Mortgage Servicing-An Introduction
Countless articles have been written about mortgage lending abuses (commonly referred to as predatory lending), particularly in connection with "sub-prime" mortgages. Mortgage lending abuses deal with deceptive practices at the "front end" of the transaction, when the loan is made. Common practices may include failing to disclose loan terms (or misrepresenting loan terms) or "steering" borrowers to a sub-prime loan when they qualify for a "prime" loan. The Center for Responsible Lending's website lists "seven signs" of predatory lending: excessive fees, abusive prepayment penalties, kickbacks to brokers, loan flipping, unnecessary products, mandatory arbitration, and steering & targeting.
Once the loan is made, the focus shifts to mortgage "servicing," which deals with such things as processing (collecting and properly crediting) mortgage payments, maintaining an escrow or impound account to pay property insurance and taxes on a borrower's behalf, attempting to collect late payments and initiating foreclosure proceedings if the loan is in default.
To some degree, depending on such things as the borrower's credit score and availability of mortgage lenders in the borrower's area, borrowers can and do choose their mortgage lenders. Once the loan is entered into, however, the lender usually has the right to sell the loan itself, or at the very least, sell the servicing rights to that loan. Thus, the lender may not be the entity who services the loan and borrowers usually have no control over who their servicer will be. Because servicers deal with borrowers who are already "locked in" (i.e., they already have a loan) they have no incentive to provide good or even adequate customer service. Accordingly, deceptive practices do occur in the mortgage servicing area.
The National Consumer Law Center reports that misconduct in the servicing industry includes misapplying mortgage payments, charging bogus late fees, prematurely initiating foreclosure proceedings and imposing high-cost homeowner insurance on borrowers, despite evidence the borrower's having their own insurance. Further, the Federal Trade Commission in a consumer alert describes examples of deceptive loan servicing as not providing the borrower with accurate or complete account statements and payoff figures, making it almost impossible to determine how much the borrower has paid and how much they still owe. Thus, the borrower may end up paying more than they owe.
While much of the popular press has been devoted to predatory lending, borrowers should be aware that deceptive practices do occur in the mortgage servicing area and an effort is being made to clamp down on these practices. For example, one of largest servicers of sub-prime loans, Fairbanks Capital Corporation, in late 2003 agreed to a $40 million settlement to resolve a complaint by the Federal Trade Commission relating to Fairbanks' unfair, deceptive and illegal practices in the servicing of sub-prime mortgage loans, including failing to post consumers' mortgage payments in a timely manner and charging borrowers illegal late fees and other unauthorized fees. On July 1, 2004, Fairbanks changed its name to Select Portfolio Servicing, Inc. Later, in 2005, The PMI Group, Inc. sold Select Portfolio (i.e., Fairbanks) to Credit Suisse First Boston (USA).