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2.1 Introduction

Mortgage servicing is the management of mortgage loans from the time they are originated until they are satisfied or foreclosed. The vast majority of residential mortgage loans are managed by “servicers” for the benefit of the holders of the loan. Servicers exist primarily to collect and process payments. They are also responsible for sending monthly statements, keeping track of account balances, handling escrow accounts, engaging in loss mitigation, and prosecuting foreclosures. In effect, servicers provide the critical link between mortgage borrowers and mortgage holders.

Despite the important role played by mortgage servicers, they typically do not have a significant stake in the performance of mortgage loans. Instead, servicers make money through investment choices: purchases of the correct pool of mortgage servicing rights and the correct interest hedging decisions.1 They are also compensated through a complex web of direct payments on the principal balance of loan pools, fees charged to borrowers, interest paid on short-term deposits (“float income”), and amounts paid from affiliated businesses. This compensation structure too often incentivizes mortgage servicers to engage in abusive conduct toward borrowers. Unfortunately, borrowers, who have no voice in selecting which servicers handle their loans, have few market mechanisms they can employ to deter abuses.

This chapter describes common mortgage servicing abuses and provides a guide for determining the proper amount due on consumer mortgage loans. The next chapter considers specific challenges to servicing abuses based on the Real Estate Settlement Procedures Act. Chapter 4, infra, and Chapter 5, infra, will focus on the rights and remedies available to borrowers under other federal and state statutes and the common law.