Federal Laws Protecting Homeowners: New and Existing Mortgages

Federal laws protect homeowners who have new and existing mortgages. Under these federal laws, loan servicers have to:

• give borrowers information about their mortgage loans
• promptly credit mortgage payments to borrowers' accounts
• respond quickly to payoff requests from borrowers
• provide options so borrowers can avoid force-placed insurance, and
• quickly resolve errors and respond to information requests from borrowers.

Servicers Must Provide Borrowers With Information

Mortgage servicers must give borrowers certain information about their loan so they're not caught off guard when an interest rate adjusts or they're charged various fees. The law requires servicers to:

Periodic Billing Statements

A servicer must provide a written statement to the borrower each billing cycle, usually monthly. (12 C.F.R. § 1026.41). The statement must show:

• the amount currently due, including how much will be applied to principal, interest, and escrow
• the total of all payments received since the last statement
• how prior payments were applied
• transaction activity
• partial payment information
• fees or other charges to the account
• account information, like the outstanding balance and interest rate
• contact information for the servicer and housing counselors, and
• information about delinquencies, if the borrower is behind on payments.

Though, if you have a fixed-rate mortgage and your servicer sends you a book of coupons to send in with your payments, then a monthly statement isn't required.

Interest-Rate Adjustment Notices

If a mortgage loan has an adjustable interest rate, the servicer must provide the borrower with a notice containing the new rate and new payment (or an estimate):

• between 210 and 240 days (7 to 8 months) days prior to the first payment due after the rate first adjusts, and
• between 60 and 120 days (2 to 4 months) before payment at a new level is due when a rate adjustment causes a payment change. (12 C.F.R. § 1026.20).

Promptly Credit Mortgage Payments

In most cases, servicers must promptly credit a borrower for the full payment the day it is received. (12 C.F.R. § 1026.36).

If the borrower only makes a partial payment, that amount may be held in a special account (called a "suspense account"), but the servicer must inform the borrower on the monthly statement. Once the suspense account has sufficient funds to make a full payment of principal, interest, and any escrow, the servicer must credit that payment to the account. (12 C.F.R. § 1026.36, 12 C.F.R. § 1026.41).

Respond Quickly to Payoff Requests

The servicer generally must provide an accurate payoff balance to a borrower no later than seven business days after receiving a written request asking how much it will cost to pay off the mortgage. (12 C.F.R. § 1026.36). In some instances, the servicer must provide the statement within a "reasonable time."

Provide Options to Avoid Force-Placed Insurance

Mortgages require homeowners to have adequate homeowners' insurance on the property to protect the lender's interest in case of fire or another casualty. If a borrower lets the insurance lapse, the servicer can buy coverage and add the cost to the loan payment. (12 C.F.R. § 1024.37). This type of coverage is called "force-placed insurance" or "lender-placed insurance."

Under the law, the servicer:

• must send notice at least 45 days before it purchases a force-placed insurance policy, which gives borrowers sufficient time to buy their own policy
• must send notice again at least 30 days later—and at least 15 days before charging the borrower for force-placed insurance coverage—if the servicer has not received proof from the borrower that insurance has been purchased, and
• generally must continue the existing insurance policy if there is an escrow account from which the servicer pays the insurance bill, even if the servicer needs to advance funds to the borrower's escrow account to do so. The servicer may then add this cost to the escrow balance or otherwise seek reimbursement from the borrower for the funds advanced.

If a borrower gives the servicer proof of hazard insurance coverage, the servicer must within 15 days:

• cancel any force-placed insurance policy and
• refund any premiums paid for overlapping periods in which the borrower's coverage was in place.

Quickly Resolve Errors and Respond to Information Requests

A servicer must, in most cases, acknowledge receiving a written information request or complaint of errors, like if a borrower complains that the servicer misapplied a payment or charged improper fees, within five days (excluding legal public holidays, Saturdays, and Sundays) and respond within 30 days.

The servicer may generally extend the 30-day period for an additional 15 days if the servicer notifies the borrower within the 30-day period of the extension and provides the reasons for the delay in responding. (12 C.F.R. § 1024.35, 12 C.F.R. § 1024.36).

Talk to an Attorney

If you think your mortgage servicer has violated any of the laws discussed in this article, especially if you're facing imminent foreclosure, consider talking to an attorney who can advise you on what to do in your particular situation.