(This is Part 3 of a three-part series. Read Part 1, “New mortgage underwriting rules will be tough to enforce,” and Part 2, “Rebates to mortgage brokers rile regulators.”)
Two previous articles examined the Federal Reserve Board’s proposals for tightening underwriting requirements and for limiting broker charges to borrowers. These are longstanding areas of board concern. In contrast, servicing abuses seem to have been discovered by the board only recently. The proposals are weak, but they are a good first step.
Proposal one would require that servicers credit payments on the day a payment is received. Proposal two would require servicers to provide accurate payoff statements within a reasonable time to borrowers who intend to pay off their loan. Both are fair, clear and not onerous for the lender.
Proposal three would prohibit servicers from imposing late fees or delinquency charges when the scheduled payment is received on time but does not include prior late charges. This rule would eliminate the practice of “pyramiding late fees,” where the servicer continues to charge late fees until all prior late fees have been paid.
But this proposal does not cover an even worse type of pyramiding. When the scheduled payment is received on time but the escrow payment is short, the practice is to place the entire payment in a suspense account, to charge the borrower a late fee, and to send a delinquency notice to the credit bureaus.
If the servicer does not send out monthly statements (which many do not, see below), 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 incurs a second late charge and a second 30-day delinquency report. At this point, the account may go to collections, and the borrower will suddenly find himself dunned for a laundry list of fees, with failure to pay possibly resulting in foreclosure.
The board’s proposed rule against pyramiding late fees should be broadened to require that monthly payments received on time be credited when only the escrow portion is deficient.
The board’s fourth 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 consumers.
Since servicing does not involve third-party fees until a loan goes into collection, this proposal is relevant mainly to borrowers who get behind in their payments and are referred to the servicer’s collections department. At that point the borrower will be billed for, e.g., a broker’s price opinion, property inspection, legal services, and more.
Borrowers in trouble do need protection, but requiring that the servicer provide them with a list of charges, when there is no standard that such charges must meet, is not going to help. 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 other way.
Conspicuous by omission from this proposal is the provision of information to all borrowers, so they can keep themselves out of trouble. The single most important step that the board could take to curb servicing abuses is to mandate the provision of monthly statements that show everything that has transpired during the month — and that is comprehensible as well as comprehensive.
Reference was made above to borrowers whose monthly payments are not credited because the escrow portion of the payment is deficient. If the borrower does not receive a monthly statement that shows this, the problem can snowball until the borrower finds himself in collections.
Consider as well the board’s proposal to require that servicers credit payments on the day a payment is 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 board 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 their accounts.
Some servicers purchase servicing contracts and convert the mortgages to simple interest if the note does not explicitly prevent it. If a borrower did not negotiate a simple-interest mortgage at origination, a later conversion to simple interest 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 — the prior servicing record. When servicing is transferred, the purchasing firm should be required to obtain and hold the complete file.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.