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Mortgage Servicing and Loan Modifications: 2.17 Failure to Provide a Timely Release

Payment in full of a mortgage loan extinguishes the security interest in the property. However, unless the mortgage holder records a release or discharge in the local land records office evidencing satisfaction of the loan, the mortgage remains a cloud on the homeowners’ title and may limit their ability to sell or refinance the property.353 The widespread sale and securitization of home mortgages has made the process of obtaining a release of a mortgage much more complicated.

Mortgage Servicing and Loan Modifications: 2.18.1 Overview

In addition to all of the servicing abuses discussed above, borrowers who have filed for bankruptcy face even more challenges.364 Some servicers inflate their claims filed in the bankruptcy case by miscalculation, misunderstanding the loan contract, or deliberate addition of unauthorized fees. Other mistakes can cause a loan to be wrongly treated as in default.

Mortgage Servicing and Loan Modifications: 2.18.2 Bankruptcy-Related Fees

Many mortgage holders and servicers charge borrowers who file bankruptcy a fee for monitoring the bankruptcy case, even in chapter 7 cases in which the borrower is current on monthly mortgage payments and plans to continue to make monthly payments as they come due. These “monitoring” fees may be $250 or more and are automatically assessed to the borrower’s account as soon as the bankruptcy is filed. They may include fees for periodic inspections of the property or for broker’s price opinions.368

Mortgage Servicing and Loan Modifications: 2.18.3 Interest Charge Abuses

Several problems related to interest charges can arise, most often in chapter 13 cases in which the debtor is proposing to cure a mortgage default.381 A common problem arises when servicers itemize or otherwise include in the proof of claim for the cure amount a figure for interest on arrears382 that will accrue postpetition under the plan. In jurisdictions in which the trustee automatically calculates and pays that interest, some debtors end up paying double.

Mortgage Servicing and Loan Modifications: 2.18.4 Misapplication of Payments

Mortgage servicing companies frequently make errors in crediting bankruptcy debtors’ payments and may file motions for relief from the automatic stay when the debtor is current in postpetition payments. This occurs due to the industry practice of crediting payments received to the oldest outstanding installment. The effect is that timely payments received postpetition are treated as if they were late.

Mortgage Servicing and Loan Modifications: 2.18.5 Escrow Overcharges

One of the most common problems found in reviewing mortgage claims in bankruptcy is abuse in the collection of escrow arrears.393 Often this occurs because servicers use the total amount of escrow arrears when performing their annual reevaluation of the borrower’s escrow account. This annual review is then used as the basis for calculating the borrower’s new escrow payment going forward. However, in most cases prepetition escrow arrears have already been included in the bankruptcy proof of claim and are being paid through a chapter 13 plan.

Mortgage Servicing and Loan Modifications: 2.18.6 Undisclosed Fees and Payment Changes

In curing a default under section 1322(b)(5), the debtor makes payments under the plan on the prepetition arrearage and provides for the “maintenance of payments while the case is pending.”403 For a cure plan to be successful, there must be full disclosure of all postpetition “maintenance” payments.404 Unfortunately, it had become common for mortgage creditors to add fees and charges to mortgage accounts without notice to the borrower, trustee, or bankruptcy court while the bankruptcy case is pe

Mortgage Servicing and Loan Modifications: 2.18.7 Credit Reporting

With its primary goal of giving the debtor a fresh start, a bankruptcy filing relies on all participants within the debt restructuring system to play their respective parts. Accurate postpetition credit reporting is a vital component in any debtor’s ability to achieve a fresh start. Unfortunately, creditors frequently fail to provide accurate reporting during bankruptcies, neglecting to update accounts and judgments which they know to have been discharged.

Mortgage Servicing and Loan Modifications: 7.6.1 Introduction

As described throughout this chapter, the GSEs have developed loss mitigation options that provide borrowers in distress with viable alternatives to foreclosure. For example, in response to the COVID-19 pandemic, the GSEs implemented flexible loss mitigation options with minimal barriers to access.313 Unfortunately, as the GSEs implemented their new loss mitigation options, they simultaneously undercut these efforts through a program that sells off many of the loans they own or guarantee.

