it within 30 days of the analysis. A smaller surplus may be refunded or credited against next year's payments (12 CFR 1024.17(f)(2)). A borrower is current if the servicer receives payments within 30 days of the due date.
- Shortage: a shortage smaller than one month's escrow payment can be left alone, repaid within 30 days, or spread over at least 12 equal monthly payments. A larger shortage can be left alone or spread over at least 12 months (12 CFR 1024.17(f)(3)).
- Deficiency (a negative balance): the servicer may require repayment in two or more equal monthly payments, or within 30 days if the deficiency is under one month's payment (12 CFR 1024.17(f)(4)).
The servicer must notify the borrower at least once during the computation year if there is a shortage or deficiency (12 CFR 1024.17(f)(5)).
Servicing transfers
Both the old and new servicer must give the borrower a notice of transfer. The transferor servicer sends it at least 15 days before the effective date; the transferee servicer sends it within 15 days after, and a single combined notice must meet the 15-day advance timing (12 CFR 1024.33(b)(3)(i)). The deadline stretches to 30 days after the transfer in cases such as a servicer's bankruptcy or termination for cause (12 CFR 1024.33(b)(3)(ii)).
For 60 days after the effective date, a payment sent to the old servicer on or before its due date (including any grace period) cannot be treated as late for any purpose (12 CFR 1024.33(c)(1)). The old servicer must promptly forward or return a misdirected payment (12 CFR 1024.33(c)(2)).
Errors and information requests
A borrower asserts an error through a written notice of error, and Regulation X lists covered errors, including failing to apply an accepted payment, imposing a fee without a reasonable basis, and failing to pay escrow items on time (12 CFR 1024.35(b)). A written information request is handled under 12 CFR 1024.36.
- Acknowledgment: within 5 business days for both notices of error and information requests (12 CFR 1024.35(d); 12 CFR 1024.36(c)). Business days exclude legal public holidays, Saturdays and Sundays.
- Notice of error, general response time: 30 business days, extendable by 15 with written notice (12 CFR 1024.35(e)(3)). An error over an inaccurate payoff balance must be answered within 7 business days with no extension.
- Information request: 30 business days, extendable by 15. A request for the identity of the loan's owner or assignee must be answered within 10 business days with no extension (12 CFR 1024.36(d)(2)).
- Outcome: the servicer either corrects the error or conducts a reasonable investigation and explains in writing why it found no error (12 CFR 1024.35(e)(1)).
Force-placed insurance
A servicer may not charge for force-placed insurance without a reasonable basis to believe the borrower failed to maintain required hazard insurance (12 CFR 1024.37(b)). Before charging, it must send an initial notice at least 45 days ahead and a reminder notice at least 15 days ahead, and the reminder cannot go out until 30 days after the first notice (12 CFR 1024.37(c)-(d)). Charges must be bona fide and reasonable (12 CFR 1024.37(h)). If the borrower shows continuous coverage, the servicer must cancel the force-placed policy and refund overlapping premiums within 15 days (12 CFR 1024.37(g)).
Early intervention and loss mitigation
- Live contact: make good faith efforts to reach a delinquent borrower by the 36th day of delinquency (12 CFR 1024.39(a)).
- Written notice: by the 45th day of delinquency, generally no more than once in any 180-day period (12 CFR 1024.39(b)).
- Continuity of contact: personnel assigned to the borrower by the 45th day (12 CFR 1024.40(a)).
- Loss mitigation application: acknowledgment within 5 business days (12 CFR 1024.41(b)(2)); evaluation within 30 days of a complete application received more than 37 days before a foreclosure sale (12 CFR 1024.41(c)(1)).
- Foreclosure referral: the first foreclosure notice or filing generally cannot be made until the loan is more than 120 days delinquent (12 CFR 1024.41(f)(1)).
For exam purposes, focus on who must act, in what order, and the deadline attached to each step rather than memorizing dollar amounts.
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