What Happens If My Servicer Changes While I'm in the Middle of Applying for a Loan Modification?

Usually, you must submit a loss mitigation application to your loan servicer to get a loan modification. But if you're in the middle of applying for a modification and your loan is transferred to a new servicer, you might be worried about what will happen to that application and whether you'll have to submit another one.

Fortunately, federal law requires the old servicer to forward all of your application information and documentation to the new servicer for evaluation. So you shouldn't have to redo it.

What Is a Loan Modification?

A "loan modification" is a permanent change to the terms of your mortgage loan. Often, a modification involves reducing the interest rate to make your monthly payments more affordable.

The modification might also include one or more of the following changes to the loan:

• extending the length (the term) of the loan—for example, from 30 years to 40 years
• converting the loan from a variable rate to a fixed rate, or
• setting aside a portion of the unpaid balance as a "principal forbearance" that doesn't accrue interest and is due in a balloon payment when the loan term ends.

How Mortgage Servicing Transfers Work

Mortgage "servicers" manage loan accounts. The servicer of your loan might be the lender from which you got your loan, or it might be a separate company that the lender hired to manage your account. That company, in turn, might hire another party, called a "subservicer," to manage the loan.

Servicer Responsibilities

The servicer's primary responsibilities include:

• processing your monthly mortgage payments
• tracking your account balance
• handling your escrow account (if you have one), and
• pursuing foreclosure if you fall too far behind in your payments.

In addition, servicers also process loan modification applications from homeowners.

Servicing Transfers in the Mortgage Industry

Transfers of loans among servicers are common. You'll know if your loan has been transferred because you'll receive notice from both the old servicer and the new one in the mail. Or you might get a combined notice.

Federal Law Protects Homeowners With Pending Modification Applications During Transfers

In 2014, federal mortgage servicing laws took effect, requiring servicers to implement policies and procedures to facilitate the transfer of information when one servicer hands a loan over to a different servicer. (12 C.F.R. § 1024.38).

The official interpretations of these federal mortgage servicing laws explain that the transferor servicer must timely transfer, and the transferee servicer must obtain from the transferor servicer, the information and documents a borrower submitted to the transferor servicer in connection with a loss mitigation application. (See official interpretation to 12 C.F.R § 1024.41(k)(1)(i)-1.i).

This duty to timely transmit and obtain documents applies even when the borrower submits the documents to the prior servicer after the transfer date. (See official interpretation to 12 C.F.R. § 1024.41(k)(1)(i)-1.iii).

So, you shouldn't have to reapply or resubmit any documentation, even if your servicer changes while you're applying for a loan modification.

Duplicative Loss Mitigation Requests

Under federal mortgage servicing laws, a loan servicer doesn't have to review more than one loss mitigation application from you unless you bring the loan current after applying. (If you then reapply, the servicer must consider your new application.) (12 C.F.R. § 1024.41).

But if you send a duplicate application to the transferor servicer and that servicer decides to review the application and then a transfer of servicing happens, the duplicative request exclusion doesn't apply to the new servicer. The new servicer must consider the application. (See official interpretation of 12 C.F.R. § 1024.41(i)-2).

The official interpretation notes that a transferee servicer and a transferor servicer aren't the same servicer. So, the duplicate request exemption doesn't apply to the new servicer. This means that a transferee servicer must comply with federal loss mitigation requirements and review the application—even if the borrower previously received an evaluation of a complete loss mitigation application from the transferor servicer.

Sometimes the Process Doesn't Go Smoothly

But even with federal laws in place, homeowners sometimes have had problems with their loan modifications due to servicing transfers. For example, you could face one or more of the following common problems if your servicer changes while your modification application is pending.

• Your modification application might get lost when the servicing rights are transferred.
• The new servicer might ask for documentation you submitted to the previous servicer.
• The new servicer might refuse to honor a modification the previous servicer approved.

What to Do If Your New Mortgage Servicer Makes an Error

You can take action so that you don't get lost in the shuffle during a servicing transfer if you're in the middle of applying for a loan modification. After you receive notice that your loan has been transferred to a new servicer, it's a good idea to call the new servicer.

Let it know you applied for a loan modification with the old servicer (or are in the process of applying). That way, the new servicer is aware of this fact. Taking this proactive step also gives the new servicer the opportunity to let you know if you need to send in any more documentation to complete the application.

If a problem arises, like if your application got lost, the new servicer refuses to honor an existing agreement, or another error was made with your modification application, you can send a written "notice of error" to the new servicer.

What If My New Servicer Won't Honor a Previous Loan Modification the Old Servicer Approved?

If your prior loan servicer already approved a modification, but the new servicer won't honor it, you might have multiple claims you can make. For example, you might make a breach of contract claim because the prior servicer entered into the agreement on behalf of the lender (or current loan owner), and the subsequent servicer is also the agent for that same entity.

The old or new servicer might also have violated federal mortgage servicing laws.

Talk to a Foreclosure Attorney

If the new servicer doesn't correct the error, won't honor a loan modification agreement, or if you're facing an impending foreclosure, consider talking to an attorney who can help you enforce your rights and determine your next steps.