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1.3.2 Servicer Compensation

Customarily, the servicer collects a monthly fee in return for the services provided. This fee is based on the outstanding principal loan balance and typically ranges from 25 basis points (prime loans) to 50 basis points (subprime loans).55 For example, a securitized loan pool with an outstanding balance of $900 million and a 38 basis point servicing fee would generate yearly income of approximately $3.42 million for the servicer. In addition, the servicer is entitled to keep “float income” and ancillary fees. Float income is the amount earned on funds invested between the collection of the payment from the borrower and the disbursement to the loan’s owner.56 For loans with escrow accounts, float income may also be earned on collected funds until they are disbursed to the taxing authority or insurance provider. Important factors affecting float earnings include escrow disbursement timing and escrow analysis and cushion requirements.

Ancillary fees consist of late fees and other “service” fees. Such fees are a crucial part of servicers’ income. Consequently, servicers sometimes have perverse incentives to charge borrowers as much in fees, both legitimate and illegitimate, as they can. For example, just one improper late fee of $15 on each loan in one average size loan pool (3500 loans) would generate an additional $52,500 in income for the servicer.

Default services, such as property inspections, broker’s price opinions, and appraisals, present another revenue generating opportunity for servicers. In some instances the costs of services provided by third-party vendors may be marked-up by the servicer resulting in additional costs to borrowers and additional profits for the servicer. In other cases, default services are performed by the servicer’s own subsidiaries or “in-sourced vendors.”57 Profits from these entities or units flow to the servicer, and mark up may likewise occur.58 As a result, the servicer has an incentive to order services provided by these entities more than may be necessary and reasonable.

Footnotes

  • 55 {55} Kurt Eggert, Fannie Mae Foundation, Limiting Abuse and Opportunism by Mortgage Servicers, Housing Policy Debate 15(3), at 758 (2004).

  • 56 {56} In 2007, one of the nation’s largest servicers reported an additional $30 million in revenue from float income which made up 9% of its servicing income. Ocwen Financial Corp., Form 10-K, at 28 (Mar. 13, 2008), available at www.sec.gov.

  • 57 {57} For example, an executive from one of the largest servicers in the country reported that increased operating expenses from increased delinquencies and loss mitigation efforts “tend to be fully offset by increases to ancillary income in our servicing operation, greater fee income from items like late charges, and importantly from in-sourced vendor functions.” See Countrywide Financial Q3 2007 Earnings Call Transcript (Oct. 26, 2007), available at http://seekingalpha.com.

  • 58 {58} See In re Stewart, 391 B.R. 327 (Bankr. E.D. La. 2008) (although servicer’s testimony at trial stated that entity which provided broker’s price opinions was an independent affiliate of servicer, servicer later revealed in another court proceeding that entity is actually a corporate division of the servicer and that the true cost incurred by the servicer for broker’s price opinions is $50 rather than the $125 charged to the borrower), aff’d, 2009 WL 2448054 (E.D. La. Aug. 7, 2009), vacated in part on other grounds, 647 F.3d 553 (5th Cir. 2011).