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1.4.2 Errors and Abuses During the Life of a Mortgage Loan

Servicing errors and abuses can occur at any time during the life of the loan including before default. Many times pre-default abuses such as the misapplication of payments or improper force-placed insurance, if not corrected by the servicer, can lead the borrower down the path to default. While these abuses may be common before default, they can occur at any time. As a result, advocates are encouraged to engage in a rolling analysis of the potential errors and abuses regardless of the borrower’s exact situation.

Before default. Despite the current status of the loan, questions may arise regarding the proper application of payments or the handling of the borrower’s escrow account.64 The servicer’s failure or refusal to correct pre-default errors can have a snowball effect in which those errors are compounded once the mortgage loan goes into default. In such cases, it may be possible to unwind the errors, eliminating subsequent fees and reinstating the loan. For example, in In re Cothern,65 the mortgage servicer falsely claimed that the borrowers’ hazard insurance had expired and improperly force-placed insurance on the property. Then instead of applying timely and full mortgage payments to principal and interest, the servicer applied payments to an escrow account deficiency that resulted from the $2000 force-placed insurance premium. Allocation of payments in this way caused payments to be treated as if they were late and a late charge was assessed each succeeding month. The servicer eventually reversed the charges for the improperly force-placed insurance, but continued to maintain an escrow account and did not unwind related late fees assessed due to its error. The servicer stopped accepting borrowers payments and initiated a foreclosure. The foreclosure was stopped only when the borrowers filed for bankruptcy. In finding the servicer’s incompetence “absolutely radiant,” the court fashioned a remedy that effectively deemed the mortgage current, that required the escrow account to be dissolved, and that awarded sanctions, in the form of attorney fees, to the borrowers.

In Rawlings v. Dovenmuehle Mortgage, Inc.,66 the servicing of the homeowners’ mortgage loan was transferred, and the new servicer claimed that the homeowner failed to make two payments for the months just prior to the transfer. The homeowners responded by sending the new servicer copies of the canceled checks showing that the payments had been timely made to the old servicer. The new servicer then sent a letter stating that the homeowners owed $38.20 in late fees and that the account was in default. The homeowners again sent copies of the canceled checks and a copy of their account history with the old servicer. Along with the copies, they requested in writing that the error be corrected and sought a copy of their loan history. The servicer then sent an account history, but it was for another borrower’s account not their account. The homeowners then made several telephone calls to the servicer and were told they needed to contact the old servicer. Two more notices of default were sent. Even after the homeowners hired an attorney, who also sent a letter to the servicer, they received five more default notices. Eventually, after battling for over seven months to resolve the error, the old servicer admitted it had applied the payments to the wrong account and the new servicer corrected the account.

After default, but before foreclosure. Here, the servicer has made a determination the borrower is in default on one or more obligations under the mortgage loan documents. The most common reason for default is nonpayment of amounts contractually due. A right to cure notice has likely been sent to the borrower and foreclosure proceedings may have been initiated. In some cases, foreclosure may be imminent. The servicer may retain local counsel to assist with the foreclosure, or the servicer may substitute the trustee for a deed of trust. It is at this point that late fees have been assessed, other mysterious fees have been charged to the borrower’s account, and the borrower’s payments are being placed in a “suspense account” or are being returned.67 Frequently neither the servicer nor the local foreclosure attorney responds to requests for information regarding the borrower’s account. When the servicer or local attorney does provide information regarding the borrower’s account it is often confusing, internally inconsistent, and sometimes simply undecipherable.

In Maxwell v. Fairbanks Capital Corp.,68 the servicer acquired the servicing rights in a portfolio of so-called “non-performing loans.” Shortly after receiving notice of the servicing transfer, the homeowner and a housing counselor assisting her made numerous attempts to get information about the account and an itemized payoff figure. The servicer first sent a letter stating that the total payoff amount was $264,603.13, but then one week later claimed that it was owed $363,603.38. During the next two-year period, the servicer and its attorneys quoted six different payoff figures on the mortgage ranging from a low of $121,948.38 to a high of $430,707.28. It was also revealed during the course of the litigation that the servicer could not locate or produce, and had never obtained, a payment history on the account, a set of original TILA disclosures, or a copy of the note. The court found that the servicer had “in a shocking display of corporate irresponsibility, repeatedly fabricated the amount of the Debtor’s obligation to it out of thin air.”69

Often borrowers in default seek assistance under the numerous programs that encourage or require servicers to engage in loss mitigation prior to foreclosure.70 Too often servicers lose borrowers’ paperwork, provide borrowers with inconsistent information regarding the status of their loss mitigation requests, or simply fail to timely consider loss mitigation alternatives. Servicers continued use of a dual track system, in which they process loan modification requests and foreclosures at the same time inevitably leads to “accidental” foreclosures and accompanying financial and emotional stress on homeowners.

In Koontz v. Wells Fargo, N.A.,71 the borrower obtained a trial modification and made the required three payments under the agreement. Despite borrower’s compliance with the agreement, the servicer denied the permanent modification of the borrower’s home loan. Instead the servicer encouraged the borrower to reapply for a modification and instructed the borrower not to make any mortgage payments until the modification was approved. The servicer then initiated a foreclosure sale due to nonpayment, but assured the borrower that the initiation of the foreclosure process was “just a formality.” The servicer denied the borrower’s second request for modification without explanation and foreclosed on the home about ten days later. The court denied the servicer’s motion to dismiss claims for illegal debt collection, breach of contract, breach of implied covenant of good faith and fair dealing, and equitable estoppel.

Post-payoff or foreclosure. At this stage, the loan has either been paid in full or the home has been sold pursuant to a foreclosure sale. Where a loan has been paid in full, servicer abuses may continue to wreak havoc upon borrowers. Most commonly, the servicer’s failure to provide a timely release of the security instrument and/or update credit report information may jeopardize the borrower’s ability sell or refinance the property or to obtain future credit. Servicers also may falsely assert that amounts are still due and owing on a mortgage loan despite full payment. For homes that have been sold pursuant to a foreclosure sale, the servicer may have breached its duty of care to the borrower in wrongfully foreclosing or the sale may have been defective or illegal under state law.72 If the home sells at foreclosure for more than is owed on the mortgage account, the servicer may fail to properly account for and provide a credit to the borrower for any surplus.

In Islam v. Option One Mortgage Corp.,73 the homeowners asserted that the servicer’s failure to properly credit the payoff funds resulted in aggressive collection efforts by the servicer and false reports to credit reporting agencies. Nearly three weeks after refinancing their mortgage loan, the borrowers were contacted by a representative of the servicer who demanded payment of an alleged past-due mortgage payment and threatened foreclosure of the home. After more than a year of phone calls and written requests, the servicer finally informed the credit reporting agencies that the mortgage had been paid in full. However, as a result of the delay, the borrowers were denied credit on two occasions.

In bankruptcy or after bankruptcy. Often one of the primary objectives of borrowers filing for bankruptcy protection is to cure mortgage arrears.74 Many times borrowers’ efforts are hampered by mortgage servicers who consistently inflate their claims by miscalculation, misunderstanding of the loan contract and their obligations under the Bankruptcy Code, or deliberate addition of unauthorized fees.75 Escrow overcharges, interest overcharges, late charge abuses, and the imposition of “junk fees” are common servicing abuses in bankruptcy. In addition, the absolute breakdown of many servicers’ accounting procedures when the homeowner files for bankruptcy has led to unfounded claims of postpetition delinquency and unsupported motions for relief from the automatic stay.

In In re Gorshtein,76 the court determined that sanctions were warranted against several servicers for filing motions to lift the automatic stay based upon attorney affidavits certifying material postpetition defaults, when in fact, there were no material defaults by the debtors. The court rejected what it termed as the mortgage servicers’ “dog ate my homework” excuses, such as those relating to “the Servicing Agent’s defective computer system, which could not cope with payments by the debtor except in the exact amount programmed into the computer, or the Bank’s mistake in taxing the debtor with the premium on a $1 million property insurance policy for a $100,000 house.”77 The court emphasized the damage to the judicial process that occurs when a court is asked to rule on incorrect or baseless facts. It also noted that in each instance, the mortgage servicers’ actions had created a danger that a debtor would lose his or her home without just cause and in violation of the debtor’s rights under the Bankruptcy Code.78

In In re Nosek,79 the bankruptcy court was outraged at the servicer’s poor accounting practices for homeowners in bankruptcy. The servicer used a variety of excuses for failing to properly account for the homeowners’ payments during bankruptcy, all of which the court found to be unacceptable. As the court said: “Even if Ameriquest must manually account for these payments . . . Ameriquest is not excused from doing it right, even if it is an administrative burden. . . . Ameriquest is simply unable or unwilling to conform its accounting practices to what is required under the Bankruptcy Code, something this Court can encourage by assessing punitive damages under Section 105(a).”80 The court awarded the consumer $250,000 in emotional distress damages and $500,000 in punitive damages for Ameriquest’s violation of section 1322(b) of the Bankruptcy Code. On appeal the First Circuit Court of Appeals reversed the decision finding no violation of the debtor’s right to cure under chapter 13 because the debtor had failed to include a provision in her plan directing how payments should be applied.81

Footnotes

  • 64 {64} See Ch. 2, infra.

  • 65 {65} 442 B.R. 494 (Bankr. D. Miss. 2010).

  • 66 {66} 64 F. Supp. 2d 1156 (M.D. Ala. 1999).

  • 67 {67} See Ch. 2, infra.

  • 68 {68} 281 B.R. 101 (Bankr. D. Mass. 2002).

  • 69 {69} Id. at 117.

  • 70 {70} See Chs. 6-10, infra.

  • 71 {71} 2011 WL 1297519 (S.D. W. Va. Mar. 31, 2011).

  • 72 {72} See National Consumer Law Center, Home Foreclosures Ch. 10 (2019), updated at www.nclc.org/library.

  • 73 {73} 432 F. Supp. 2d 181 (D. Mass. 2006).

  • 74 {74} See National Consumer Law Center, Home Foreclosures Ch. 9 (2019), updated at www.nclc.org/library.

  • 75 {75} See § 2.18, infra.

  • 76 {76} 285 B.R. 118 (Bankr. S.D.N.Y. 2002).

  • 77 {77} Id. at 126.

  • 78 {78} Id. at 120.

  • 79 {79} 363 B.R. 643 (Bankr. D. Mass. 2007).

  • 80 {80} Id. at 650.

  • 81 {81} In re Nosek, 544 F.3d 34 (1st Cir. 2008). The First Circuit’s opinion should not be applicable where debtor’s plan specifies how payments received by the servicer from the debtor and/or trustee should be applied.