What happens if my mortgage servicer doesn't pay the insurance or property taxes on time?

Question

A couple of months ago, I moved out of my parents' house and bought my own place. My loan is escrowed. So, as I understand it, the lender has to make the homeowners' insurance and property tax payments. I just heard that lenders are sometimes late when paying these bills. What happens if my lender doesn't make the payments on time?

Answer

Because your loan is escrowed, the servicer (on behalf of the lender or subsequent owner of the loan) has a duty to make timely escrow disbursements under federal mortgage servicing law.

If the servicer fails to make the insurance or tax payment, you should notify the servicer right away, and if it doesn't immediately fix the situation, send the servicer a notice of error, explained in more detail below.

The Servicer's Obligation to Make Homeowners' Insurance and Property Tax Disbursements

The servicer must make the insurance and tax payments in a timely manner—that is, on or before the deadline to avoid a penalty—as long as your mortgage payment is not more than 30 days overdue. (12 C.F.R. § 1024.17).

Even if you don't have enough funds in your escrow account to cover the disbursements, the servicer usually must advance funds to make the payments.

What If the Servicer Doesn't Make the Payments On Time?

While most servicers are pretty good about paying insurance and property tax bills in a timely manner, mistakes can happen. If your servicer doesn't pay the insurance or property taxes on time, contact the servicer and ask it to make the payment immediately. If this step doesn't remedy the problem, send a copy of the bill along with a "notice of error" (a letter describing the mistake) to your mortgage servicer. Be sure to include:

• your name
• information that allows the servicer to identify your mortgage loan account, and
• a description of the error—that is, that the servicer failed to make the escrow disbursements.

You need to send a separate letter, not a note scribbled on your payment coupon. Be sure you send it to the proper address. Check your monthly mortgage statement, coupon book, or the servicer's website for the address to use for notices of errors. You can also call your servicer to get the address.

Under federal law, the servicer must acknowledge its receipt of the notice of error within five business days. If it turns out that the servicer did forget to make the insurance or tax disbursements, it must correct the error within 30 business days (or 45 days if it notifies you of the extension and the reason for the delay before the end of the initial 30-day period) and cover the cost of any penalties imposed due to the late disbursement. (12 C.F.R. § 1024.35).

Contact Your Tax Authority and Insurance Carrier

You should also contact your tax authority or insurance carrier, depending on the situation, as soon as possible. If the property taxes aren't paid, the taxing authority could get a lien on your home, and you might eventually lose the place to a tax sale. Or you might have to deal with uninsured damage if the servicer neglects to pay the insurance premiums.

Getting Help

If your servicer fails to pay your property taxes or insurance premiums out of your escrow account and won't remedy the matter after you notify them of the problem, you might want to consult an attorney.