Paying Off Outstanding Creditors In A Mortgage Refinancing Transaction - Q1 2000

By the Division of Banks

The issue raised is whether a lender is required to use an escrow account when making disbursements from loan proceeds as shown on a HUD-1 settlement statement or whether the lender may simply issue these payoff checks out of its own operating accounts is governed by 209 CMR 42.11.

209 CMR 42.11 establishes the requirement that a mortgage lender or mortgage broker must place any funds collected from a mortgage applicant at the time of application in a separate or escrow account until the mortgage loan has closed, the application has been withdrawn in writing, or the loan has been denied. The funds cannot be taken into the general operating funds of the mortgage lender or broker. 209 CMR 42.11 does not in any way regulate how the actual proceeds of the mortgage loan are disbursed at closing.

The proper method of disbursement of proceeds of a mortgage loan is set forth in Massachusetts General Laws chapter 183, section 63B, the "good funds" law. It is the position of the Division that the language of section 63B prohibits a mortgage lender from making disbursements directly from the loan proceeds. The law requires the loan proceeds to be in the possession of a third party, not the lender, at the time of recording the mortgage. In practice, the funds most often are delivered to the mortgagee's attorney for disbursement after recording the mortgage at the registry of deeds. The lender, in any event, shall not retain possession of loan proceeds in order to pay off existing liens.

The Division considers an escrow account, as used in 209 CMR 42.00 to mean an account that a mortgage lender or mortgage broker uses to hold funds collected from a borrower which remain the property of the borrower until disbursed according to the terms of a written agreement. These funds are not the property of the lender and should be placed in an account separate from the lender's or broker's operating account.