Mortgage Servicing and Loan Modifications: 4.2.6.4 Coverage, Limitations, and Exemptions

The Dodd-Frank Act amendment provides that the requirement is applicable to all “home loans,” a term not defined by the Act that is presumably broader than “residential mortgage loans.”294 The final regulation implements the statutory language by providing that the requirement applies to any consumer credit transaction secured by a “consumer’s dwelling.”295 Thus, the rule applies to open-end, home-secured loans such as HELOCs.296 By not limiting ap

Mortgage Servicing and Loan Modifications: 4.2.12 Private Remedies for Violation of the TILA Servicing Requirements

The Dodd-Frank Act’s mortgage servicing provisions are within part B of TILA.417 Section 1640(a) of TILA provides that part B violations lead to TILA private remedies of actual and statutory damages and attorney fees, in both individual and class actions.418 Claims must generally be brought within one year of the date on which the violation occurred, although equitable tolling may be appropriate in certain circumstances.419

Mortgage Servicing and Loan Modifications: 4.2.7.1 Generally

When defending against a foreclosure or challenging servicing abuses it is important to know not only who the servicer is, but also who is the current owner of the mortgage. The identity of the current mortgage owner, however, may not always be apparent. Many mortgages today are assigned by the loan originator to a purchaser on the secondary market. Very often the mortgage owner at the time of foreclosure (or even shortly after the loan closing) is not the bank or mortgage company that originated the loan.

Mortgage Servicing and Loan Modifications: 4.2.7.2 Persons Subject to the Notice Requirement

TILA applies to persons to whom an obligation is initially made payable and that regularly engage in extending credit. However, section 1641(g)’s new transfer notice requirement is not limited to loan originators and applies to persons that acquire ownership of an existing debt. Thus, the rule uses the term “covered person” rather than “creditor” to describe persons subject to its requirements.319

Mortgage Servicing and Loan Modifications: 4.2.7.3 Timing of Disclosure Requirement

Section 1641(g) provides that the disclosures must be given “not later than 30 days after the date on which the mortgage loan is sold or otherwise transferred or assigned to a third party.”340 Regulation Z clarifies that the disclosures must be provided on or before the thirtieth day following the “date of transfer” which may be either the acquisition date recognized by the transferee, or the date recognized by the transferor.341 Similarly, either date may be stated on the disclosure as the date

Mortgage Servicing and Loan Modifications: 4.2.7.4 Persons Entitled to Receive Disclosure

The statute requires notification of the transfer to the borrower.342 Regulation Z, however, permits the covered person to deliver the disclosure to any consumer who is “primarily liable.” No definition of “primarily liable” is provided. Consumer groups initially asked the Federal Reserve Board to require that transfer notices be provided to all consumers obligated on the loan note, and to any consumer who would be entitled to a notice of rescission on the transaction. The Board declined to adopt this suggestion.

Mortgage Servicing and Loan Modifications: 4.2.7.5.1 Identification of the loan

The disclosure must identify the loan that was acquired or transferred.345 To provide flexibility, the official interpretations permit a covered person to use any information that would reasonably inform a consumer.346 Examples given include providing the property address along with the pre-transfer account number, the account number alone (if previously provided to the consumer such as on a monthly statement), or the date when the credit was extended and the original loan amount or credit line.

Mortgage Servicing and Loan Modifications: 4.2.7.5.2 New owner’s identity, address, and telephone number

The covered person acquiring the loan must disclose its name, address, and telephone number.347 This information must be provided even if there is another party who is servicing the loan.348 If a single disclosure is provided for more than one covered person, the information shall be provided for each of them.349 However, if one of the covered persons in that case has been authorized to receive the consumer’s notice of the right to rescind and to r

Mortgage Servicing and Loan Modifications: 4.2.7.5.4 Agent’s contact information

Regulation Z requires that the disclosure provide the name, address, and telephone number for the agent or other party having authority to receive a rescission notice and resolve issues concerning loan payments.356 It does not require contact information for an agent or other party if the consumer can use the covered person’s contact information for these purposes.

Mortgage Servicing and Loan Modifications: 4.2.7.5.5 Recording location

Section 1641(g) provides that the notice must disclose “the location of the place where transfer of ownership of the debt is recorded.”361 Regulation Z requires the covered person to disclose where transfer of ownership of the debt to the covered person is or may be recorded, or, alternatively, that the transfer of ownership has not been recorded in public records at the time the disclosure is provided.362 Because the statute refers to debt ownership, and transfers of debt ownership (as opposed