Mortgage servicers are the bridge between mortgage borrowers and mortgage owners. Mortgage “owners” may be the original lenders, but are usually the investors in securitized loans. When you apply for a home mortgage, you may think that the lender, or loan originator, will service the loan until it is paid off or your house is sold. This is not always true. Mortgage servicing rights often are bought and sold. With the mortgage market being susceptible to various mergers, portfolio acquisitions, and bank failures, the potential for confusion can be great, especially given the role of mortgage servicers in the loss mitigation and foreclosure processes.
Many consumers have been victimized by predatory or negligent servicing practices, including 1) illegal late charges, 2) erratic payments to tax and insurance escrows, 3) unverifiable and/or inaccurate application of additional principal payments and regular monthly principal and interest payments, 4) insufficient or lack of notice of loan servicing transfers (and these usually result in unfairly charged late fees and penalties), 5) “force-placed” insurance even when you can prove you already have home insurance, 6) abusive use of “suspense” accounts (holding bank accounts for what they deem to be incomplete payments), and 7) refusal or obstruction of delinquent mortgage workout assistance. Costly errors or fraud against the borrower often go undetected until too late and then become impossible to correct without placing a huge burden on the borrower to prove their innocence.
It’s important to stay on top of your mortgage servicer’s activity on your account. This report explains what a mortgage servicer does and what your rights are. It also covers what you can do if you have complaints regarding your loan servicing and important new responsibilities of lenders in working with delinquent borrowers.
What are the Responsibilities of a Mortgage Servicer?
The mortgage servicer handles a variety of account maintenance activities, such as sending monthly statements, collecting and processing payments, tracking account balances, including principal and interest paid, responding to borrower inquiries, managing escrow accounts, figuring interest rate changes on adjustable rate mortgages, and also handle delinquent loan procedures and foreclosures.
Mortgage Statements
Servicers are required to provide borrowers with written mortgage statements each billing cycle promptly after the payment due date or the end of the previous billing cycle. Notices may be emailed or mailed and must include, among other things, information on payments currently due and previously made, fees imposed, transaction activity, application of past payments, contact information for the servicer and housing counselors, and, in some cases, information regarding delinquencies.
In general, this requirement does not apply to fixed-rate loans if the servicer provides a coupon book, open-end lines of credit and Home-Equity Lines of Credit (HELOCs), reverse mortgages, timeshare loans, loan services by small servicers[1] , and bankruptcy borrowers. If servicers use coupon books, they must ensure each coupon contains similar information that periodic statements must include, as well as provide additional information such as an explanation of the amount due, a breakdown of past payments, and/or a list of all transaction activity that has occurred since the last statement.
Applying Payments
The servicer must credit payments to your loan account the same day they are received. If a partial payment is made, the servicer may hold the funds in a special account until enough money has been collected to make a full payment. They must inform you on your monthly statement that the funds are being held, and must credit the account once the full payment is collected.
Escrow Account Management
An escrow account is a fund that your lender establishes in order to pay property taxes and hazard insurance as they become due on your home during the year. In this way, the lender uses the escrow account to guard its investment in your home. Your escrow payment typically is part of your monthly mortgage payment. If your mortgage servicer administers an escrow account for you, they are required to make payments for taxes, insurance, and other escrowed items on time.
When your escrow account is first established, your mortgage servicer must give you an itemized statement that clearly tells you the estimated taxes, insurance premiums, and other charges that are anticipated over the next 12 months, and the expected totals of those payments.
The mortgage servicer is also required to give you a free annual statement that details the activity of your escrow account. This statement shows your account balance and reflects payments for property taxes, homeowners insurance, and other escrowed items.
Servicing Transfers
If the mortgage servicing for your loan is being transferred to a new servicer, notification needs to be provided from your current servicer at least 15 days before the transfer date. Additionally, the new servicer needs to notify you of the servicing transfer within 15 days after the effective transfer date. Notices must include the following information:
- The name and address of the new servicer.
- The date the current servicer will stop accepting mortgage payments, and the date the new servicer will begin accepting them.
- Toll-free or collect telephone numbers for both the current servicer and the new servicer that you can call for information about the transfer of service.
- Information that tells whether you can continue any option insurance, such as mortgage life or disability insurance, and what action, if any, you must take to maintain coverage. You also must be told whether the insurance terms will change.
- A statement that the transfer will not affect any terms or conditions of your mortgage, except those directly related to the servicing of the loan. For example, if your old lender did not require an escrow account, but allowed you to pay property taxes and insurance premiums on your own, the new servicer cannot demand that you establish such an account.
