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2.6 Escrow Account Issues

Escrow accounts are generally required by lenders in order to ensure the payment of taxes, insurance, or other charges. These accounts are most commonly established and initially funded at the time of the loan settlement. After settlement, a portion of the borrower’s mortgage payment is typically allocated to the escrow account. While escrow accounts are common in conventional mortgage loans, historically74 they were found less often in loans made by subprime lenders.75

Even in the absence of abusive servicing, the existence of an escrow account creates a complex set of issues and potential pitfalls for homeowners. The most common problems relate to the changing amount of the monthly payment and the timely and accurate disbursement of funds to taxing authorities and insurance providers.76 In addition, the presence of an escrow account complicates the accounting process—leading to questions about whether particular payments should have been applied to the interest and principal of the loan or to the escrow account. Escrow account issues may also be implicated when the borrower suffers a covered loss under an insurance policy.77

The Real Estate Settlement Procedures Act (RESPA) closely governs the amounts borrowers are required to pay into an escrow account, the disbursement of payments from the escrow account, and the proper method for addressing surpluses, shortages, and deficiencies in escrow accounts. These issues are more fully described in § 3.5, infra. State laws may augment the requirements of RESPA.78 The mortgage instruments should also be carefully scrutinized to determine any additional obligations of the servicer or prohibitions related to the establishment and maintenance of the borrower’s escrow account. For example, if there has been an initial waiver of the escrow requirement, the uniform instrument states that the lender or servicer may revoke the waiver upon notice to the borrower.79 Loan modification documents may impose an escrow account requirement even when such an account requirement was waived initially at origination.80 In bankruptcy cases, mortgage creditors are subject to special rules related to payment changes, which often result from escrow account analyses.81

In addition, when the servicer has stated that there is a negative escrow balance, but refuses to provide an accounting and is unable to explain how it determined the balance due, that may be sufficient grounds for challenging the servicer either affirmatively or defensively.82

There have been numerous instances in which servicers have failed to make timely disbursements from borrowers’ escrow accounts for real estate taxes, insurance, or other charges.83 In the most devastating cases, homeowners have lost their homes to tax foreclosure after the servicer failed to make real estate tax payments,84 while other homeowners have been left to deal with uninsured property damage after the servicer failed to pay insurance premiums.85 More commonly, the penalties assessed by the taxing authorities or reinstatement fees imposed by insurance companies as a result of late payments are simply passed on to the borrower.86 While such fees or penalties may be relatively small, they can nevertheless lead to escrow account shortages or deficiencies, which in turn may cause the borrowers’ mortgage payments to increase.

Failure of the servicer to make timely payments may give rise to claims such as breach of fiduciary duty or breach of contract and may violate state deceptive practices (UDAP) laws.87 State statutory protections may provide an additional remedy.88 RESPA also creates an express right of action for a servicer’s failure to make payment from an escrow account for taxes, insurance, and other charges “in a timely manner as such payments become due.”89

Footnotes

  • 74 {72} As of April 2010, escrow accounts are required for the payment of property taxes and mortgage-related insurance premiums for certain higher-priced mortgage loans. For a detailed discussion of these requirements, see National Consumer Law Center, Truth in Lending § 9.5.4.5 (10th ed. 2019), updated at www.nclc.org/library.

  • 75 {73} One of the hallmarks of a predatory mortgage loan was the refinancing of a low interest rate mortgage with an escrow account into a higher rate mortgage without an escrow account. The homeowner was led to believe that the payments on the new mortgage were lower than on the previous mortgage, only to find out months later that the “reduced” payment did not include any amounts for taxes or insurance premiums. The homeowner then was in the difficult position of either having to find sufficient funds to pay the property tax or insurance bill or face default and higher monthly payments when the servicer advanced funds to cover the taxes or force-placed insurance on the property.

  • 76 {74} See also McGinnis v. Am. Home Mortg. Servicing, 817 F.3d 1241 (11th Cir. 2016) (upholding jury verdict when borrower alleged servicer had improperly increased her escrow payment); Sarsfield v. Citimortgage, Inc., 667 F. Supp. 2d 461 (M.D. Pa. 2009) (denying motion to dismiss negligence claim based on a failure to provide a reasonable estimate of the escrow expenses).

  • 77 {75} See § 2.8, infra.

  • 78 {76} See § 3.13, infra (discussing state laws and RESPA preemption); Appx. D, infra (summary of state laws).

  • 79 {77} “Lender may revoke the waiver as to any or all Escrow Items at any time by a notice given in accordance with Section 15 and, upon such revocation, Borrower shall pay to Lender all Funds, and in such amounts, that are then required under this Section 3.” Single Family—Fannie Mae/Freddie Mac Single-Family Uniform Instruments at ¶3, available at https://singlefamily.fanniemae.com. See, e.g., Neel v. Fannie Mae, 2014 WL 1050125 (S.D. Miss. Mar. 17, 2014) (denying summary judgment motion when fact issue remained as to whether annual escrow account disclosure statement satisfied notice requirement); Anolik v. EMC Mortg. Corp., 28 Cal. Rptr. 3d 759 (Cal. Ct. App. 2005) (lender not authorized under the note or deed of trust to unilaterally create an account when one had not existed before the borrower failed to pay property taxes). See also Blackston v. Seterus, Inc. (In re Blackston), 557 B.R. 858 (Bankr. D. Md. 2016) (plain language of standard borrower assistance form requesting loan modification revoked escrow waiver).

