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2.18.5 Escrow Overcharges

One of the most common problems found in reviewing mortgage claims in bankruptcy is abuse in the collection of escrow arrears. Often this occurs because servicers use the total amount of escrow arrears when performing their annual reevaluation of the borrower’s escrow account. This annual review is then used as the basis for calculating the borrower’s new escrow payment going forward. However, in most cases prepetition escrow arrears have already been included in the bankruptcy proof of claim and are being paid through a chapter 13 plan. Because those arrears are being paid under the plan, this practice can lead to double or sometimes triple payments.365

Mortgage servicers are required under the Real Estate Settlement Procedures Act to reevaluate each borrower’s escrow account on an annual basis.366 The Act permits the servicer to conduct such an analysis before the end of debtor’s normal escrow account year.367 The Federal Rules of Bankruptcy Procedure, effective December 1, 2011, require mortgage creditors to perform an escrow account analysis as of the date of the petition and to attach the resulting escrow account statement to the proof of claim.368

To give effect to the cure plan, the servicer must conduct an escrow account analysis as of the petition date and must assume that no prepetition default exists on the account. Any deficiency for funds advanced and any projected shortage based on the escrow analysis should be included as part of the mortgage holder’s arrearage claim to be paid under the plan, and cannot be collected through postpetition maintenance payments.369 Thus, prepetition escrow account shortages and deficiencies, often representing amounts advanced by the servicer for taxes, insurance, and other escrow items when there were insufficient funds in the debtor’s escrow account, are largely paid as part of the mortgage holder’s arrearage claim during the longer cure period under the plan, rather than recovered in the shorter one-year period following the case filing as part of debtor’s escrow portion of the postpetition maintenance payments. If done correctly, in most cases this will produce a lower monthly escrow payment to be included as part of the debtor’s total postpetition maintenance payments.

Another variation on the theme entails the servicer paying off prepetition debts, such as real estate taxes, after the bankruptcy filing and then significantly increasing the debtor’s postpetition payments. Servicers have asserted that they are contractually entitled to make such advances and to adjust the debtor’s payment upward. However, courts have held that paying off such prepetition debts merely allows the mortgage holder to stand in the shoes of the third-party creditor and be paid through the chapter 13 plan.370

Escrow overcharges may also arise when the servicer includes foreclosure fees in the borrower’s escrow account balance.371 At the same time, the fees may also be broken out as a separate element of the claim. Again, this practice results in the double-counting of these fees.

Proofs of claims should be reviewed for these problems. When the line items on the mortgage proof-of-claim attachment form for escrow deficiency and shortage appear to be out of line (for example, if an item is more than the amount of the monthly payment for taxes and insurance multiplied by the number of months the debtor is in arrears), then more information should be obtained through a qualified written request or discovery, if necessary. Servicers’ obligation to respond to qualified written requests under the RESPA timeframe should apply in all bankruptcy cases.372

Escrow problems may also occur during a chapter 13 case because the amount due for taxes and insurance often increases over the three-to-five year plan. Bankruptcy Rule 3002.1(b) requires mortgage creditors to file and serve “a notice of any change in the payment amount, including any change that results from an interest rate or escrow account adjustment.”373 Notice of payment changes should be scrutinized to ensure that servicers are properly calculating the escrow amounts due. One court found a servicer’s escrow analysis and payment change notice to be “utterly incomprehensible.”374

Footnotes

  • 365 {356} See In re Breit, 490 B.R. 821 (Bankr. N.D. Ind. 2013) (disallowing more than $3000 of mortgage creditor’s claim based on improper escrow calculation); In re Newcomer, 438 B.R. 527 (Bankr. D. Md. 2010) (by improperly collecting prepetition escrow deficiency from postpetition payments, servicer collected same amount twice); In re Pitts, 354 B.R. 58 (Bankr. E.D. Pa. 2006) (incongruity of proof of claim that seemed to claim taxes as a separate item as well as escrow deficiency satisfied debtor’s burden of challenging validity of claim, and mortgage company failed to meet burden of presenting evidence justifying taxes claimed); In re Wines, 239 B.R. 703, 708 n.5 (Bankr. D.N.J. 1999). But see In re Ogden, 532 B.R. 329 (Bankr. D. Colo. 2014) (award of damages not appropriate given bankruptcy court’s limited role in supervising mortgage lender’s accounting of payments during plan).

  • 366 {357} See 12 U.S.C. § 2609(c); § 3.5.2, infra. See also In re Laskowski, 384 B.R. 518 (Bankr. N.D. Ind. 2008) (bankruptcy exemption in Regulation X relating to escrow statement does not relieve servicer of duty to conduct annual escrow analysis).

  • 367 {358} RESPA’s implementing regulation, Regulation X, provides that in certain situations the servicer need not wait until the end of the twelve-month escrow computation year to perform an escrow analysis. If the analysis is done before the end of the twelve-month computation year, the servicer is required to send the borrower a “short year statement” that will change one escrow account computation year to another and establish the beginning date of the new computation year. See Reg. X, 12 C.F.R. § 1024.17(i)(4); § 3.5.3.2.2, infra (discussing short-year escrow statements).

  • 368 {359} Fed. R. Bankr. P. 3001(c)(2)(C); National Consumer Law Center, Home Foreclosures § 9.4.6.1 (2019), updated at www.nclc.org.

  • 369 {360} In re Rodriguez, 629 F.3d 136 (3d Cir. 2010); Campbell v. Countrywide Home Loans, Inc., 545 F.3d 348 (5th Cir. 2008); In re Harris, 2012 WL 1410264 (Bankr. C.D. Ill. Apr. 23, 2012) (requiring servicer to back out prepetition tax advance from current mortgage payment and treat the advance through the plan); In re Beaudet, 455 B.R. 671 (Bankr. M.D. Tenn. 2011).

  • 370 {361} Campbell v. Countrywide Home Loans, Inc., 361 B.R. 831 (Bankr. S.D. Tex. 2007), aff’d in part, rev’d in part, 545 F.3d 348 (5th Cir. 2008) (borrower’s missed prepetition escrow payments must be included in proof of claim and collected through proof-of-claim process, even though servicer paid the underlying tax bills postpetition; however, the act of listing the shortfall in proof of claim did not violate automatic stay).

  • 371 {362} Fees paid to third-party vendors who provide foreclosure services are often referred to as “corporate advances.” Although these advances are not typically treated as an escrow item, servicers occasionally disburse funds from the borrower’s escrow account to pay for these foreclosure expenses.

  • 372 {363} See § 3.11.3.1, infra. See also In re Moffitt, 390 B.R. 368 (Bankr. E.D. Ark. 2008); In re Payne, 387 B.R. 614 (Bankr. D. Kan. 2008); In re Laskowski, 384 B.R. 518 (Bankr. N.D. Ind. 2008); In re Thompson, 350 B.R. 842 (Bankr. E.D. Wis. 2006).

  • 373 {364} Fed. R. Bankr. P. 3002.1(b). See National Consumer Law Center, Home Foreclosures § 9.4.6.4 (2019), updated at www.nclc.org.

  • 374 {365} In re Grove, 2016 WL 825392 (Bankr. E.D. Mich. Mar. 2, 2016) (but noting that sloppy and incomprehensible pleadings do not constitute bad faith sufficient to warrant the award of attorney fees to debtor).