1.2.4 Analyze the Loan for Servicing Claims
Generally, the loan servicer initiates the foreclosure. The servicer may act on its own behalf or as agent for the loan holder. Regardless, the servicer’s actions may provide either a defense to the foreclosure or a counterclaim in the foreclosure action. The problems attributable to servicers and the legal claims that flow from these problems, are explained in Chapters 2 through 4, infra.
In almost all cases, the home’s foreclosure is based on the servicer’s assertion that the homeowner is behind in the payments on the mortgage. This fact alone may be subject to challenge. Questions to consider include:
- ● Is the debt balance correct? Scrutinize a payment history for added fees and overcharges that are not authorized by the loan contract or state law. If an overcharge appears to be deliberate or if a creditor fails to correct an overcharge after notice, the borrower may have grounds for state UDAP claims and state debt collection law claims. See § 2.2.8, infra. When overcharges involve interest, a usury claim may be available. See § 2.2.4, infra.
- ● Did the servicer fail to apply payments properly to an account? A misapplication of payments can occur because there has been a lost payment, an overcharge for an escrow item, an inappropriately charged fee that causes the rest of the payments to be insufficient, or the questionable application of payments to a suspense account. See §§ 2.2.2, 2.2.3, 3.6.3, infra. Servicers might also overcharge interest, which can occur in daily accrual contracts. See § 2.2.4, infra.
- ● Did the servicer mishandle the borrower’s escrow account by overcharging the borrower or by failing to make timely payments on taxes and insurance? Servicers have special statutory duties, and possibly common law duties, to administer escrow accounts appropriately. Failure to do so may result in liability under the Real Estate Settlement Procedures Act, UDAP statutes, or common law theories of breach of contract, breach of implied covenant of fair dealing or breach of fiduciary duty. See Chapter 2, §§ 2.2.5, 4.9, 4.10, 4.11, infra.
- ● Did the servicer wrongly charge the homeowner for force-placed insurance? There are often misunderstandings, failures of communication, or mistakes that cause servicers to place their own insurance on the property. Force-placed insurance is much more expensive than homeowner’s property insurance and will often create havoc with the payment stream. Unwinding the story back to the placement of force-placed insurance may uncover mistakes by the servicer that led to the default, which might be used to stop the foreclosure. See §§ 2.2.6, 3.2.5, infra.
- ● Has the homeowner been wrongfully charged late fees or other fees? Under most pooling and servicing agreements, the servicer is permitted to keep the late fees and other fees that are assessed against the homeowner. In some cases, servicers use third-party affiliates to perform inspections or prepare broker’s price opinions. The servicers’ own financial incentives can lead to the improper assessment of fees or requests for default services to be performed more than is reasonable or necessary. See §§ 2.2.7, 2.2.8, infra.
- ● Has the servicer mishandled the account while or after the homeowner was in bankruptcy? Many borrowers who have filed for bankruptcy have found that servicers consistently inflate their claims by miscalculation, misunderstanding the loan contract, or deliberate addition of unauthorized fees. See § 2.4, infra.
- ● Did the servicer fail to engage in loss mitigation or follow proper procedures for evaluating a loss mitigation application? Several state and federal programs direct servicers to consider borrowers for loss mitigation alternatives, such as a loan modification, before proceeding to foreclosure. Federal law under the Real Estate Settlement Procedures Act imposes a number of procedural requirements upon servicers in evaluating loss mitigation applications. Borrowers may be able to prevent foreclosure, obtain an award of damages, or even unwind a foreclosure, if the servicer did not consider the borrower for these alternatives or follow proper procedures. See §§ 2.2.10, 3.2.8, 3.2.9, 3.2.10, infra.
Determining whether any of these problems exist in the relationship between the homeowner and the servicer can quite often provide grounds for both relief from the foreclosure and for affirmative claims against the servicer and the investor (as the servicer is generally either the agent for the investor or they are engaging in a joint venture).