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The bank’s mortgage loan customer has failed to pay his property taxes for two years so the state will auction the home for nonpayment of taxes. The mortgage servicing rules prohibit servicers from taking foreclosure action until the loan is past due 120 days, but the mortgage note and deed of trust notes stipulate that borrowers in default if they fail to pay taxes. Is it permissible under the mortgage servicing rules to foreclose on these grounds?

A bank cannot foreclose, but it can accelerate the mortgage. See the following from the ABA’s Reference Guide for Mortgage Servicing.

Servicers commonly inquire whether they may foreclose on a mortgage loan if a borrower violates a term of the loan contract but is current on his or her mortgage loan payments (e.g., the borrower is current on the mortgage loan but has not paid property taxes and there is no escrow account).

Servicers may not make the first notice or filing for foreclosure unless a borrower’s mortgage loan obligation is more than 120 days delinquent. Even though this term is undefined, the CFPB has generally interpreted “mortgage loan obligation” to include principal, interest, and escrow. Under this view, the mortgage loan obligation would not include unpaid, non-escrowed taxes when the borrower is otherwise current on the loan.

However, the Servicing Rules do not prevent a creditor from accelerating a mortgage loan payment for a breach of that contract. Depending on the contract, a servicer could accelerate the mortgage loan if the borrower fails to pay the monthly periodic payment amount on the payment due date or if the borrower fails to comply with other components of the contract, such as requirements to pay property taxes, maintain insurance, or pay late fees. The borrower’s failure to pay the amount due after the creditor accelerates the mortgage loan obligation would begin or continue delinquency. After acceleration, the servicer must wait until the borrower is more than 120 days delinquent before initiating foreclosure proceedings. If the borrower reinstates the loan or otherwise cures the arrearage following acceleration, the borrower would no longer be delinquent. (May 2018)

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