Can excess mortgage payments be applied to escrow? If they are not applied to escrow, when do they have to be refunded to the borrower?

Excess mortgage payments? If the customer does not designate that the excess is to be placed in the escrow account, then the additional monies would be applied to the loan in the order of how your loan contract applies payments. Typically, any excess is applied to principal reduction. If the excess is to be applied to the escrow, any overages would be refunded at the next annual escrow analysis.

Does 12 CFR 1026.21 (Treatment of credit balances) apply if the contract does not state that excess should be applied to principal?

Credit balance? - you mean they overpaid their mortgage at pay-off and the principal balance is a negative amount? That is the only time that section of the regulation applies.

Yes, thank you.

Typically overpayments will be used to pay down principal, unless there is unpaid accrued interest that might get priority according to the Note. Assuming the overpayment was intentional (a prepayment) the consumer is probably expecting that it be applied to principal.