In Florida, banks are governed by federal regulation as well as state law. This means that any Florida homeowner involved in a controversy with their mortgage lender needs to understand their rights and protections provided both by Washington, D.C. and Tallahassee.
One issue that is often a source of friction between a homeowner and his or her mortgage company is the collection, or the escrow, of ad valorem property taxes and insurance premiums that must be paid each year by a homeowner.
Property Taxes and Insurance Premiums
Mortgage companies are very concerned with the payment of ad valorem taxes and homeowner’s insurance policies for residential properties for 2 simple reasons:
- Not being insured means the property is at risk of hazards or harm without financial protection. That puts the lender at risk of loss regarding the home that secures the mortgage.
- The County taxing authority has a lien against all real estate located within its boundaries which is superior to the lien created by a mortgage. This means the bank has to make sure the property taxes are paid each year because if the ad valorem taxes are not paid, a third party may be able to take ownership of the property and wipe out the mortgage lien (this happens when the county sells a tax certificate and eventually issues a tax deed to a third party bidder).
For these reasons, the bank will include language in its mortgage that failure to pay the real estate taxes or the homeowner’s insurance will constitute an act of “default” under the agreement. This default is so serious that the bank or mortgage company will foreclose upon a home even if the homeowner is current on their mortgage payments (meaning, the homeowner has paid the principal and interest due each month).
See: What Happens When You Stop Making Your Mortgage Payments?
Collecting Property Taxes and Insurance from a Florida Homeowner
What if a Florida mortgage lender is trying to collect property taxes and hazard insurance from a residential property owner? What legal protections or defenses does that home owner have against the bank’s demands?
Both state and federal law are involved in the answer to this question.
1. Florida Statute on a Mortgage Lenders’ Duty For Escrowed Taxes and Insurance
State law governs the actions of mortgage lenders in Florida. Florida Statute 501.137 sets forth specific duties for mortgage lenders regarding the taxes and insurance collected from a homeowner.
Here, the statute requires the bank to take several steps relating to its collection rights.
- In Florida, every mortgage lender who collects money in connection with a mortgage for property taxes and/or hazard insurance premiums must hold those funds in an escrow account. Each year, at the end of the bank’s annual accounting period, it is legally mandated to issue to the property owner an annual statement of the escrow account. This statement gives all the details of the money that has gone into this account, and the money that has been deducted from it.
- When the taxes or insurance premiums are due, the lender must pay these obligations so that (1) the maximum tax discount available may be obtained with regard to the taxable property, and (2) the insurance coverage on the property does not lapse.
- If, at the time payment is due, there isn’t enough money in the escrow account to cover the taxes due or the insurance premiums, then the lender is to notify the property owner within 15 days after the lender gets the official notice of the taxes due from the county tax collector, or receives the notification from the insurer that a premium is due.
- If that lender fails to pay the property taxes or insurance premium when it is due and there is enough money in the escrow account to cover them, the lender is liable for any losses sustained by the property owner. **note: the lender is not liable for any loss that exceeds the coverage limits of any insurance policy which has lapsed.
- If the lender doesn’t pay the insurance premium with the escrowed money and it is less than 90 days overdue, the insurer is legally bound to reinstate the insurance policy, retroactive to the date of cancellation.
The lender has to reimburse the property owner for any penalty or fees imposed by the insurer and paid by the property owner.
If the lender fails to pay the property taxes or insurance premium after they are 90 days overdue, then the lender must pay the difference between the cost of the previous insurance policy and a new, comparable insurance policy for a period of 2 years. If the bank refuses to do this, then that lender is liable to the borrower under Florida law for both:
- his reasonable attorney’s fees and
- his costs incurred as a result of the lender’s violation of this legal duty.
More so, if the lender fails to pay the pay the property taxes or insurance premium after they are 90 days overdue, or if the insurer refuses to reinstate the insurance policy, the lender shall pay the difference between the cost of the previous insurance policy, and a new, comparable insurance policy for a period of 2 years.
If the lender refuses to pay this, then it is liable for the borrower’s reasonable attorney’s fees and incurred costs.
2. Federal Law On Escrow Accounts
Federal law also provides guidance when a mortgage lender collects property taxes and hazard insurance.
Here’s a Florida court case that explains the issues.
Chase Manhattan: Southern District of Florida
In the case of Chase Manhattan Mortgage Corp. v. Padgett, 268 B.R. 309 (S.D.Fla.2001), the homeowners had filed bankruptcy (Chapter 13) and their bankruptcy plan was confirmed.
As part of that Bankruptcy Plan, their mortgage payments were increased to cover their increased property taxes and their increased homeowner’s insurance premium.
Under their mortgage, they were required to not only pay principal and interest each month, but also pay taxes and insurance. In the mortgage industry, this is known as “PITI” payment. Essentially, the bank placed a portion of their monthly mortgage payment into a separate escrow account and when the taxes and insurance premiums were due, the bank would deduct the amounts from the escrow account and pay these bills.
However, the bank never notified the homeowners (bankruptcy “debtors”) about the increase in both the taxes and insurance. The bank just paid the increase.
This went on for almost two years. The bank then sent out a formal notice to the homeowners seeking reimbursement for the excess money the bank had to pay for these items. The homeowners hired a lawyer to resolve the issue.
The homeowners argued that the bank had waived its right to seek reimbursement from the homeowners for the increased tax and insurance payments because it didn’t give timely notice to the borrower that there had been a change in the amount due.
They argued that the bank’s behavior violated Federal and Florida law. Fortunately, the court ruled in their favor even though the mortgage permitted the bank to make advances without prior notice to the homeowner.
The Florida Federal Court Ruled Against The Bank.
In the above case, the Federal court held that the bank waived its right to recover from the homeowner the increased amounts that it had paid for taxes and insurance because:
- Under the Bankruptcy Code’s automatic stay law, the bank was not barred from notifying the debtor of these changes. (Padgett, pp. 314-315.)
- Under the Real Estate Settlement Procedures Act of 1974 (§§ 10, 12 U.S.C.A. §§ 2609(b))(RESPA), the bank waived its right to recover those increased payments it paid on behalf of the home owner / borrower because it did not comply with RESPA notice provisions.
Even if the bank was correct and the mortgage and/or other mortgage related documents allowed it to pay those taxes and insurance premiums proactively and without approval or knowledge of its borrower, and even though the borrowers had filed bankruptcy, the RESPA notice provisions had to be followed.
So, the homeowners did not have to reimburse the lender for these taxes and insurance premium payments and the bank was left to adsorb those extra costs.
What Should You Do?
If you are involved in a conflict with your mortgage lender over property taxes or homeowners’ insurance premiums, then you need to know your legal rights under the law. State or federal law may be able to provide some help.
If you are having a problem with a mortgage company about your escrow account, then a good piece of advice is to speak with an experienced Florida real estate lawyer to learn about your rights. Most real estate lawyers, like Larry Tolchinsky, offer a free initial consultation (over the phone or in person, whichever you prefer) to answer your questions.
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