Mortgage Loan Servicing Expert Witness: Mortgage Loan Servicer Abuse: Examples, Targets, and Signs

The role of mortgage loan servicers
Mortgage loan servicers play a key role in the mortgage loan industry. Securitization of mortgage loans has changed the sector; sourcing, origination, closing, ownership, servicing, and collection of these loans typically are handled by different market participants.

Mortgage loan servicers are responsible for managing mortgage loans, and most servicers provide this service efficiently. They collect and process payments from borrowers, handle loss mitigation, and are generally responsible for the day-to-day mortgage loan administration. A mortgage loan may be transferred to different servicers multiple times over the life of the loan. The consumer who pays the mortgage may or may not be aware of which company owns the mortgage itself and in fact, may not need to know its name.  

After the loan has closed, mortgage loan servicers have the most direct contact with borrowers. They are often third parties, remote from the loan owner. As a result, borrowers commonly find it difficult to understand the role such a company plays in their loans. This lack of transparency can become a basis for certain predatory practices, such as refusing to acknowledge agreements with a previous loan servicer.
Mortgage servicers must maintain transparency concerning their services as much as possible. They owe several obligations to borrowers, including:
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• Transfer of loan servicing: Every time a new servicer takes over the management of a mortgage loan, they must notify borrowers. The notice must be sent at least 15 days before the loans' servicing rights are transferred to the new servicer.
• Payoff statement: Upon request by the borrower, mortgage servicers are required to provide an accurate payoff statement that details the amount left to pay a loan in full. The statement must be provided within five business days.
• Fair debt collection: Should a mortgage loan enter into default, a servicer may be considered a debt collector under the Fair Debt Collection Act. They must comply with all fair debt collection laws, including not engaging in harassing or intimidating practices.

Despite these clear obligations, which are almost universally observed, mortgage loan servicer abuse can still occur, putting borrowers at risk of losing their homes.

Common abuses of mortgage loan servicers
Alleged mortgage loan servicer abuse refers to a wide range of unfair or abusive practices through which mortgage servicers compromise borrowers' rights. The allegations may include charging unreasonable fees, improper payment application, unfair collection practices, or any other acts that make default or foreclosure more likely.

Predatory mortgage loan servicing has long been regarded as a problem in the US financial services system. Laws such as the Real Estate Procedures Act (RESPA) were designed to combat these practices. The Consumer Financial Protection Bureau was created to protect consumers.

Mortgage loan abuses can occur in a wide range of circumstances. These include the following:
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• Improper application of payment: This can involve the misapplication of payments in a manner that is not consistent with the loan documents. For instance, a servicer improperly holds amounts sufficient to make a full payment in a suspense  account instead of applying it as a loan payment. A suspense account is an account set up by the servicer to hold a borrower’s funds until it decides how the funds should be allocated. Suspense accounts are primarily used when a partial payment is made to the loan). This can cause the loan to be improperly reported to the credit bureaus, which harms the credit rating of the borrower.
• Failure to promptly credit an account: Under federal mortgage rules, the prompt crediting rule requires mortgage servicers to credit payment on the day it is received. Any delay in crediting payments can result in unnecessary late fees and possible claims of default.
• Charging unreasonable or improper fees: Some servicers charge fees that are not stated within the mortgage agreement. This can be a problem for borrowers who cannot easily read and understand the agreement. Other servicers may erroneously charge late fees for payments that were made on time or within the loan's grace period.  This practice is known as the pyramiding of late fees.
• Improper force-placed insurance: Servicers have the right to buy insurance if a homeowner fails to insure the property; however, they must be fair in doing this.  
• Failure to make escrow payments: Mortgage loan servicers typically make tax and insurance payments on behalf of the borrower.  In some cases, servicers may not make these payments on time; the borrower may be charged a late fee by the taxing authority or a reinstatement fee by the insurance company instead of charging the mortgage servicer who missed the payment date.
• Charging for improper default-related services: Default-related services are usually carried out when a loan is delinquent or in default. They are part of the loss mitigation strategies servicers rightfully employ to ensure the property is well-maintained and does not rapidly depreciate. Servicers could abuse this right by charging for default-related services that are not allowed under the terms of the loan documents.
• Failure to honor the agreement with past servicers: Servicers could refuse to honor agreements, such as forbearance or repayment arrangements, entered into with past servicers. This can put borrowers in a difficult position by requiring them to make larger payments than were agreed to with a previous servicer.
• Committing foreclosure abuses: Servicers are expected to provide sufficient assistance to help borrowers honor their loan obligations. Most servicers are ready and willing to assist a borrower in retaining their home. However, a servicer can commit foreclosure abuses, including attempting improper foreclosure.

While a borrower may feel that they are being mistreated with servicing practices that they deem too harsh, the servicer may, in fact, be following the terms under the originating loan documents or the servicing agreement. In litigation or other dispute resolution procedures between the parties, a mortgage loan servicing expert can be retained to conduct an investigation and provide an opinion regarding the mortgage loan servicer's practices and whether their methods would be consistent with industry standards.
 
However, the occurrence of any of these actions may not be conclusive evidence of improper mortgage loan services abuses. Determining if a breach has occurred may require the involvement of a mortgage loan servicing expert witness.
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Conclusion
Unfair mortgage servicer practices can quickly cross the line into abusive or exploitative practices that are improper and not in compliance with regulatory rules. Borrowers who discover that they have been exposed to these practices may want to pursue redress through the courts.
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A mortgage loan expert can assist in evaluating the mortgage servicer's actions regarding regulatory guidelines and industry standards.