Proposals on Servicers Are Only a First Step

By Jack Guttentag
Saturday, February 16, 2008

In my last two articles, I examined the Federal Reserve Board's proposals for tightening mortgage underwriting requirements and for limiting mortgage broker charges to borrowers. These are long-standing regulatory concerns.

In contrast, the Fed seems to have discovered mortgage servicing abuses only recently. The regulatory proposals are weak, but they are a good first step.

One proposal would require that servicers credit payments on the days payments are received. Another would require servicers to provide accurate payoff statements within a reasonable time to borrowers who intend to pay off their loans. Both are fair, clear and not onerous for the lender.

A third proposal would prohibit servicers from imposing late fees or delinquency charges when scheduled payments are received on time but do not include previous late charges. This rule would eliminate the practice of "pyramiding late fees," in which servicers continue to charge late fees until all previous late fees have been paid.

But the proposal does not cover a worse type of pyramiding. When a scheduled payment is received on time but the escrow payment is short, the practice is to place the entire payment in a suspense account, charge the borrower a late fee and send a delinquency notice to the credit bureaus.

If the servicer does not send out monthly statements, which many do not, the borrower will be in the dark. The next month's regular mortgage payment will also be deposited into the suspense account, and the borrower will incur a second late charge and a second 30-day delinquency report. At this point, the account may go to collection, and the borrower may find himself dunned for a list of fees, with failure to pay possibly resulting in foreclosure.

The Fed's proposed rule against pyramiding late fees should be broadened to require that monthly payments received on time be credited when only escrow portions are deficient.

Another regulatory proposal "would require a servicer to provide to a consumer upon request a schedule of all specific fees and charges that may be imposed in connection with the servicing of the consumer's account . . . and an explanation of each." The fees and charges covered include those of third parties that are passed on to borrowers.

Because servicing does not involve third-party fees until a loan goes into collection, that proposal is relevant mainly to borrowers who get behind in their payments and are referred to their servicers' collection departments. At that point, a borrower will be billed for such things as a broker's price opinion, property inspection and legal services.

Borrowers in trouble need protection, but requiring that their servicers provide them with a list of charges is not going to help when there is no standard that such charges must meet. What could help is mandatory disclosure combined with a rule that servicers cannot mark up the prices charged by third parties or profit from them in any way.

Conspicuous by omission from this proposal is that information be provided to all borrowers, so they can keep themselves out of trouble. The single most important step that regulators could take to curb servicing abuses is to require monthly statements that show everything that has transpired during the month -- and that are comprehensible as well as comprehensive.

I mentioned borrowers whose monthly payments are not credited because the escrow portions of their payments are deficient. If a borrower does not receive a monthly statement that shows this, the problem can snowball until the borrower ends up in collection.

Consider as well the Fed's proposal to require that servicers credit payments on the day they are received. Who is going to monitor the roughly 50 million home-mortgage payments that are made every month to assure compliance? The only ones who possibly can are the 50 million borrowers, who know when their payments were made and have a financial interest in receiving timely credit. But without access to monthly statements, borrowers are severely handicapped.

The Fed also ignores other important abuses:

  • Some servicers cripple the ability of borrowers to refinance profitably by not reporting good payment records to the credit bureaus. Servicers should be required to report payment histories on all accounts.

  • Some servicers purchase servicing contracts and convert the mortgages to different interest-accrual schedules if the notes do not explicitly prevent it. If a borrower did not negotiate such a schedule at origination, a later conversion is unconscionable. Such conversions should be prohibited.

  • Some servicers cover up abusive practices by selling the servicing to another firm without forwarding evidence of the abuses -- that is, the prior servicing record. When servicing is transferred, the purchasing firm should be required to obtain and hold the complete file.

    Jack Guttentag is professor of finance emeritus at the Wharton School of the University of Pennsylvania. He can be contacted through his Web site, http://www.mtgprofessor.com.

    Copyright 2008 Jack Guttentag

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