1.2.4 Analyze for Servicing Claims
Generally, the loan servicer initiates the foreclosure. The servicer typically acts as an agent for the loan’s owner. A servicing agreement or pooling and servicing agreement defines the scope of the servicer’s authority to act for the owner of the loan. Servicing agreements may authorize the servicer to conduct the foreclosure in its own name, nominally as the holder of the loan. However, even in this arrangement the servicer is still an agent acting for a principal.
The servicer’s actions can lead to a number of potential legal claims. These may provide a basis for opposing a non-judicial sale or defending against a judicial foreclosure. Claims against servicers can also result in monetary relief when raised in a complaint or counterclaim. Mortgage servicers are more heavily regulated today than they were before the foreclosure crisis. Federal and state laws now provide concrete remedies when servicers fail to comply with many basic servicing obligations, including obligations pertaining to the conduct of foreclosures.
In view of the growth in regulation of mortgage servicers and the appearance of new remedies for servicer misconduct, NCLC has devoted a separate practice Manual to mortgage servicing issues. A complete assessment of a borrower’s foreclosure defenses should include consideration of the content of NCLC’s Mortgage Servicing and Loan Modifications (2019), updated at www.nclc.org/library.13
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. The RESPA Notice of Error and Request for Information procedures are an essential means for investigating and remedying account history questions. See NCLC’s Mortgage Servicing and Loan Modifications §§ 3.3, 11.2.5 (2019), updated at www.nclc.org/library. If the servicer imposed the charge in an unfair or deceptive manner, or failed to correct an overcharge after notice, the borrower may have grounds for state UDAP claims and state debt collection law claims. See NCLC’s Mortgage Servicing and Loan Modifications § 2.10 (2019), updated at www.nclc.org/library. When overcharges involve interest, a usury claim may be available. See NCLC’s Mortgage Servicing and Loan Modifications § 2.5 (2019), updated at www.nclc.org/library.
- ● 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 NCLC’s Mortgage Servicing and Loan Modifications §§ 2.4, 2.5, 2.10 (2019), updated at www.nclc.org/library. These errors can implicate the TILA provisions governing application of payments and the RESPA rules that regulate servicers’ management of escrow accounts. See NCLC’s Mortgage Servicing and Loan Modifications § 4.2.4 (prompt crediting of payments under TILA), § 4.2.5 (periodic mortgage statements under TILA), and § 3.5 (servicers’ escrow account management under RESPA) (2019), updated at www.nclc.org/library. Certain state servicing statutes also create servicer obligations to properly credit payments and manage escrow accounts. See NCLC’s Mortgage Servicing and Loan Modifications § 5.2 (2019), updated at www.nclc.org/library. Servicers might also overcharge interest, which can occur in daily accrual contracts. See NCLC’s Mortgage Servicing and Loan Modifications § 2.4 (2019), updated at www.nclc.org/library.
- ● 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 NCLC’s Mortgage Servicing and Loan Modifications §§ 2.6, 3.5 (RESPA provisions on escrow account management), §§ 5.5, 5.6, 5.7 (state law claims) (2019), updated at www.nclc.org/library.
- ● 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 NCLC’s Mortgage Servicing and Loan Modifications §§ 2.7, 3.6 (2019), updated at www.nclc.org/library (RESPA force-placed insurance rules).
- ● 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 NCLC’s Mortgage Servicing and Loan Modifications § 2.10 (2019), updated at www.nclc.org/library.
- ● 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 NCLC’s Mortgage Servicing and Loan Modifications § 2.18 (2019), updated at www.nclc.org/library.
- ● Did the servicer fail to engage in loss mitigation or follow proper procedures for evaluating a loss mitigation application? Federal law under the Real Estate Settlement Procedures Act imposes a number of procedural requirements upon servicers in evaluating loss mitigation applications. See Ch. 6, infra. See also NCLC’s Mortgage Servicing and Loan Modifications § 3.8 (2019), updated at www.nclc.org/library. State laws may require consideration of loss mitigation alternatives before foreclosure, including as part of mediation or conference programs. See § 5.13, infra. The guidelines for servicing government-insured or guaranteed loans, as well as the terms of servicing agreements, define the range of loss mitigation options that are available to a particular loan. 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 NCLC’s Mortgage Servicing and Loan Modifications §§ 2.12, 3.8, 3.9, 3.10, 3.12 (2019), updated at www.nclc.org/library.
- ● Is the servicer proceeding toward a foreclosure sale without completing a loss mitigation review? In the course of the foreclosure crisis, federal and state governments added significant protections for borrowers facing simultaneous foreclosure and loss mitigation reviews (commonly referred to as “dual tracking”). The Real Estate Settlement Procedures Act’s regulations contain enforceable dual tracking prohibitions. See NCLC’s Mortgage Servicing and Loan Modifications §§ 3.8.7, 3.12 (2019), updated at www.nclc.org/library. State law common law remedies and UDAP statutes can also apply to dual tracking abuses. See NCLC’s Mortgage Servicing and Loan Modifications §§ 5.3, 5.5 to 5.8 (2019), updated at www.nclc.org/library. See also §§ 5.11, 5.13, infra (discussing servicer obligations under state mediation and conference laws and other duties to consider loss mitigation prior to foreclosure).
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).