QUESTION
I am General Counsel to a large mortgage servicer. My
question has to do with the transfer of mortgage servicing.
Does RESPA require taxes to be paid by the entity
responsible for servicing the mortgage at the time the tax payment is due or
does RESPA demand that the entity that received funds for escrow make the tax
payment when it is ultimately due?
ANSWER
Your question has regulatory and litigation history. When
the terms of any federally related mortgage loan require the borrower to make
payments to an escrow account, the Real Estate Settlement Procedures Act
(RESPA) and its implementing Regulation X[i] require the servicer to
make disbursements in a timely manner, which the regulation defines as “on or
before the deadline to avoid a penalty.” This requirement does not apply when
the borrower’s payment is more than 30 calendar days overdue.
Regarding property taxes, if the taxing jurisdiction
neither offers a discount for disbursements on a lump sum basis nor imposes any
additional charge or fee for installment disbursements, the servicer must make
disbursements on an installment basis,
unless the servicer and borrower otherwise agree. If the taxing jurisdiction
offers a discount for disbursements on a lump sum annual basis or imposes any
additional charge or fee for installment disbursements, the servicer may, at
its discretion (but is not required by RESPA to) make lump sum annual
disbursements as long as that method of disbursement complies with the
timeliness requirements of Regulation X.[ii] RESPA encourages,[iii] but does not require,
the servicer to follow the preference of the borrower, if the servicer knows
that preference.
Having set forth some basic information, let’s turn
now to your question, which involves the transfer of servicing: (1) whether RESPA requires taxes to be paid by the entity responsible for servicing the mortgage at the time the tax payment is
due, or (2) whether RESPA demands that the entity that received funds
for escrow make the tax payment when it is ultimately due.
To begin, I refer you to a recent decision by the U.S.
Court of Appeals for the 4th Circuit considered the meaning of the term
“servicer” insofar it relates to the timely payment of taxes. The case is Harrell
v. Freedom Mortgage Corp.[iv]
Let’s look at the case
through a timeframe outline.
·In 2005, Harrell bought a home and financed its purchase with a
loan from NYCB Mortgage Company.
·In 2012, Harrell refinanced with NYCB because interest rates had
dropped significantly. His mortgage contract required him to make property tax
payments to NYCB for deposit into an escrow account. This triggered a
corresponding obligation under RESPA for NYCB to pay his property tax bills on time.
The mortgage permitted NYCB to sell the mortgage loan
and transfer the servicing rights.
·In 2017, NYCB sold Harrell’s loan, as part of a much larger
transaction, to Freedom Mortgage Corp. Freedom took over all servicing rights
and responsibilities, effective October 31, 2017.
·Starting November 1, 2017, Harrell became obligated to pay his
mortgage payments to Freedom.
·NYCB made Harrell’s June 2017 tax payment by its due date, but the
November 2017 payment was late.
·Before October 31, 2017, Harrell had deposited the funds in the
escrow account overseen by NYCB. Ownership of the loan and the servicing rights
transferred from NYCB to Freedom on October 31, 2017.
·The November 15, 2017 due date for property taxes came and went,
while Harrell’s funds remained in escrow.
·In 2018, Freedom finally made the tax payment from Harrell’s
escrow account, but the tax jurisdiction assessed late payment penalties, and
the tardy payment adversely affected Harrell’s 2017 income tax bill in the
amount of $895.
Harrell filed a putative class action against Freedom,
alleging that Freedom’s failure to make a timely tax payment violated RESPA,
breached his mortgage contract, and was negligent. Freedom responded by
disclaiming responsibility, arguing that it was not the “servicer” responsible
for the November 15 tax payment and that NYCB was. The district court agreed
with Freedom and granted Freedom’s motion to dismiss.
But the 4th Circuit reversed.
By requiring “the servicer” to make tax payments “as
[they] become due,” RESPA connects the servicer’s obligation to a payment’s due
date, not the date of payment into escrow by the borrower. Thus, the relevant “servicer” under RESPA is
the entity “responsible for servicing” the mortgage loan when the tax payment
is due. Harrell sufficiently alleged that Freedom bore the
responsibility for servicing his mortgage on the tax’s due date, therefore,
under RESPA,
Freedom was “the servicer” accountable for making the tax payment on time.
The court noted that its role was not to ask how NYCB
and Freedom had agreed by contract to allocate servicing responsibilities
between themselves. Instead, its inquiry focused on what the statute requires.
