Banking and Finance Law Daily Fourth Circuit reverses decision over the responsibility of a mortgage servicer to make tax escrow payments
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Monday, October 5, 2020

Fourth Circuit reverses decision over the responsibility of a mortgage servicer to make tax escrow payments

By Donielle Tigay Stutland, J.D.

The fourth circuit reversed a lower court decision in a potential class action lawsuit regarding tax escrow payments by a new mortgage servicer, finding that under RESPA, the servicer who handles the mortgage when the tax bill comes due is the one responsible for the payment—not the servicer who initially received the borrower’s escrow payment.

The Fourth Circuit Court of Appeals reversed a lower court decision regarding tax payments in escrow by a mortgage servicer that had purchased a mortgage from another servicer. In 2018, a Virginia district court held that Freedom Mortgage Corporation (Freedom) was not responsible for making a tax payment when the escrow funds were paid to the company that had previously serviced the mortgage prior to the effective date of the transfer of the mortgage. On appeal, the fourth circuit disagreed with the lower court’s analysis and found that under the Real Estate Settlement Procedures Act (RESPA), when a mortgage changes hands, the servicer who handles the mortgage when the tax bill comes due is the one responsible for the payment—not the servicer who initially received the borrower’s escrow payment. (Harrell v. Freedom Mortgage Corporation, Oct. 2, 2020, Richardson, J.)

Background. The case involves a residential mortgage in Virginia. The plaintiff, Rodney Harrell, purchased a home in 2005 with a mortgage from NYCB Mortgage Company (NYCB). In September 2012, the plaintiff refinanced his loan with NYCB. In June 2017, NYCB sold the mortgage, as part of a larger transaction, to defendant Freedom. Freedom took over all servicing rights and responsibilities from NYCB as of Oct. 31, 2017. On Nov. 1, 2017, Harrell became obligated to send his mortgage payments to Freedom. Harrell had been paying his property taxes into escrow to be paid by his mortgage servicer. Before the transaction that transferred the servicing rights to Freedom, which became effective as of Oct. 31, 2017, the plaintiff had paid an amount sufficient to cover the Nov. 15, 2017, tax bill to NYCB. However, Freedom did not make any tax payment until 2018. As a result of no payment being made when taxes were due on Nov. 15, 2017, the plaintiff was assessed a late payment, and he had an increase in tax fees for the subsequent year because of the late payment.

The putative class action weas brought against Freedom, alleging that the company’s failure to timely make tax payments from the escrow account was a violation of RESPA, a breach of the mortgage contract, and negligence. Freedom argued that it was not the servicer responsible for making the tax payment, NYCB was, as the plaintiff had paid the funds in escrow to NYCB. The district court agreed with Freedom. The plaintiff appealed the RESPA claim, and the Fourth Circuit agreed to the appeal, noting that the case is hinges on a single question of statutory interpretation who is the servicer responsible for the tax payment under RESPA?

Discussion. The appellate court focused its analysis on the plain meaning of RESPA. The court noted that by RESPA 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." So the relevant "servicer" is the entity "responsible for servicing" the mortgage when the tax payment is due, not when the payment was put into the escrow account. The decision states that "the plaintiff has sufficiently alleged that the defendant bore the responsibility for servicing his mortgage on the tax’s due date. So under RESPA, the defendant would be ‘the servicer’ accountable for effecting that tax payment on time."

Freedom had disagreed with this analysis and argued that because the definition of "servicing" under RESPA includes, "making the payments of principal and interest and such other payments with respect to the amounts received from the borrower," and NYCB "received" Harrell’s escrow payment, "[t]hat makes NYCB the servicer." The court disagreed and noted that the statutory duties of servicers control, and that Freedom’s argument confuses the duties of "servicers" with the definition of "servicing." Freedom also argued that under the terms of the Purchase Agreement between NYCB and Freedom, NYCB was obligated to pay the taxes billed prior to the transfer of the loan. The court found this argument to not hold any relevance, as the transferee still has a statutory obligation to pay the taxes from the escrow account, "on the date a tax payment is due," under RESPA.

CFPB Amicus Brief. The Consumer Financial Protection Bureau, the agency tasked with RESPA compliance and enforcement following the enactment of the Dodd-Frank Act, filed an amicus brief in connection with the appeal. The CFPB argued that the district court erred in its analysis and its conclusion was inconsistent with RESPA. CFPB argued that under RESPA, a servicer’s obligation to make timely payments from an escrow account, "does not depend on when the consumer paid funds into the account."

Further, CFPB’s amicus brief posits that under the district court’s interpretation of RESPA and Reg X, "a company could not transfer all rights to service a loan, along with any escrowed funds, without remaining potentially liable as a servicer for however long it took for all escrowed funds to be paid out."

The CFPB argued that an entity becomes a servicer under RESPA when it becomes "responsible for the servicing of a loan." In the instant case, Freedom became the servicer of the loan on Nov. 1, 2017, the date Freedom acquired all rights to service the loan from NYCB.

Further, the CFPB brief points to the responsibilities of the new servicer, as specified in Reg. X. Reg. X provides that when a mortgage loan is transferred, "the new servicer shall treat shortages, surpluses and deficiencies in the transferred escrow account according to the procedures [that generally apply to escrow accounts]." The CFPB believes that this provision is in direct contradiction to the district court’s decision, and it contemplates that the new servicer will be responsible for the escrow account as of the date it acquires the loan.

Attorneys: Rodney W. Harrell (Beins Axelrod, P.C.) for Rodney W. Harrell. Travis Aaron Sabalewski (Holland & Knight, LLP) and Kim M. Watterson (Reed Smith, LLP) for Freedom Mortgage Corp.

Companies: Freedom Mortgage Corporation; NYCB Mortgage Company

MainStory: TopStory MarylandNews Mortgages NorthCarolinaNews RESPA SouthCarolinaNews VirginiaNews WestVirginiaNews

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