The U.S. Court of Appeals for the Fourth Circuit recently reversed the dismissal of a borrower's claims that the servicer of his mortgage loan violated the federal Real Estate Settlement Procedures Act, 12 U.S.C. § 2601, et seq. ("RESPA") by failing to timely make his tax payment from the loan's escrow account.
In so ruling, the Fourth Circuit rejected the servicer's argument that it was the responsibility of the loan's prior servicer who received the borrower's payment to escrow to make those payments on time, holding that RESPA requires taxes to be paid by the entity responsible for servicing the mortgage at the time the tax payment is due.
A copy of the opinion is available at: Link to Opinion
A homeowner ("Borrower") obtained a refinance home mortgage loan (the "Loan"). The Loan's mortgage ("Mortgage") required the Borrower to make his property tax payments to the lender ("Lender"), for placement in the Loan's escrow account, triggering requirements for the Lender — who at the time was also the Mortgage servicer — to timely pay the Borrower's property tax bill. See 12 U.S.C. § 2605(g); 12 C.F.R. § 1024.17(k)(1).
The Lender sold the Loan to a new entity who also took over servicing rights and responsibilities from the Lender (the "Mortgagee"), effective October 31, 2017 with the Borrower's first monthly installment due November 1, 2017.
Before the service transfer of the Loan, funds tendered by the Borrower for payment of property taxes due to his local municipality taxes were deposited into the Loan's escrow account, then overseen by the Lender.
However, the Mortgagee failed to timely pay the Borrower's November 2017 real estate taxes and did not disburse the tax payment until 2018, leading the municipality to assess $895 in late payment penalties (ultimately paid by the Mortgagee), and allegedly resulting in a loss of tax savings to the Borrower for his 2017 income taxes.
The Borrower filed a putative class action suit against the Mortgagee, on behalf of himself and all others similarly situated, alleging that its failure to timely pay his municipality taxes: (i) violated RESPA , (ii) breached the Mortgage, and; (iii) the Mortgagee was negligent.
The Mortgagee moved to dismiss the Borrower's complaint, arguing that it was not under the "servicer" responsible for the 11/15/17 tax payment under RESPA's statutory definition, and that the responsibility to timely pay taxes fell on the prior servicer -- here, the Lender.
The trial court agreed that the Lender was, indeed, the "servicer" under RESPA and granted the Mortgagee's motion to dismiss for failure to state a claim. The instant appeal followed, with the Borrower electing to only pursue his RESPA claims on appeal.
As you may recall, subsection 12 U.S.C. § 2605(g) of RESPA establishes the obligation for a servicer to make payments from the escrow account for taxes, while subsections 2605(i)(2) and 2605(i)(3) define the terms "servicer" and "servicing," respectively.
Specifically, subsection 2605(g) provides that "[i]f 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."
Here, this subsection applied to the Borrower's Loan because it is both a "federally related mortgage loan" and the "terms" of the loan "require the borrower to make [tax] payments.. into an escrow account," thus triggering the Mortgage servicer's responsibility to "make [tax] payments from the escrow account" as they "become due"—that is, the date at which payment is required. see Due, 4 Oxford English Dictionary 1105 (2d ed. 1989).
The Fourth Circuit read the relevant provision to mean that the obligation for the servicer to make payment is triggered by the "terms of . . . [the] loan" and the date at which a payment "becomes due," not the date that a payment is received for escrow, and does not contemplate when (or whether) a payment is received into escrow from a borrower.
The Court held that the natural reading of this subsection contemplates that whoever "the servicer" is when a payment becomes due shall make that payment. Accordingly, the Court was tasked with identifying who was "the servicer" under RESPA on November 15, 2017.
Applying RESPA's definition of a "servicer" — "the person responsible for servicing of a loan" (12 U.S.C. 2605(i)(2)) — to subsection (g), it followed that the person "responsible for servicing" the mortgage at the time a payment is due must make that payment. The term "servicing" itself is further defined in subsection (i)(3) as: "receiving 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."
The Mortgagee's arguments on appeal were unavailing.
First, the Mortgagee argued that because the definition of "servicing" includes "making the payments of principal and interest and such other payments with respect to the amounts received from the borrower," that the Lender was the "servicer" because it received the Borrower's escrow payment. The Fourth Circuit rejected this argument as confusing the definition of "servicing" with the statutory definition of "servicers," who are obligated to make timely payments from an escrow account connected to the terms of the loan and the date a payment is due — not when a payment is received from a borrower nor when a bill is received from the taxing authority. Accord Marks v. Quicken Loans, Inc., 561 F. Supp. 2d 1259, 1264 (S.D. Ala. 2008).
Moreover, the Mortgagee's underlying assumption that a middleman that receives payment should be responsible for forwarding that payment along to the ultimate recipient conflicts with statutory interpretation of a servicer's control of an escrow account and transferring of same pursuant to a servicing transfer (12 C.F.R. § 1024.17(b), (e), (i)(4)(ii)), and the relevant loan purchasing agreement between the Lender and Mortgagee (the "Purchase Agreement"), expressly included a transfer of "all right, title and interest," including "Related Escrow Accounts."
Second, the Mortgagee argued that the Purchase Agreement reaffirmed the Lender's designation as the "servicer" responsible for the November 2017 tax payment. Specifically, the Purchase Agreement provided that "[Lender] shall pay or cause to be paid, from the applicable Related Escrow Account, all real estate taxes on the Mortgaged Properties (and all interest, late payments and penalties in connection therewith) (x) for which either (i) a tax bill has been received, [or] (ii) a tax bill was issued on or prior to the Servicing Transfer Date . . . , and (y) that have due dates . . . prior to or within (30) days after the Servicing Transfer Date." Thus, the Mortgagee reasoned that the Lender "was obligated to ensure payment of taxes billed with due dates before or within thirty days of October 31, the effective date of the transfer."
This argument, too, was rejected by the Fourth Circuit, noting that a transferor's contractual responsibility to apply a tax payment before the transfer of servicing has no effect on the transferee's statutory obligation or what a previous servicer already should have done.
Here, because the Borrower's complaint properly alleged that the Mortgagee was "responsible for servicing the loan" on November 15, 2017 (when the tax payment became due), the Fourth Circuit determined that it plausibly alleged that the Mortgagee was obligated to make the payment as the supposed servicer.
The Fourth Circuit further noted that this allocation of responsibility is reinforced by the broader statutory structure of section 2605 which imposes servicing obligations with a focal point on the "effective date of transfer," or the "the date on which the mortgage payment . . . is first due to the transferee servicer of a mortgage loan pursuant to the assignment, sale, or transfer of the servicing of the mortgage loan" (12 U.S.C. § 2605(i)(1); 12 C.F.R. § 1024.2(b) (same)) and, further, was consistent with the terms of the Purchas Agreement between the Lender and Mortgagee, who acquired "all right, title and interest of [Lender] . . . as Servicer under the Servicing Agreements" and "the related Servicing obligations as specified in each Servicing Agreement" as of November 1, 2017.
Because the Borrower's complaint adequately alleged that the Mortgagee was responsible for servicing his mortgage when the November 15, 2017 tax payment was due, and its failure to do so violated RESPA, the trial court's dismissal for failure to state a cause of action was reversed.
Ralph T. Wutscher
Maurice Wutscher LLP
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