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2.2 Mortgage Math

From the borrower’s perspective, much of what servicers do relates to loan accounting. The servicer collects and processes payments, tracks account balances, handles escrow accounts, and sends monthly statements. Many servicing problems arise from mistakes or failures in the servicer’s loan accounting processes. As a result, mortgage math is a critical component of being able to understand, challenge, and litigate problems with consumer mortgage loans.

Mortgage lenders have invented a seemingly infinite variety of mortgage loan products. But, despite the array of possibilities, the mortgage loan note and security instrument remain the starting point for identifying the borrower’s legal obligations. The key money terms include the principal amount, interest rate and method of calculating interest, term (or maturity date), payment schedule, and default and delinquency provisions.2 For every mortgage-related case, it is generally good practice to verify the amount the servicer claims is owed. If there are concerns about the servicer’s loan accounting, such as the application of payments, improper fees, or mishandling of an escrow account, then a more thorough analysis of the payment history may be needed. Unfortunately, when there are loan accounting issues, determining the proper amount due can be challenging because of the complexity and murkiness of most servicers’ payment records.

The framework set out below is one method of determining or verifying what is owed on the loan. These steps are designed primarily for fixed-rate, scheduled loans. While these general principles can be applied to adjustable rate loans, such loans require further calculations to account for interest rate changes. The concepts apply equally to more exotic loans, such as payment option loans, but the calculations become much more complex.

I. Establishing the Framework

A. Obtain adequate supporting documentation to begin the analysis. At a minimum, the note, security instrument, any forbearance or modification agreement, and a payment history should be gathered. In addition, any other written communications with the servicer will be helpful in determining the proper amount due. These may include, for example, monthly statements, servicing transfer letters, payoff statements, and notices of default. If there is a difference between the servicer’s records and the homeowner’s records, collect evidence of all payments madeor at least of those in dispute—and be sure to account for any bounced checks or late fees.

B. Determine the type of loan involved (for example, FHA, VA, conventional uninsured, conventional insured) and who owns the loan, so that regulations or guidelines governing the servicing of the loan may be gathered.

C. READ and UNDERSTAND the note and security instrument, including any riders. Then identify the following contract terms:

1. What is the method of charging interest? Most mortgages use the scheduled method of calculating and charging interest. This means that interest is calculated based on the date the payment is due, rather than when it is paid.3

2. In what ORDER are payments applied to the amounts due? Post-2001, the uniform Fannie Mae/Freddie Mac security instruments call for applying payments first to interest, then to principal, then to amounts due for escrow (taxes and insurance). Late fees can be collected from the payment stream only if there are sufficient funds left in the payment after the first three steps.4

3. Is a suspense account authorized by the contract?5 Even if it is, remember that the fact that funds are put into suspense does not authorize the charging of more interest or fees, and does not permit the retention of the funds in the suspense account in violation of TILA’s prompt-crediting-of-payments rule.6 Nor does the existence of the suspense account authorize the use of funds in the suspense account for any purpose that is not specifically authorized by the loan terms.

4. Are late fees authorized by the contract? If so, determine the amount of the late fee (for example, $10 or 5% of the principal and interest payment) and when a payment is deemed late.7

5. Is an escrow account for taxes, insurance, and other items authorized by the contract, and has such an account been established?8 If the escrow account was waived at origination by the lender, was that waiver properly revoked if the lender subsequently attempted to impose an escrow account? Were the proper disclosures provided for a later-established escrow account?

6. Does the loan permit the servicer to add unpaid interest to the loan balance? Loans that do so can result in negative amortization and compound interest if the borrower’s monthly payments are insufficient to pay the interest that accrued since the last payment.9 If the documents are silent on this question, assume it is not allowed.

D. Determine the existence of any events that could alter the amount due.

1. Have there been any loan modifications or forbearance agreements?

2. Have there been any bankruptcy filings by the homeowner? Is there a confirmed chapter 13 plan or other order that modifies the payment requirements?10

E. Figure out who owns or guarantees the loan. This will determine what guidelines apply and help you understand the servicer’s responsibilities to the owner or guarantor.11

1. If the loan was made on Fannie Mae/Freddie Mac uniform instruments, it is likely, but not certain, that the loan was sold to one of these two entities. If so, either Fannie Mae’s or Freddie Mac’s servicing guidelines will apply.

2. If the loan was insured by FHA, VA, or the Rural Housing Service (RHS), then their respective servicing guidelines will apply.

3. If the loan owner is a trust holding a pool of securitized loans, then a pooling and servicing agreement or separate servicing agreement governs the servicer’s relationship with the owner of the loan and outlines the servicer’s authority and responsibility.

F. If questioning how or when the servicer posted the borrower’s payments, obtain documentation from the homeowner showing when and how much was paid.

G. Review the transfer-of-servicing notices to determine if either the new servicer or the old servicer indicated that the loan was in default on the date of transfer.12

H. Determine the last date at which the borrower and servicer agree that the loan was current. This information should be available from the account history or old monthly statements. Depending on the nature of the dispute, it may not be necessary to examine transactions prior to that date.

