Errors and Abuses by Mortgage Servicers & Your Legal Rights
When you take out a loan to buy a home, you may expect to deal with that company if any issues related to the loan arise. This is not always the case, though. Often, the original bank or other lender that gave you the loan for your home will sell the loan to a new owner, known as an investor. The company that owns the loan also may transfer servicing rights to a third party, known as the “mortgage servicer.” In other words, the loan owner would pay the mortgage servicer to handle your account, which includes collecting payments, pursuing a foreclosure if you default on the loan, and negotiating with you on alternatives to foreclosure if appropriate.
Whether the loan owner or a separate mortgage servicer manages your loan, this company may be susceptible to making mistakes. In some situations, a mortgage servicer may engage in outright abuse that harms homeowners. If you suspect that an error has occurred, or if you just want more information about your loan account, you should contact the servicer in writing. It must respond within a certain time under the Real Estate Settlement Procedures Act, a federal law.
Mortgage servicer = an entity responsible for managing a loan, separate from a loan owner
Errors and Abuses by Mortgage Servicers
Mistakes made by mortgage servicers can have a devastating impact on homeowners if they do not detect and address them. For example, a mortgage servicer may fail to properly process monthly payments by the homeowner and promptly credit them to the account. Under the prompt crediting rule, the servicer must credit your payment on the day that it receives the funds, with certain exceptions. A mortgage servicer also may fail to account for a grace period that it provided and inaccurately report a payment as late or missing to credit bureaus. This could result in major damage to your credit even if no foreclosure results.
Sometimes mortgage servicers engage in outright deceptions or abuse. They may improperly charge late fees to a homeowner, tack on inappropriate foreclosure costs, or impose other invalid fees related to a homeowner falling behind on payments or facing foreclosure. Even if the fee itself is legitimate, you may have grounds to challenge the amount of the fee if it is excessive.
Another type of problem is known as dual tracking. This involves the mortgage servicer ostensibly negotiating with the homeowner to modify their loan while also pursuing a foreclosure. Dual tracking might result in a foreclosure taking effect before the loan modification application is complete. State laws often prohibit this practice altogether, and federal law restricts its application.
Under the terms of a mortgage, a homeowner likely will need to get insurance for their home. The mortgage servicer can get a new insurance policy if the homeowner allows their policy to lapse, and then they can charge the homeowner fees for the policy. Whether accidentally or intentionally, a mortgage servicer sometimes will impose force-placed coverage on a homeowner who still has an insurance policy in effect. This can substantially increase the payments made on a mortgage each month and lead to a foreclosure if it is not addressed.
Mortgage Servicers and Escrow
A mortgage servicer may use an escrow account to collect money for property taxes and homeowners’ insurance payments. Even if the homeowner makes the appropriate payments into the escrow account, the servicer may fail to make the payments for taxes or insurance from the account. This could result in a tax foreclosure or a gap in insurance coverage. The homeowner also might face extra fees based on late payment of taxes or the reinstatement of an insurance policy that lapsed through the servicer’s error. You should address any apparent errors in making payments from the escrow account so that you do not face an escrow shortage and increased monthly payments.