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2.4.2 Use of Suspense Accounts

Servicers use suspense accounts to hold payments received from borrowers instead of returning them or applying them to amounts currently due. The ostensible accounting justification for suspense accounts is that the methodology for applying payments to scheduled loans requires the entire amount of interest and principal due for any given month to be applied at the same time. A major national servicer explained the use of suspense account this way:

If the amount received was not sufficient to pay the contractual obligation according to the loan servicing program, the payment was placed in suspense. When the next payment was received, it was placed in suspense and if the total in suspense then equaled a contractual obligation, then the oldest outstanding contractual obligation was deemed paid, at least in theory.48

As the name “suspense account” implies, borrowers’ funds held in such accounts are in legal limbo—they are not credited to the loan, the borrower does not receive interest on them, and the account is not a trust account.49 As of January 2014, periodic statements for residential mortgage loans must indicate amounts that are held but not applied to the loan.50 Still, in some cases borrowers may be unaware that a suspense account even exists and may be confused when payments made are not reflected in the accounting that the homeowner receives from the servicer.

Though the reason for putting funds into a suspense account is to hold them until there are sufficient funds to apply to a scheduled payment, servicers have been known to hold more than a month’s payment in suspense.51 Too often, servicers have raided suspense accounts to pay unauthorized fees.52 Servicers also place homeowners’ payments into suspense accounts when the amounts received do not cover the escrow amounts due.53 In some circumstances, the use of suspense accounts can cause borrowers to be improperly charged more interest.54 Servicers may improperly place payments made under a trial or permanent loan modification in suspense.55 Servicers may fail to credit borrowers for funds held in suspense when providing payoff statements or filing proofs of claim in bankruptcy.56 In bankruptcy cases, servicers may also create a trustee suspense account where payments from the trustee are held prior to being applied to the borrower’s account.57

Suspense accounts, while often a tool of abuse, are not necessarily illegal or improper. The first question to consider is whether the contract and state law permit the use of suspense accounts. The current Fannie Mae/Freddie Mac uniform instruments allow for the use of suspense accounts.58 However, this provision assumes that the monthly payment amount asserted by the lender is correct.59 The uniform instrument contemplates that in some circumstances the lender may need to pay interest on unapplied funds.60 Non-uniform instruments should be reviewed closely to determine whether the contract authorizes the creation and maintenance of a suspense account.61 Some state laws, to the extent not preempted, may limit the use of suspense accounts by creditors. A statutory mandate to apply payments when received to the loan installment payments due makes the use of such accounts illegal.62

The TILA rule on prompt crediting of payments offers specific guidance to servicers on how to deal with partial payments (that is, payments less than the periodic payments).63 The rule allows, but does not require, servicers to place partial payments received into a suspense account. Under the rule, suspense accounts may be used only if authorized by the contract and permitted by state law. Funds must be applied from the suspense account when the amount in suspense is equal to or greater than a periodic payment. If the servicer elects to hold funds in suspense rather than crediting the partial payment or returning it to the consumer, the servicer must disclose the amount of funds held in suspense on the periodic statement, if such a statement is required.

The servicer’s use of a suspense account should not affect either the amount of interest or the fees that are due, because the account is simply a mechanism to deal with partial payments. To determine whether the homeowner’s funds have been properly applied, ask the following questions: Has the proper amount of interest been charged? Have payments been applied to interest, principal, and escrow amounts, as required by the contract terms? Have fees been improperly assessed because the payments were in suspense rather than posted to the loan (such as late fees)? Have fees been improperly deducted from the suspense account before all of the interest and principal due were posted?

The improper use of suspense accounts can be challenged on grounds similar to those available for misapplication of payments.64

Footnotes

  • 48 {46} Nosek v. Ameriquest Mortg. Co., 2006 WL 1867096 (Bankr. D. Mass. June 30, 2006), rev’d, 354 B.R. 331 (D. Mass 2006) (reversed on preemption grounds), subsequent decision, 363 B.R. 643 (Bankr. D. Mass. 2007), vacated on other grounds, 544 F.3d 34 (1st Cir. 2008). See In re 1098 Blue Hill Ave., L.L.C., 2020 WL 1080386, at *3 (Bankr. D. Mass. Mar. 5, 2020) (illustrating correct use of suspense account for holding partial payments).

  • 49 {47} See O. Max Gardner, III, Mortgage Securitization, Servicing, and Consumer Bankruptcy, Am. Bar Ass’n, GP Solo Law Trends and News—Business Law (Sept. 2005), available at www.abanet.org.

  • 50 {48} Reg. Z, 12 C.F.R. § 1026.41(d)(4). See § 4.2.5, infra (discussing periodic mortgage statements). A suspense account is sometimes labeled “unapplied funds” on the account histories provided by servicers.

  • 51 {49} See In re Fagan, 376 B.R. 81 (Bankr. S.D.N.Y. 2007) (finding at one point servicer held an amount in excess of the monthly mortgage payment in suspense). See also Scales v. First Horizon Home Loans, 2012 WL 531022 (E.D. Cal. Feb. 17, 2012) (pursuant to the standard language in the uniform deed of trust, the servicer was permitted to hold funds in excess of monthly payment amounts until there were sufficient funds to bring the loan current; note, however, that this would be inconsistent with Fannie Mae servicing guidelines).

  • 52 {50} See Grady v. Ocwen Loan Servicing, L.L.C., 2012 WL 929928 (N.D. Ill. Mar. 19, 2012) (borrower stated FDCPA claim when she alleged the imposition of unwarranted fees and improper use of a suspense account).

  • 53 {51} See Severson v. Chase Manhattan Mortg. Co., 2013 WL 1688026 (D. Or. Mar. 8, 2013) (mag.; servicer placed payments that did not include escrow portion into suspense account, causing delinquency and eventual foreclosure), adopted by 2013 WL 1702163 (D. Or. Apr. 18, 2013).

    Note that the CFPB rule on the prompt crediting of payments uses the term “periodic payment” and defines it as the amount necessary to cover principal, interest, and escrow (if applicable) for a given billing cycle. See § 4.2.4.3, infra.

  • 54 {52} See Messineo v. Ocwen Loan Servicing, L.L.C., 2017 WL 733219 (N.D. Cal. Feb. 24, 2017) (approving class settlement in case alleging that Ocwen failed to credit amounts in excess of interest-only payment to principal and instead held amounts in suspense); Jefferson v. Chase Home Fin. L.L.C., 2007 WL 1302984 (N.D. Cal. May 3, 2007); In re Jones, 366 B.R. 584 (Bankr. E.D. La. 2007) (use of suspense account contributed to addition of significant interest charges that were not really due), aff’d in relevant part, 391 B.R. 577 (E.D. La. 2008).

  • 55 {53} See, e.g., Saika v. Ocwen Loan Servicing, L.L.C., 357 F. Supp. 3d 704, 711 (N.D. Ill. 2018) (payments wrongly placed in suspense while borrower’s applied for loan modification even though borrowers remained current on loan); Barnett v. BAC Home Loan Servicing, L.P., 772 F. Supp. 2d 1328 (D. Or. 2011) (borrower alleged that servicer placed payments under loan modification agreement in suspense and then initiated foreclosure); Gladstein v. Aurora Loan Services, L.L.C., 2013 WL 637040 (N.D. Ga. Jan. 18, 2013) (mag.; after loan modification, defendants placed plaintiff’s timely and full payments in suspense account; summary judgment motions under RESPA, wrongful foreclosure, and breach of the covenant of good faith and fair dealing claims denied), adopted by 2013 WL 632259 (N.D. Ga. Feb. 20, 2013).

  • 56 {54} See Ruvalcaba v. Ocwen Loan Servicing, L.L.C., 2016 WL 7178855 (S.D. Cal. Sept. 9, 2016) (alleging that servicer held payoff funds, which were short due to servicer’s error, in suspense for more than seven months); In re Borin, 461 B.R. 719 (Bankr. W.D. Mich. 2011) (servicer overstated arrearage by $14,880; court noted that suspense account evaporated when mortgage loan and its servicing rights changed hands); In re Sanchez, 372 B.R. 289 (Bankr. S.D. Tex. 2007).

  • 57 {55} See In re Moffitt, 390 B.R. 368 (Bankr. E.D. Ark. 2008); In re Nosek, 2006 WL 1867096 (Bankr. D. Mass. June 30, 2006), rev’d on other grounds by 354 B.R. 331 (D. Mass. 2006).

  • 58 {56} “Lender may accept any payment or partial payment insufficient to bring the Loan current, without waiver of any rights hereunder or prejudice to its rights to refuse such payment or partial payments in the future, but Lender is not obligated to apply such payments at the time such payments are accepted. If each Periodic Payment is applied as of its scheduled due date, then Lender need not pay interest on unapplied funds. Lender may hold such unapplied funds until Borrower makes payment to bring the Loan current. If Borrower does not do so within a reasonable period of time, Lender shall either apply such funds or return them to Borrower).” See, e.g., Single-Family Fannie Mae/Freddie Mac Uniform Instrument ¶ 1 (Jan. 2001); Haynes v. Navy Fed. Credit Union, 825 F. Supp. 2d 285 (D.D.C. 2011) (deed of trust authorized use of suspense account to hold partial payment, but breach-of-contract claim against lender was stated when payments were timely and in full to bring the loan current).

  • 59 {57} McGinnis v. Am. Home Mortg. Servicing, Inc., 817 F.3d 1241 (11th Cir. 2016) (lender asserting wrong amount due breached contract by placing correct mortgage payment in suspense).

  • 60 {58} “If each Periodic Payment is applied as of its scheduled due date, then Lender need not pay interest on unapplied funds.” See Single-Family Fannie Mae/Freddie Mac Uniform Instrument ¶ 1 (Jan. 2001). This language suggests that interest must be paid if periodic payments remain unapplied or for daily accrual loans. See § 2.5, infra (discussing scheduled versus daily accrual loans). See also Ihebereme v. Capital One, 933 F. Supp. 2d 86 (D.D.C. 2013) (discussing the payment of interest on unapplied funds).

  • 61 {59} Use of an unauthorized suspense account may constitute a breach of contract or UDAP violation. One court, however, has rejected a borrower’s argument that holding excess partial payments in suspense rather than crediting partial payments was unfair when the contract did not specifically authorize the use of a suspense account. See Fasanaro v. The First Nat’l Bank of Chicago, 920 So. 2d 103 (Fla. Dist. Ct. App. 2006).

  • 62 {60} See, e.g., W. Va. Code § 46A-2-115(c) (stating that “[a]ll amount paid to a creditor arising out of any consumer credit sale or consumer loan shall be credited upon receipt against payments due”).

  • 63 {61} See § 4.2.4.3.2, infra.

  • 64 {62} See Jefferson v. Chase Home Fin. L.L.C., 2007 WL 1302984 (N.D. Cal. May 3, 2007) (granting borrower’s motion for judgment on the pleadings on conversion claim when lender put mid-monthly prepayments in suspense account instead of crediting to loan). But see Margulies v. Chase Manhattan Mortg. Corp., 2005 WL 2923580 (N.J. Super. Ct. App. Div. Nov. 7, 2005) (no fiduciary duty exists between servicer and homeowner based upon escrow or suspense accounts, even if improper disbursements are made; breach-of-contract claim remanded).