Recent years have seen a flurry of proposals and legislation directed toward predatory mortgage lending. The focus, however, has been almost entirely on loan originations. Aside from a few well-publicized lawsuits, predatory servicing has attracted little attention, yet in many respects it is more vicious, and the adverse consequences are more far-ranging.

The loan origination market is a minefield for borrowers, to be sure, but they do have choices. Exercising intelligence and care, and with a little homework, they can find a loan provider who will treat them fairly. When the loan is closed and shifted to a servicing agent, however, the borrower’s choices disappear.

Borrowers have no say whatever in choosing the firm that will be servicing their loan. They cannot fire that firm for cause, no matter how wretched the firm’s service. The only way they can extricate themselves from a predatory servicer is to refinance, which is costly, with no assurance that the next servicer will be any better.

The financial incentives to provide good service to customers, which work in other sectors of our economy, work only selectively with loan servicing. Servicers who originate loans have an incentive to provide good service to those borrowers they view as potential clients for new loans or other services. The incentive disappears, however, for borrowers with spotty payment records, who are not viewed as potential customers for other services.

An incentive to provide good service doesn’t exist at all for specialized servicing firms who have nothing to sell. Such firms will not get more customers by improving service quality — only higher costs — nor will they lose customers if they provide poor service. Their incentive is to generate as much revenue as possible from borrowers. It is hardly surprising that such firms figure so prominently in discussions of predatory servicing.

Predatory servicing could be reduced or eliminated by legislation that restricted the sale of servicing contracts, or gave borrowers the right to change servicers. However, these would be drastic changes that would be very difficult to enact. The alternative is to identify predatory practices and make them illegal. Here is a partial list:

Mandatory Provision of Complete and Comprehensible Monthly Statement. The law should require servicers to provide easy-to-understand monthly statements showing everything that transpired during the month that affected the borrower’s account. This should include balance changes and their sources, payments, disbursements, rate adjustments, and fees.

Rationale: In the absence of comprehensible monthly statements, predatory practices can go unnoticed by the borrower indefinitely.

No Suspension of Payments Because of an Escrow Shortage. Servicers should be prohibited from placing scheduled payments of principal and interest in suspense accounts when only the escrow payment is short.

Rationale: This pernicious practice results in unnecessary delinquencies and late payments, and can lead down a slippery slope to collections and ultimate foreclosure.

No Profits From Loans in Collection. On services purchased from third parties in connection with a loan in collections, such as legal fees and property inspections, servicers should be barred from marking up third-party fees, receiving payments for referral of business, or purchasing the services from affiliated entities.

Rationale: Profiting from loans in collections provides an incentive to move borrowers to that status unnecessarily. It also increases the cost to borrowers struggling to return to good standing by paying back arrears.

Mandatory Reporting to Credit Bureaus. Servicers would be required to report payment history on all their accounts.

Rationale: Servicers should not be able to cripple the ability of borrowers to refinance profitably by not reporting good payment records to the credit bureaus.

No Conversions to Simple Interest. On purchased servicing contracts, the purchasing servicer should not be permitted to convert a mortgage to simple interest merely because the note does not explicitly prevent it.

Rationale: Simple-interest mortgages, which accrue interest daily, are more problematic for borrowers than standard monthly accrual mortgages. If a borrower did not negotiate a simple-interest mortgage at origination, a later conversion to simple interest following the transfer of servicing is unconscionable.

Mandatory Disclosure of Policy Toward Crediting Extra Payments. Servicers should disclose exactly what their procedures are for crediting extra payments to the loan balance.

Rationale: Borrowers making extra payments of principal have the right to this information so that they can plan their schedule of extra payments in the most advantageous way.

Mandatory Retention of Complete Servicing Files. Servicers should be required to retain the complete file on every account until it is paid off. When servicing is transferred to a new servicer, the purchasing firm should be required to obtain the complete file.

Rationale: Servicers should be prevented from covering up abusive practices by selling the servicing to another firm while leaving evidence of the abuses behind.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at

Show Comments Hide Comments


Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
By submitting your email address, you agree to receive marketing emails from Inman.
Thank you for subscribing to Morning Headlines.
Back to top
Only 3 days left to register for Inman Connect Las Vegas before prices go up! Don't miss the premier event for real estate pros.Register Now ×
Limited Time Offer: Get 1 year of Inman Select for $199SUBSCRIBE×
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription