Escrow Account for Back Taxes?

Issue/Question

The Bank wants to force place an escrow account and use it to pay delinquent real estate taxes. It asks what notice should be sent.

Response Summary

When real estate taxes are delinquent, the bank may be forced to pay them in order to protect its collateral position. In such case, either the existing loan documents or a modification of those documents will allow the bank to add the amount of the taxes to the loan balance and re-amortize the schedule of payments over the remaining term of the loan. The establishment of an escrow account may also be required, though this would ordinarily be used for the payment of real estate taxes, going forward. The bank would be required to perform an escrow account analysis to determine the amount to be charged to the borrower, and to provide an initial escrow account statement within 45 calendar days of the establishment of the escrow account. While such an account might also be used to address the delinquent taxes, the limitations on the amount the bank can charge the borrower would make it less suitable for this purpose than other options.

Response Detail

The provisions for a mortgage loan made by a bank will almost always require real estate taxes to be paid in a timely manner, so that a failure to do so will be an event of default. The loan documents may also provide options for the bank to take when such a default occurs, including the establishment of an escrow account. While such an account would not be “force placed,” in the sense of being established whether or not the borrower consents, as a practical matter, the bank would be able to require the borrower to accept it.

When real estate taxes have not been paid, the bank will be required to do so in order to protect its collateral interest in the property against the superior priority of a tax lien, which could potentially extinguish its position.

If the bank has paid the taxes and decided not to demand payment in full of the loan, it will have three options:

 

• Require the back taxes to be paid by the borrower
• Add the back taxes to the principal balance of the loan but leave the schedule of payments the same, so that there will be a balloon payment when the loan matures
• Add the back taxes to the principal balance of the loan but re-amortize the balance over the remaining term of the loan

These options may found in the terms and conditions of the loan, or they may be added to the loan through a modification of the loan terms. In the latter case, the consideration for the modification would be the bank’s forbearance from requiring the loan to be paid in full for the default.

The existing loan documents may provide for an escrow account to be established for the payment of real estate taxes. It may also be established on the basis of a modification of the existing loan terms. Ordinarily, this would be for the payment of real estate taxes, going forward.

In order to establish an escrow account, the Real Estate Settlement and Procedures Act (“RESPA”), as implemented by Regulation X, requires the bank to perform an escrow account analysis to determine the amount of real estate taxes the bank reasonably anticipates paying during the 12-month period of what is called the “escrow account computation year.” The bank may charge the borrower a monthly sum equal to one-twelfth of the total annual escrow payments. In addition, the bank may add an amount to maintain a cushion of no more than one-sixth of the estimated total annual payments from the account [12 CFR §§1024.17(b), (c)(1)(ii)].

For escrow accounts established after settlement, as in the case here, the initial escrow account must be submitted to the borrower within 45 calendar days of the date of the establishment of the escrow account. It will include the amount of the borrower’s monthly mortgage payment and the portion of the monthly payment going into the escrow account, with the real estate taxes itemized for the escrow account computational year as well as the cushion, if any, and with a running trial balance for the year [12 CFR §1024.17(g)].

A question is whether the escrow account might also be used to pay the back real estate taxes. While some unofficial sources say that this is not permitted, RESPA itself indicates that it could be used in this fashion, but its limitations on payments to such accounts would make it less suitable for this purpose than the options already discussed.

At the time the bank creates the escrow account, it could charge the borrower an amount sufficient to pay the charges respecting the mortgaged property, including taxes attributable to the period from the date such payments were last made until the initial payment date. Presumably, this could cover the delinquent taxes in question. The problem for dealing with real estate taxes which are delinquent for any significant period of time is that the bank is allowed to charge the borrower only for one-twelfth of the total annual escrow payments. This means that the charges for the year would include not only the taxes, going forward, but also the back taxes. However, the payment required of the borrower would be one-twelfth of that amount [12 CFR §1024.17(c)(i), (ii)]. If the bank wished to spread the amount of the delinquent real estate taxes over a longer period of time, the addition of the amount of the taxes to the loan balance and the re-amortization of the loan balance over the remaining term of the loan would be preferable.

This entry was posted on Friday, March 6th, 2015 at 1:30 pm.