Source: https://go.info-pro.com/pillar-real-estate-tax-monitoring-and-regulatory-compliance
Timestamp: 2019-05-25 11:13:03
Document Index: 93340345

Matched Legal Cases: ['§ 706', '§ 1831', 'art 364', '§ 1831', '§ 1831', '§ 308', 'art 1024', '§ 1024', 'art 34', 'art 208', 'art 365']

The following whitepaper was written by Godfrey & Kahn, S.C., Attorneys at Law, and commissioned by Info-Pro Lender Services.
Allowing real estate taxes to go unchecked can lead to lien priority issues, which can directly impact your institution’s bottom line. In Wisconsin, the mortgages made in favor of banks, credit unions and certain other types of financial institutions enjoy superpriority status.1 This means that a mortgage made in favor of a bank will take priority over most other liens (e.g., construction liens), even if the other liens predate the bank’s mortgage. There are, however, a few exceptions to the super-priority status afforded these mortgages, one of which is tax liens filed after the recording of the institution’s mortgage.2
The third effect, above, merits further explanation. Let’s assume that a bank has a mortgage on a piece of property, that piece of property is also subject to a subsequently recorded real estate tax lien, and the bank’s borrower has defaulted on the loan for which the piece of property serves as collateral. When the bank forecloses on the borrower, the bank’s foreclosure action will not extinguish the real estate tax lien (i.e., the real estate tax lien will continue to encumber the property after the bank has acquired title to the property). When the bank finds a buyer for the property, the buyer’s financier invariably will require that any tax liens be satisfied at or prior to the closing of the sale. To ensure the sale closes, the bank will have to pay the past due real estate taxes. Had the bank monitored the real estate taxes on the property in the example above, it would have given itself an opportunity to pay the real estate taxes and roll the payment into the principal balance of the loan, at least preserving the possibility of recapturing the advance through a deficiency judgment.
1 Wis. Stat. § 706.11. 2 Id.
Failing to adequately monitor real estate taxes may lead to consequences under safety and soundness guidelines. For example, Section 39 of the Federal Deposit Insurance Act3 directed the Federal banking agencies to issue safety and soundness standards for all insured depository institutions. The standards, which were issued as interagency guidelines in July of 1995, require insured depository institutions to, among other things, “establish and maintain a system…to identify problem assets and prevent deterioration in those assets.”4 In other words, under the safety and soundness guidelines, institutions are required to implement systems designed to protect the value of assets.
The penalties under the safety and soundness guidelines for failing to implement a system that protects assets can be serious. For example, regulators may, under certain circumstances:
3 12 U.S.C. § 1831p-1. 4 12 C.F.R. Part 364, Appendix A, Section II(G). 5 12 U.S.C. § 1831p-1(e). 6 12 U.S.C. § 1831p-1(e)(2). 7 12 C.F.R. § 308.305(b). 8 OCC Handbook, “Residential Real Estate Lending,” June 2015, page 26.
While on the topic of escrow accounts, it is worth mentioning that the implementing regulations of the Real Estate Settlement Procedures Act (“RESPA”)9 require institutions that maintain escrow accounts for the payment of real estate taxes, insurance, etc. to pay the real estate taxes in a timely manner.10 Examiners are directed to review lending institutions’ loan servicing-related practices and policies to determine whether they comply with applicable law.11 Institutions whose loan servicing-related practices and policies do not comply with applicable law may be subject to regulatory criticism. This is yet another reason why accurately compiling real estate tax information is an important function for banks and credit unions.
9 12 C.F.R. Part 1024. 10 12 C.F.R. § 1024.17(k). 11 See supra footnote 8, pages 105-106.
From what we have seen, examiners are not shy about critiquing institutions with regard to their loan administration procedures. In particular, we have recently seen a specific example of a regulator focusing on real estate tax payment oversight. In evaluating the effectiveness of an institution’s real estate tax payment oversight program, examiners will typically review, among other things, (1) the level of unpaid real estate taxes on the collateral for the institution’s loan portfolio and the institution’s efforts to resolve the unpaid taxes, and (2) the protocol(s) the institution has in place for monitoring the payment of real estate taxes.
12 12 C.F.R. Part 34 (National Banks); 12 C.F.R. Part 208 (State Member Banks); and 12 C.F.R. Part 365 (State Non-member Banks) 13 Id. 14 Id.
Neglecting to monitor real estate taxes may adversely affect a servicer’s business relationship with government sponsored enterprises like the Federal Home Loan Mortgage Corporation (i.e. Freddie Mac) and the Federal National Mortgage Association, colloquially referred to as “Fannie Mae.” Servicers of loans held by Fannie Mae, for example, are subject to the directives set forth in Fannie Mae’s Servicing Guide. Pursuant to the Servicing Guide, a “servicer must protect Fannie Mae’s lien and the property securing the mortgage loan by [(1)] maintaining accurate records on the status of…real estate taxes; and [(2)] ensuring the timely payment of taxes…and related charges.”15 Noncompliance with the directives set forth in the Servicing Guide may result in Fannie Mae taking a range of possible actions against the servicer to remedy the servicer’s noncompliance. For example, Fannie Mae may (i) terminate its business relationship with the servicer, (ii) assess a compensatory fee or a make whole payment on the servicer,16 or (iii) require the servicer to repurchase the loan or indemnify Fannie Mae for any losses or damages.17 As you can imagine, the election by Fannie Mae to exercise any of its remedies described above could have a material adverse impact on a servicer’s revenue.
15 Fannie Mae Servicing Guide, Section B-1-01: Administering an Escrow Account and Paying Expenses (March 9, 2016). 16 Fannie Mae Servicing Guide, Section A3-1-01: Maintaining Eligibility. 17 Fannie Mae Servicing Guide, Section A1-3-02: Fannie Mae-Initiated Repurchases, Indemnifications, Make Whole Payment Requests and Deferred Payment Obligations.
As mentioned at the beginning of this article, institutions have the option to outsource their real estate tax monitoring function. If an institution chooses to outsource, care should be taken to select a vendor with experience providing this service to other regulated financial institutions. Institutions should also understand that they will ultimately bear regulatory responsibility for vendors’ performance, so they will need to conduct adequate due diligence and monitoring on the provider as well as follow regulatory guidelines regarding third party vendor relationships.
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