Abuses by the Mortgage Servicing Industry

Mortgage servicers collect and process payments from homeowners, and handle loss mitigation applications and foreclosures for defaulted loans. Unfortunately, servicers sometimes make errors and engage in harmful practices when it comes to managing homeowners' accounts. For example, here are some common errors that servicers make, with more details below:

• misapplying payments or inaccurate accounting practices
• charging unreasonable fees
• improperly buying a homeowners' insurance policy for the property (called "lender-placed" insurance) and making you pay for it
• dual tracking your loan, and
• failing to make escrow disbursements for insurance or taxes.

Misapplication of Payments or Inaccurate Accounting

One of the duties of a servicer is to collect and process payments from the borrower. But in some cases, a servicer might:

• improperly apply funds (in violation of the terms in the mortgage or deed of trust)
• ignore a grace period, or
• fail to credit funds to the correct account.

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 laws, the servicer must credit your payment to the account on the day it receives the payment. This requirement is called the "prompt crediting rule." But a few exceptions to this rule exist. 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.

• The servicer doesn't charge you anything—like a late fee, additional interest, or any similar penalty—due to the delay.
• The servicer doesn't report negative information to a consumer reporting agency.
• You didn't follow the servicer's written instructions on how to make your payment. Payments that don't comply with the servicer's specific instructions must be credited within five days of receipt.
• You actually made a partial payment. (A partial payment occurs when you pay less than the full amount due, including principal, interest, and escrow, if applicable.)

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 the suspense account has enough to cover a full payment—including principal, interest, and any applicable escrow amounts—the servicer must then apply the funds to the account.

Charging Unreasonable Fees

Loan contracts generally allow a servicer to charge fees under certain circumstances, like 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.

But servicers sometimes charge excessive fees or incorrect amounts to the account, which unfairly increases the total balance owed by the borrower.

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. But if the homeowner lets the coverage lapse, the servicer can obtain insurance coverage at the homeowner's expense. This kind of insurance is called "force-placed" or "lender-placed" insurance. Usually, the servicer adds the cost of the force-placed insurance to the loan payment.

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 a Loan

Dual tracking occurs when the servicer proceeds with foreclosure while simultaneously working with the borrower on a loan modification or another loss mitigation option. 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 restricts dual tracking, and some states, like California, Colorado, and others, have laws that prohibit dual tracking.

Failing to Make Appropriate Escrow Disbursements

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.

Talk to a Lawyer

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 on what to do in your particular situation.