II. Run Two Amortization Schedules13

A. Create an amortization schedule based on the terms of the note and mortgage assuming that each payment was made on time and for the exact amount due. This can be done using an online amortization calculator or a spreadsheet.14 The amortization schedule should show the payment due date, the amounts credited to principal and interest, cumulative amounts paid to principal and interest, and the principal balance after application of each payment.

B. Create an amortization schedule based on the payments actually made. Additional columns may be necessary to track escrow amounts and fees. Use the payment history provided by the servicer to obtain the dates and amounts of the payments. Apply payments in the order specified by the contract.15 Late fees should be separately evaluated,16 but generally cannot be deducted from the payments before interest and principal are applied. The same rule applies to other fees.

C. Compare various components of the amortization charts to determine if they match. If they do not match, is it clear why? Consider the questions below if there is an unresolved discrepancy.

III. Other Areas of Inquiry17

A. Were payments applied to principal, interest, and other items in the order specified by the contract when the payment was received?

B. Were payments applied in accordance with TILA’s prompt-crediting-of-payments rule?18

C. Were any payments or portions of a payment placed in a suspense account?

D. Were payments pulled out of suspense and applied in accordance with the contract terms?

E. Determine when fees were charged and whether the fees were proper.

1. When were fees charged?

2. Were those fees authorized by the contract and applicable state and federal law? Were the fees reasonable?

3. Did the event triggering the fees in fact occur (for example, was the payment really late)?

4. Did the homeowner pay the fees, or were the fees otherwise charged to the homeowner’s account? Were fees paid before interest and principal? If so, is the order of payment consistent with the contract terms?

5. Has the servicer reversed any of the charges?

6. Is there an explanation in the transaction notes?

IV. The Burden of Proof

The courts seem generally confused about which party should bear the burden of proving the amount due and the propriety of assessed fees.19 The question of who has the burden of proof may very well turn on the procedural posture of the case. For example, if the servicer is asserting amounts due in the course of a bankruptcy proceeding, courts have generally placed the burden on the servicer to prove the amount due, including the legality of any fees charged. On the other hand, if the homeowner is mounting an affirmative action against the servicer, the burden of proving the misapplication of payments or improper assessment of fees may lie with the homeowner.20

Footnotes

  • 2 {2} National Consumer Law Center, Mortgage Lending § 2.4.2 (3d ed. 2019), updated at www.nclc.org/library.

  • 3 {3} There are several accounting methods used for calculating the amount of interest due on mortgage loans. See § 2.5, infra.

  • 4 {4} The language in the uniform instruments is somewhat confusing on the question of whether late fees can be collected from a payment, after interest, principal, and escrow have been applied for at least one periodic payment, but all amounts due for principal and interest have not yet been paid. See § 2.10.7, infra.

  • 5 {5} See § 2.4.2, infra.

  • 6 {6} See 15 U.S.C. § 1639f(a); § 4.2.4, infra.

  • 7 {7} See § 2.10.7, infra.

  • 8 {8} See § 3.5, infra (discussion of escrow accounts).

  • 9 See National Consumer Law Center, Mortgage Lending § 2.3.3.4 (3d ed. 2019), updated at www.nclc.org/library (explaining negative amortization).

  • 10 {9} See § 3.11.3, infra.

  • 11 {10} See § 1.2.3.3, supra (discussion on determining who is the current owner of the loan).

  • 12 {11} See § 2.3, infra (discussing default).

  • 13 {12} This is exactly what the homeowners did in McAdams v. Citifinancial Mortg. Co., 2007 WL 141128 (M.D. La. Jan. 16, 2007). The court denied summary judgment for lender, construing the contract prepared by the lender against it, and found that a plain reading of the allocation provision required payments to be applied to interest and principal, not late payment fees.

  • 14 {13} See National Consumer Law Center, Mortgage Lending § 2.5.3 (3d ed. 2019), updated at www.nclc.org/library (describing how to build a spreadsheet to run this sample amortization).

  • 15 {14} Remember, if the loan is a scheduled loan, the amount of interest charged for each payment is determined by what the interest would have been had the payment been made on time and in the correct amount; the interest amount charged does not change based on the actual dates and amounts of the payments.

  • 16 {15} See § 2.10.7, infra.

  • 17 {16} Remember that payment histories reflect the books of the servicers and not the borrowers. Suspense and escrow balances will be a liability for the servicer (a credit balance) and an outstanding corporate advance will be a receivable for the servicer (a debit balance).

  • 18 {17} See 15 U.S.C. § 1639f(a); § 4.2.4, infra.

  • 19 {18} Compare In re Sanders, 2007 WL 188676 (Bankr. D. Mass. Jan. 23, 2007) (disallowing claim for fees which were not adequately shown to be due), with Dowling v. Litton Loan Servicing, L.P., 2006 WL 3498292 (S.D. Ohio Dec. 1, 2006) (homeowner has burden of proving that fees charged were improper).

  • 20 {19} See, e.g., Dowling v. Litton Loan Servicing, L.P., 2006 WL 3498292 (S.D. Ohio Dec. 1, 2006).