Mortgage servicers collect and process payments from homeowners, as well as handle loss mitigation applications and foreclosures for defaulted loans. However, mortgage servicers often make grievous errors when it comes to managing homeowners’ accounts. Read on to learn about common abuses perpetrated by the mortgage servicing industry, as well as about the independent foreclosure review and national mortgage settlement, which occurred in response to those bad practices.
Understanding Mortgage Servicing
To fully understand the serious problems that can occur in the mortgage servicing industry, you must first understand the players involved in a residential mortgage loan.
Mortgagor. The mortgagor is the individual (the homeowner) who borrows money and pledges the home as security to the lender for the loan.
Mortgagee. The mortgagee is the lender. The mortgagee gives the loan to the mortgagor.
Mortgage servicer. Mortgage servicers manage loan accounts on behalf of the mortgagee. The servicer typically handles:
- sending the monthly mortgage statement to the mortgagor
- collecting and processing the payments
- tracking account balances
- managing the escrow account
- reviewing loss mitigation applications, and
- pursuing foreclosure in the case of defaulted loans.
Common Abuses by the Mortgage Servicing Industry
Unfortunately, servicers often engage in harmful servicing practices that can cause a borrower to default on the loan or otherwise lead to foreclosure. Below are some common problems perpetrated by mortgage servicers.
Misapplication of Payments or Inaccurate Accounting
One of the duties of a mortgage servicer is to collect and process payments from the borrower. However, in some cases, a mortgage servicer may:
- improperly apply funds (in violation of the terms in the mortgage contract)
- ignore a grace period, and/or
- fail to credit funds to the account.
Charging Unreasonable Fees
Mortgage contracts generally allow a loan servicer to charge fees under certain circumstances, such as when the borrower is late on a payment or is in foreclosure. A few examples of these types of fees are:
- late fees
- inspection fees
- foreclosure costs, and
- other default-related fees.
However, servicers sometimes charge excessive fees or incorrect amounts to the account, which unfairly increases the total balance owed by the borrower. Learn more in Challenging Late & Other Fees in Foreclosure.
Improperly Force-Placing Insurance
Most mortgages and deeds of trust require homeowners to maintain hazard insurance coverage on their property. The property owner will generally purchase a homeowners policy to meet this requirement. However, if the homeowner lets the coverage lapse, the mortgage servicer can obtain insurance coverage at the homeowner’s expense. This is called force-placed insurance. Usually, the servicer adds the cost of the force-placed insurance to the loan payment. (Learn more about force-placed insurance.)
Sometimes, a mortgage servicer may force-place insurance coverage even though the borrower already had other coverage in place. Since force-placed insurance is expensive, it can increase the monthly payment by a large amount. As a result, a homeowner who is already behind in payments or is facing financial difficulties may go into foreclosure when it becomes even more difficult to keep up with the monthly payments.
Dual tracking occurs when the mortgage servicer proceeds with foreclosure while simultaneously working with the borrower on a loan modification. With dual tracking, the foreclosure may be completed even though the loan modification application is still pending.
Efforts have been made to address and correct this problem:
- The Consumer Financial Protection Bureau issued new mortgage servicing rules (effective as of January 10, 2014) that, among other things, restrict dual tracking.
- California now prohibits dual tracking. (See California Foreclosure Protection: The Homeowner Bill of Rights.)
- Legislators in Colorado have introduced a bill (House Bill 13-1249) that, if passed, would prohibit dual tracking. (However, as of now it does not look like it will pass. You can track its progress at www.leg.state.co.us. Go to the "Bills & Fiscal Notes" to find and review the bill's history.)
- Dual tracking is also banned as part of the national mortgage settlement.
Failing to Make Appropriate Escrow Disbursements
Escrow accounts are established to ensure that real estate taxes and homeowner's insurance get paid. Along with the monthly mortgage payment for principal and interest, the servicer collects funds from the borrower that will be used to make payments for these expenses on behalf of the borrower. But, in some cases, the servicer neglects to make the tax or insurance payment.
Consequently, a homeowner could lose his or her home to a tax foreclosure or face difficulties with uninsured property damage. Additionally, any late fee imposed by the taxing authority or reinstatement fee imposed by the insurance company could improperly be charged to the borrower’s account. These fees could possibly lead to an escrow shortage, which in turn would increase the borrower’s monthly payments.
Responses to Abuses in the Mortgage Servicing Industry
The independent foreclosure review and national mortgage settlement came about after state and federal investigations into mortgage foreclosure activities during the recent foreclosure crisis revealed extensive loan servicing misconduct.
The Independent Foreclosure Review
In 2011, the Federal Reserve Board and the Office of the Comptroller of the Currency required certain mortgage servicers to hire consultants to review foreclosures that were initiated, pending, or completed during 2009 or 2010 to identify borrowers they believe may have incurred financial harm as a result of improper loan servicing.
Most mortgage servicers settled and stopped the reviews. The reviews took longer and cost more than expected and, as a result, the program was effectively scrapped in favor of a settlement. The settlement between federal banking regulators and 13 mortgage servicers provided an estimated $3.6 billion in direct cash compensation to nearly 4.2 million eligible borrowers and $5.7 billion in additional mortgage assistance, such as loan modifications and forgiveness of deficiency judgments. (The participating servicers were Aurora, Bank of America, Citibank, Goldman Sachs, HSBC, JPMorgan Chase, Morgan Stanley, MetLife Bank, PNC, Sovereign, SunTrust, U.S. Bank, and Wells Fargo and their affiliates. EverBank, Ally/GMAC, and OneWest continued with the reviews.)
The first checks from the $3.6 billion went out in April 2013, with the final payout expected mid-summer.
GMAC and EverBank joined the settlement in the summer of 2013. In July 2013, GMAC Mortgage also reached an agreement with the Federal Reserve Board to end its reviews. Under the agreement, GMAC will make approximately $230 million in cash payments to more than 232,000 borrowers. In August 2013, EverBank agreed to halt its reviews and pay approximately $37 million in cash payments to more than 32,000 eligible mortgage borrowers. Checks for borrowers whose mortgages were handled by these banks have not been sent as of November 2013.
For more information, go to the Office of the Comptroller of the Currency’s website, www.occ.treas.gov and click on “Independent Foreclosure Review.”
National Mortgage Settlement
In 2012, forty-nine state attorneys general and the federal government reached a historic settlement with five of the nation’s largest banks. The settlement holds them accountable for servicing violations that contributed to the mortgage crisis in this country.
Read more about the national mortgage settlement.
Hiring an Attorney
The abusive practices mentioned in this article represent just a few of the typical offenses that mortgage servicers have been known to commit. There are, of course, others. If you have been the victim of abusive mortgage servicing practices and are facing foreclosure, you should speak to a qualified attorney who can advise you what to do in your particular situation.
For more information on challenging a foreclosure in court, see our article Should You Fight Your Foreclosure in Court?