  • 80 {78} See, e.g., Handbook for Servicers of Non-GSE Mortgages § 9.3.7 v. 5.1 (May 26, 2016) (requiring all HAMP loan modifications to have escrow accounts). See also Blackston v. Seterus, Inc. (In re Blackston), 557 B.R. 858 (Bankr. D. Md. 2016) (unambiguous language of modification agreement completed and submitted by borrower revoked the escrow waiver).

  • 81 {79} See National Consumer Law Center, Home Foreclosures § 9.4.6.4 (2019), updated at www.nclc.org/library.

  • 82 {80} See McGinnis v. Am. Home Mortg. Servicing, Inc., 2014 WL 2949216 (M.D. Ga. June 30, 2014) (affirming jury award of $6000 in compensatory damages and $500,000 in emotional distress damages, but reducing punitive damages from $3 million to $250,000, when jury found an unreasonable increase in escrow amounts followed by foreclosure), aff’d, 2015 WL 3429085 (11th Cir. May 29, 2015); In re Price, 403 B.R. 775 (Bankr. E.D. Ark. 2009) (alleging that servicer diverted payments to unauthorized escrow account and failed to send notice of rate adjustment); In re Sanders, 2007 WL 188676 (Bankr. D. Mass. Jan. 23, 2007) (shifting amount of claimed negative escrow account balance contributed to finding that lender’s accounting was unpersuasive). See also Fraley v. BAC Home Loans Servicing, L.P., 2012 WL 779130 (N.D. Tex. Jan. 10, 2012) (mag.; denying motion to dismiss breach-of-contract claim when borrower alleged that double tax payment led servicer to improperly claim loan was in default and to foreclose), adopted by 2012 WL 779654 (N.D. Tex. Mar. 9, 2012).

  • 83 {81} See § 3.5.6, infra.

  • 84 {82} See, e.g., Mortg. Elec. Registration Sys., Inc. v. Alicea, 2006 WL 1149236 (M.D. Pa. Apr. 26, 2006); Choi v. Chase Manhattan Mortg. Co., 63 F. Supp. 2d 874 (N.D. Ill. 1999).

  • 85 {83} See, e.g., Veloz v. Green Tree Servicing, L.L.C., 2014 WL 2215866 (D. Ariz. May 29, 2014) (denying summary judgment to servicer on RESPA claim when borrower alleged servicer failed to timely pay hazard insurance premium); Rentrop v. Nationwide Mut. Fire Ins. Co., 2008 WL 2465288 (S.D. Miss. June 12, 2008) (failure to pay flood insurance premium from escrow account); First Fed. Sav. & Loan Ass’n of Bowling Green v. Savage, 435 S.W.2d 67 (Ky. 1968); Johnson v. Bank of Am., 2014 WL 5490935 (Tex. App. Oct. 30, 2014) (borrower sufficiently pleaded breach-of-contract claim when servicer failed to timely pay wind insurance premium and home was damaged in hurricane); Monahan v. GMAC Mortg. Corp., 893 A.2d 298 (Vt. 2005) (affirming $43,380 jury award for consequential and compensatory damages for servicer’s conduct in failing to renew flood insurance policy and subsequent uninsured property damage). See also Whitfield v. Countrywide Home Loans, Inc., 252 Fed. Appx. 654 (5th Cir. 2007) (servicer not liable for failing to pay insurance premium after renewal notice sent only to borrower, borrower did not forward notice, policy lapsed, and home destroyed in hurricane); Marks v. Quicken Loans, Inc., 561 F. Supp. 2d 1259 (S.D. Ala. 2008) (alleging servicers failed to make timely payment of hazard insurance premium; holding prior servicer not liable under RESPA because premium not yet due at time of servicing transfer); Randy R. Koenders, Duty of Mortgagee of Real Property with Respect to Obtaining or Maintenance of Fire or Other Casualty Insurance Protecting Mortgagor, 42 A.L.R.4th 188 (1985 and Supp.).

  • 86 {84} See, e.g., Settlement Agreement by and Between the United States Department of Housing and Urban Development and Mellon Mortgage Company (Sept. 30, 1999), available at www.hud.gov (describing HUD’s investigation into Mellon’s handling of borrower escrow accounts).

  • 87 {85} See Hollenshead v. New Penn Fin., L.L.C., 447 F. Supp. 3d 283 (E.D. Pa. 2020) (borrower stated UDAP and breach of contract claims based on servicer’s failure to capitalize tax payments advanced on escrow account as agreed in loan modification then wrongly attempted to foreclose for nonpayment). But see Parks v. Wells Fargo Home Mortg., 398 F.3d 937 (7th Cir. 2005) (homeowner did not have claim for emotional distress or punitive damages under Illinois state law for servicer’s failure to pay county real estate taxes); Margulies v. Chase Manhattan Mortg., 2005 WL 2923580 (N.J. Super. Ct. App. Div. Nov. 7, 2005) (no fiduciary duty exists between servicer and homeowner based upon escrow or suspense accounts, even if improper disbursements made).

  • 88 {86} See, e.g., Ky. Rev. Stat. Ann. § 367.320 (West) (requiring timely payments from escrow accounts on high-cost loans even if account is in default, unless account funds are insufficient); Me. Stat. tit. 9-A, §§ 9-305-A, 9-405 (mandating timely payments from escrow accounts and making creditor, assignee, or servicer liable for actual damages for violation); Minn. Stat. § 47.205, subd. 3 (same); N.Y. Banking Law § 6-k (McKinney); N.Y. Real Prop. Tax Law § 953 (McKinney); N.C. Gen. Stat. § 45-92; Vt. Stat. Ann. tit. 8, § 10404(d).

  • 89 {87} 12 U.S.C. § 2605(g). See § 3.5.6, infra.