In the first place, the statute establishes the
obligation for a servicer to make payments from the escrow account for taxes:
“If
the terms of any federally related mortgage loan require the borrower to make
payments to the servicer of the loan for deposit into an escrow account for the
purpose of assuring payment of taxes, insurance premiums, and other charges
with respect to the property, the servicer shall make payments from the escrow
account for such taxes, insurance premiums, and other charges in a timely
manner as such payments become due.”
The court noted that two factors triggered the
servicer’s obligation to make payments:
(1)
Harrell’s loan qualified as a “federally related mortgage loan,” which
encompasses virtually every residential real estate transaction closing in the
United States; and,
(2)
the terms of Harrell’s loan required Harrell to make tax payments into an
escrow account. Accordingly, Harrell’s servicer had to make tax payments from
the escrow account as they became due, or Harrell could seek actual damages,
statutory damages, costs, and attorneys’ fees.
Secondly, RESPA defines the term “servicer” to mean
“the person responsible for servicing of a loan.” The court combined that
definition with the way RESPA[v]
uses the word “servicer.” RESPA connects “the servicer’s” responsibility to
effect payment to the date that payment “becomes due,” to wit, the date by
which payment is required. It does not mention when or whether a payment is
received into escrow from a borrower. This contemplates that whoever is “the
servicer” when payment becomes due must make that payment.
And
third, RESPA
also defines the term “servicing” as used in the phrase “the person responsible
for servicing of a loan.” Thus:
“[R]eceiving
any scheduled periodic payments from a borrower pursuant to the terms of any
loan, including amounts for escrow accounts…, and making the payments of
principal and interest and such other payments with respect to the amounts
received from the borrower as may be required pursuant to the terms of the
loan.”
Harrell’s complaint plausibly alleged that
Freedom was responsible for servicing his mortgage loan on November 15, 2017,
the tax payment due date, by saying that “NYCB transferred [his] mortgage…,
including the servicing of [his] loan, to Freedom” before November 15, 2017.
The NYCB-Freedom purchase agreement confirmed that, as of November 1, 2017,
Freedom acquired “all right, title and interest of [NYCB]…as Servicer under the
Servicing Agreements” and “the related Servicing obligations as specified in
each Servicing Agreement.” Accordingly, Freedom agreed to “assume, pay, perform
and discharge the obligation to service the Serviced Loans…on and after” that
date.
Because Harrell’s mortgage payments became due to
Freedom on November 1, 2017, that was the “effective date of transfer” of his
loan under RESPA.
RESPA contemplates that before this date, NYCB was the servicer. From this
date forward, Freedom became the servicer. Period.
The court concluded that RESPA places the obligation to pay
taxes with the entity responsible for servicing a loan when that tax payment is
due. In this case, that entity was Freedom Mortgage.
So, what lesson can we extract from the above-described
case?
Freedom argued that because servicing includes “making
the payments of principal and interest and such other payments with respect to the amounts received from
the borrower,” and NYCB had received Harrell’s escrow payment, that made
NYCB the servicer. ‘Not so fast,’ said the court! The court determined that this
confused the statutory duties of “servicers” with the definition of
“servicing.” Instead, RESPA obligates “the servicer” to make timely payments
from an escrow account.
The court noted that an intuitive assumption seemed to
underlie Freedom’s argument – the view that a middleman who receives a payment
should be responsible for forwarding that payment along to the ultimate
recipient. While that assumption might hold in normal transactions, it ignored
the use of escrow accounts under RESPA.
Borrowers like Harrell do not make payments simply to a servicer;
rather, they make payments to a servicer for deposit into an escrow account.
The servicer controls the account in trust; the account is not the servicer’s
account.
Transferring servicing involves transferring control over the
escrow account. Accordingly, the court saw no interpretive problem with a
transferor servicer depositing a borrower’s payment into escrow, and the
transferee servicer being obligated to disburse those funds.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Director Lenders Compliance Group
____________________________
[i] RESPA §§ 1024.17(k)1) and 1024.34(a)
[ii] RESPA § 1024.17(k)(1) and (k)(2)
[iii] Idem. Paragraph (k)(3)
[iv] Harrell v. Freedom Mortgage Corp., 2020 U.S. App., 4th Cir. October 2, 2020
[v] RESPA § 6(g), 12 U.S.C. § 2605(g)
