Providing payoff quotes is an everyday part of mortgage servicing and foreclosure practice. While most payments tendered in reliance on those quotes are made without issue, errors and unintended misstatements do occur. So what happens when a borrower makes payment in reliance on an erroneous statement, particularly one that understates the debt owed?
For example, Servicer X provides the borrower with a payoff statement but mistakenly fails to include a disbursement for insurance premiums that were paid the same day that the statement was generated. This example leads to several key questions.
First, must Servicer X release the mortgage assuming the borrower relies in good faith on the payoff statement and makes the payment? The short answer is yes. Second, can Servicer X still recover additional amounts if the borrower tenders payoff funds in the amount shown on the inadvertently errant quote? Again, the short answer is yes—probably.
According to I.C. 32-29-6-13, a mortgage servicer cannot withhold a release if a written payoff is relied upon in good faith, even if it is misstated. But the release of the mortgage does not prevent a servicer from seeking collection of the amounts due by other means. Thus, while the servicer is required to accept the payoff funds and release its mortgage, the servicer retains the ability to collect the full amount owed. In short, with respect to Indiana state law, a servicer is not prohibited from seeking other remedies to collect amounts due.
With respect to the accuracy of a payoff quote in general, Indiana Code 32-39-6-5 law defines a payoff statement to include the unpaid balance, interest, and other charges “properly due.” The caveat that the amounts must be “properly due” makes the requirement just vague enough to lead to potential errors in the statement. While most payoff issues are likely resolved in settlement, or in state court rulings that never reach a level of legal precedence, the Fair Debt Collections Practices Act (FDCPA) and rulings pertaining thereto provide information from which lenders can extrapolate what may be considered “properly due.”
The Seventh Circuit
For example, the Seventh Circuit has held that it is an “unfair” practice, and a violation of 15 § U.S.C. 1692f(1) of the FDCPA for a debt collector to attempt to collect amounts which, though they may be awarded by a court in certain circumstances, were neither included in the contract between the debtor and creditor nor created by operation of law. Additionally, the Seventh Circuit has ruled it a potential violation of the FDCPA to require borrowers to remit estimated or anticipated amounts as a condition to pay off the loan.
The Seventh Circuit has also carved out a safe harbor of sorts to allow debt collectors to at least partially protect themselves in the event of good faith errors or misstatements. In Miller v. McCalla, Raymer, Cobb, Nichols & Clark, the Seventh Circuit suggested the following as Safe Harbor Language for “amount of the debt:”
“As of the date of this letter, you owe $___ [the exact amount due]. Because of interest, late charges, and other charges that may vary from day to day, the amount due on the day you pay may be greater. Hence, if you pay the amount shown above, an adjustment may be necessary after we receive your check, in which event we will inform you before depositing the check for collection. For further information, write the undersigned or call 1-800- [phone number].”
A Final Note
While the safe harbor language may protect and resolve many disputes, the dispute itself can be costly in time, effort, and most importantly, reputation for the servicer. As a result, it is important that quotes be as accurate as possible throughout the payoff process and that servicers have procedures in place to reduce the likelihood of misrepresenting the amounts due.
Determining what is “properly due” under Indiana and federal law is important to avoiding disputes that cost time and money and which pose a reputational risk. However, a lender may not be entirely left without recourse should the payoff erroneously omit information, particularly if the procedures in place are clearly intended to avoid misstatements.