QOur mortgage has been with the same lender for several years. We recently received a notice that our loan has been sold to another lender. Should this concern us? Can the new lender change any of the terms or conditions of our loan? How do we know for sure that the new lender is legitimate?
AEvery day at settlements conducted in my office, I hear similar questions: What is the likelihood that my lender will sell my loan? Do I have any right to insist that the lender not sell my loan? Does it really matter to me if the loan is sold as long as I get the best deal from the bank initially? Does anybody regulate the sales of these loans?
The simple answer is that if your lender escrows money for real estate taxes and insurance, you want to make sure that the new lender pays the bills on time. Other than that, it's not a problem.
Lenders have been selling their loans for years in the secondary mortgage market. Organizations such as Fannie Mae and Freddie Mac purchase large packages of loans from lenders. They essentially buy the loans at a discount, giving the individual lender more cash to generate new loans.
The originating lender usually, although not always, services the loan. This means that you, the borrower, will continue to make your monthly payments to that lender, even if it does not own the loan. The servicing lender gets a small fee for its work.
For years, many lenders did not use the secondary mortgage market, instead keeping mortgage loans in their own portfolios. As the secondary market has become larger and more established, many more lenders have been selling their mortgages to third parties.
Over the years, there have been serious problems with mortgage sales. For instance, there have been a number of fraud cases in which unscrupulous people obtained the names and addresses of borrowers and sent them letters advising that effective immediately the loan payments should go to the crook. The names and addresses of borrowers generally are publicly available from land records.
Picture the following scenario: You have a loan with ABC Mortgage Co., which is a legitimate lender. All of a sudden, you get a letter from the XYZ Co., advising you that you are to make your new mortgage payment to XYZ.
You would be surprised at the number of gullible people who blindly follow XYZ Co.'s instructions without investigating. After one or two months of receiving mortgage checks, XYZ Co. folds camp and moves on to another jurisdiction.
Because of such mortgage scams and less blatant abuse of the system, Congress in 1990 regulated the assignment, transfer or sale of mortgage loans under the Real Estate Settlement Procedures Act. The law is quite complex, but here are some of the protections given to individual borrowers whose loans have been sold, transferred or assigned to new lenders:
At the time a potential borrower applies for a mortgage loan from a federally regulated lender, that lender must disclose to the borrower its policy on assigning or selling loans. The lender must advise borrowers of the percentage of loans that it has sold in the past few years. The Housing and Urban Development Department has a model disclosure statement that must be used by all federally regulated mortgage lenders.
If a mortgage lender does assign, sell or transfer your loan, the transferor (your current lender) and the transferee each must make certain disclosures. They include the effective date of the transfer; the name, address and telephone number of the transferee; and a contact telephone number at both the transferor's and transferee's offices. That allows the borrower the opportunity to ask questions and confirm the transfer.
More important, the disclosure statement must state that the transfer does not affect any term of the security instrument other than the servicing provision.
No matter who receives the mortgage payments, the basic terms of your note and deed of trust cannot be changed. They remain in full force whether the original lender holds your paper or some other party does.
Congress also was concerned about payments made during the time a loan is transferred. The law provides a 60-day grace period if the borrower misdirects payments. For 60 days from the effective date of the transfer, as long as the borrower makes the payment on time in accordance with the terms of the note, no late fee can be charged and the payment can not be deemed late. Neither lender can report to a credit reporting bureau as being late or delinquent.
The law also includes a complaint-resolution procedure. If you, the borrower, have a question or a complaint about the transfer of your loan, you have the right to send a written request to the lender. Note that for the complaint-resolution mechanism to be effective, you have to send a separate letter. You cannot merely jot a note on your mortgage payment coupon when you send your check.
Your lender must either take action or respond to your letter within 20 business days of receiving it. Furthermore, the lender has 60 business days from the date of receipt of the request to either correct the problem and give the borrower notice that the problem has been corrected, or give reasons in writing why the account is correct or the information requested by the borrower is unavailable.
If a lender fails to comply with the law, a borrower can recover any actual damages, and any additional damages that a court might allow if the court finds that there is a pattern or practice of noncompliance with the law. The additional damages are limited to $1,000 per individual. A court also can award reasonable legal fees if a borrower sues and prevails.
If a class action is filed against a lender, each member of the class, if successful, is entitled to actual damages as well as up to $1,000 additional damages, again if the court determines there is a pattern or practice of noncompliance. However, Congress capped the total liability of a mortgage lender at $500,000 or 1 percent of the net worth of the mortgage lender, whichever is less.
The bottom line is that other than confirming that your real estate taxes and insurance have been paid by a new lender, you really do not have to worry about your loan if your current lender sells or transfers your loan. Obviously you want to make absolutely sure it is a legitimate transfer. Contact both lenders and make sure that you have something in writing from the old and the new lenders before you send your next mortgage payment.
If your lender escrows for taxes and insurance, I strongly recommend that once a year you send a letter to your lender (by certified mail, return receipt requested) demanding proof that the bills were paid. You do not want to wake up one morning to find that you have no insurance coverage, or that your home has been sold at a tax sale.
Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.