Mortgage servicers collect and process payments from homeowners, as well as handle loss mitigation applications and foreclosures for defaulted loans. (Learn more about how the loan servicing industry works.)
Unfortunately, servicers sometimes make errors when it comes to managing homeowners’ accounts. Read on to learn about common abuses and errors perpetrated by the loan servicing industry.
Servicers sometimes 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.
One of the duties of a servicer is to collect and process payments from the borrower. But in some cases, a servicer might:
Example. Let’s say a borrower sends in a proper monthly payment of $1,200, but the servicer incorrectly records the payment as $200 and places this amount in a suspense account. (Servicers often use suspense accounts when partial payments are received from a borrower.) The servicer then reports the payment as late to the credit reporting agencies. The servicer's actions could affect the homeowner’s credit score, even if the mistake is eventually corrected.
The prompt crediting rule. Under federal mortgage servicing rules, the servicer must credit your payment to the account on the day it receives the payment. This is called the prompt crediting rule. But there are a few exceptions to this rule. The servicer doesn't have to apply the funds to the account on the day the payment comes in if any of the following are true.
Partial payments and suspense accounts. The servicer may place a partial payment into a suspense account rather than applying it to your account. If the servicer places your payment into a suspense account, it must let you know on your next monthly statement (called a periodic statement) that it has decided to hold the funds in suspense rather than applying them to your account. Once you make another payment and there are enough funds in the suspense account to cover a full payment—including principal, interest, and any applicable escrow amounts—the servicer must then apply the funds to the account.
Loan contracts generally allow a 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:
But 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.)
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. But if the homeowner lets the coverage lapse, the servicer can obtain insurance coverage at the homeowner’s expense. This is called "force-placed" or "lender-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 servicer force-places insurance coverage even though the borrower already had other coverage in place. Because force-placed insurance is expensive, these charges 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 might go into foreclosure when it becomes even more difficult to keep up with the monthly payments.
Dual tracking occurs when the servicer proceeds with foreclosure while simultaneously working with the borrower on a loan modification. With dual tracking, the foreclosure might be completed even though the modification application is still pending.
Efforts have been made to address and correct this problem: Federal law—effective as of January 10, 2014—restricts dual tracking, and some states, like California and Colorado, have laws that prohibit dual tracking.
Escrow accounts are established to ensure that real estate taxes and homeowners' 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 face penalties from the taxing authority (and, in a worst-case scenario, a tax foreclosure) or face difficulties with uninsured property damage. Additionally, the servicer might charge a late fee imposed by the taxing authority or reinstatement fee imposed by the insurance company to the borrower’s account. These fees could possibly lead to an escrow shortage, which in turn would increase the borrower’s monthly payments.
The errors mentioned in this article represent just a few of the typical offenses that servicers have been known to commit. There are, of course, others. If you have been the victim of abusive servicing practices and are facing foreclosure, you should speak to a qualified attorney who can advise you what to do in your particular situation.