After the transfer, there is a 60-day grace period during which you cannot be charged a late fee if you mistakenly send your mortgage payment to the old mortgage servicer instead of the new one. Guidelines for transfer of loan ownership are also available.
Force Placed Insurance
If you do not maintain the proper homeowner’s insurance, your servicer can buy insurance on your behalf and charge you for it, which is referred to as force placed insurance. It is typically more expensive than a policy you can get on your own, and primarily covers the mortgage owner.
Servicers cannot charge for force placed insurance unless they have a reasonable basis to believe you’ve failed to maintain hazard insurance and they must notify you in advance about the charge. The servicer must notify the borrower that they believe the insurance has lapsed and ask the borrower to provide proof of insurance. The communication must occur twice before the servicer charges the borrower for insurance (at least 45 days before charging you and again no later than 15 days before charging for the insurance). This allows the borrower to obtain their own coverage. If they do provide proof of coverage, the servicer must immediately cancel the force placed insurance and refund any premiums paid for overlapping coverage.
The servicer can only charge what is permitted by state regulations or a reasonable amount for the force placed insurance. If you have an escrow account from which insurance payments are made, and you are no more than 30 days overdue on payment, the servicer generally must continue your existing policy, instead of buying the force placed insurance.
Respond Promptly, Resolve Complaints, & Good Customer Service Procedures
Mortgage servicers need to have procedures in place so they are able to access correct information about your loan and promptly respond to complaints or information requests. Written requests for pay off information must be responded to within seven business days. When borrowers send written complaints regarding errors, such as payments not being applied correctly, improper fees charged, inaccurate information provided about loss mitigation, or violations of foreclosure rules, the servicer has five days to acknowledge the letter. Plus the servicer must either correct your account or determine it is accurate and they must send you a written notice of what action was taken and why within 30-45 business days.
Servicers must establish procedures and policies to effectively access and provide accurate account information, respond to complaints, facilitate servicing transfers, maintain records and documents, and promptly evaluate loss mitigation applications, among other things.
Handling Delinquencies, Defaults, and Loss Mitigation Procedures
If you fail to make payments or get behind, your loan is considered in default. When you default, the servicer can order start procedures to protect the value of the property, including property inspections to make sure you are still living in the home and maintaining the property, hiring someone to provide property maintenance and preservation services like lawn mowing, landscaping and repairing broken windows and doors. The costs for these services are charged to your loan account. If the servicer starts to foreclose on your property, additional costs like attorneys fees, property title search fees, and other charges for mailing and posting foreclosure notices will be charged to your loan account as well. That can add hundreds and thousands of dollars to your loan, and makes it even more difficult for you to bring the loan current and avoid foreclosure.
Mortgage rules now require servicers to attempt to speak with you about your delinquent payment no later than 36 days after your payment is due. They must tell you about all mortgage workout plans available to you no later than 45 days after you are late on your payment and assign personnel help once your mortgage reaches 45 days past the due date, sometimes sooner than that.
If you continue to have difficulty paying your mortgage, you may apply for loss mitigation help with your servicer. Once an application is submitted or you’ve provided information about your request for loss mitigation, the servicer has five days to acknowledge your request and tell you whether it needs additional information. They must assist you with completing the application. Within 30 days after you have submitted a complete application, the servicer will review all foreclosure prevention options available to you and let you know which you are eligible for.
Servicers may not start foreclosure proceedings while they are evaluating the borrower for loan modification or other loss mitigation options. Once you are 120 days behind on your loan payment, the servicer can begin the foreclosure process, if you have not submitted a complete application. You may still submit a complete application up until 37 days before the scheduled foreclosure sale. If you do, the servicer has to evaluate you for a loan workout before foreclosing on your home. Foreclosure proceedings can commence if the servicer determines you do not qualify for any workout, if you reject the workout options offered to you by the servicer, or if you fail to do what is promised in the workout agreement. If you wish to have the servicer’s decision regarding your workout plan reviewed, as long as you send your application at least 90 days before the foreclosure sale, the review has to be assigned to someone not involved in the initial decision.
Where to Complain and Seek Help
If you have issues with the servicer, file a complaint with Business Consumer Alliance. If you believe your mortgage servicer has not responded appropriately to your written inquiries or complaints, you may also contact your local or state regulatory office for mortgage servicers. The U.S. Department of Housing and Urban Development (HUD) has a list of approved housing counselors to assist homeowners with understanding their loan, mortgage relief options, and finance management recommendations.
[1] Small servicers only service mortgages that they or an affiliate originate or own and can only service up to 5,000 loans.