Skip to main content

Search

Mortgage Servicing and Loan Modifications: 6.4.5.3 RESPA Provision Requires Servicers to Provide Information About Loan Accounts and to Correct Errors

The Real Estate Settlement Procedures Act (RESPA) mandates that loan servicers respond to borrowers who have disputes about their accounts, make corrections to their accounts when appropriate, and respond to requests for information regarding the account.72 These written communications are referred to in the statute as “qualified written requests.” Under RESPA, borrowers in default can challenge the amount of the claimed default and require the servicer to provide information or correct an error within certain timelines.

Mortgage Servicing and Loan Modifications: 6.4.6 Determining Whether Your Client Has Defenses to Repayment

In some cases, obtaining loan paperwork or talking to your client may uncover potential consumer defenses to collection, such as Truth in Lending Act violations, usury, fraud, or unfair and deceptive practices.77 Whenever possible, the client should not make an agreement to repay money to a lender when there is a substantial defense to repayment. When appropriate, legal claims can be used as bargaining chips for workouts either before or after legal action is commenced.

Mortgage Servicing and Loan Modifications: 6.4.7 Timing

There are significant advantages to beginning a workout discussion as early as possible after the default. There is the obvious advantage of reaching a workout on a smaller default. Getting involved early also avoids the difficulty of addressing the issue at the last minute, when a potential foreclosure sale date is pending; it makes the borrower appear more responsible in trying to prevent the problem from getting out of hand; and, in some cases, it avoids the extra layer of complexity when a foreclosure lawyer is involved on behalf of the lender.

Mortgage Servicing and Loan Modifications: 6.4.9 Saving Up a Lump Sum

Borrowers should be encouraged to save anything possible toward the mortgage while a workout is being discussed. (If possible, those funds should be placed in escrow.) Even if the mortgage holder has refused partial payments, after several months the accumulated lump sum may be useful in workout discussions. In some instances, a growing arrearage balance may at some point make a loan modification unfeasible.

Mortgage Servicing and Loan Modifications: 6.5.1 Knowing What Terms to Request

Advocates for borrowers with Fannie Mae, Freddie Mac, FHA, VA, RHS, and USDA loans should understand the rules that apply for those loans in helping borrowers assess potential workout options. For loans held in portfolio or in a private-label securitization, the situation is more challenging because there are not fixed modification programs with transparent terms. Many servicers have adopted an internal modification protocol post-HAMP, but it is difficult to know when these protocols apply.

Mortgage Servicing and Loan Modifications: 6.5.2.1 Generally

As discussed above, when evaluating a loan modification or other workout proposal, first determine who holds, guarantees, or insures the mortgage. The servicer should tell you who owns or insures the mortgage. For instructions on obtaining this information from recalcitrant servicers, see § 4.7.2, supra.

Mortgage Servicing and Loan Modifications: 6.5.2.2 Workout Limits Based Upon a Loan’s Securitization

Servicers often claim that when a mortgage has been securitized, the servicer’s actions are limited by a pooling and servicing agreement (PSA), and spelled out in servicing contracts or guidebooks which are incorporated by reference in the servicing contract.81 Some pooling and servicing agreements give servicers the ability to modify any loans, while others cap loan modifications to a fixed number or percentage of the outstanding balance in the loan pool.82 Still other PSAs limit certain modificati

Mortgage Servicing and Loan Modifications: 6.5.3 Requesting Delay of Foreclosure Sales

At the outset, the most important request may be for a delay of the foreclosure sale process long enough to make a workout application. Depending on when the application package is submitted, and whether it is complete, such a delay may be required.85 A completed foreclosure sale will generally cut off all workout possibilities.86 In addition, as the foreclosure process moves forward, the mortgage holder continues to incur costs that will eventually have to be reimbursed by the borrower.

Mortgage Servicing and Loan Modifications: 6.5.4 When the Servicer Initiates a Modification

Sometimes the servicer may initiate contact with borrowers to offer a modification or other workout agreement. If the homeowner receives a pre-approved modification offer, it should be reviewed carefully. The offers are based on the information that the servicer has on file regarding the homeowner’s income, principal balance, and property value, among other factors. These modifications do not take into account a borrower’s actual income, and thus may not provide the best possible option.95

Mortgage Servicing and Loan Modifications: 6.5.5 The Homeowner’s Application for a Workout

Different mortgage holders and their servicers have different workout application processes and forms. They generally obtain financial information about the borrower’s debts, assets, income, expenses and reasons for default, with appropriate verification although there has been a recent trend to streamline and minimize the information collected. Additionally, mortgage servicers may obtain a property appraisal and/or a credit report.

Mortgage Servicing and Loan Modifications: 6.5.6 Workout and Foreclosure Fees

Some servicers or investors purport to charge a workout or modification fee for handling workout applications. Some want this up front regardless of the application’s outcome. When possible, however, modification fees should be avoided or minimized. This can involve requesting a waiver or asking for a fee reduction to make the modification affordable.

Mortgage Servicing and Loan Modifications: 11.2.4 Appraisal

A determination of the current fair market value of the client’s home is important for determining what claims the homeowner may be able to assert as well as what outcomes are realistic for the homeowner. When dealing with abusive lending, property flipping, or foreclosure rescue scams, it is also a good idea to obtain an estimate of the home value at the time of the transaction. Some loan modification programs are also based, at least in part, on the value of the home.

Mortgage Servicing and Loan Modifications: 11.2.5.1 Payoff Amount

The payoff amount is typically the amount the homeowner is required to pay to satisfy the loan and obtain a release of the mortgage or reconveyance of the deed of trust. In addition to principal and interest owed on the loan, the payoff amount will include any prepayment penalties, late fees, or other fees that the servicer believes are due. It may be useful to compare the current payoff amount to any previous payoff statements that the homeowners obtained to determine if any improper fees or charges have been assessed.

Mortgage Servicing and Loan Modifications: 11.2.5.2 Payment History

A complete life-of-the-loan payment history should be obtained from the current servicer. The payment history should provide a complete breakdown of all transactions from the date of the original loan closing to the present. The payment history should show each payment received as well as how that payment was credited.

Mortgage Servicing and Loan Modifications: 11.2.5.3 Contact History

Most servicers maintain a contact history detailing communications with the homeowner and other third parties. The contact history may also list important events in the loan’s history such as the date letters were sent to the borrower or the date the loan was referred to a default servicer. Automated calls to the borrower may also be recorded in the contact history. Note that different servicer departments (e.g., collections, loss mitigation, foreclosure, tax, insurance) may maintain separate contact histories. When possible, it is best to obtain a consolidated contact history.

Mortgage Servicing and Loan Modifications: 11.2.5.4 Periodic Statements

For closed-end loans, servicers are required to send periodic statements to borrowers on residential mortgage loans unless an exemption applies.38 Exemptions to the periodic statement rule apply to reverse mortgages, timeshare plans, and if the servicer provides the consumer with a coupon book that provides specific information about the loan, a practice not much used anymore.39 Small servicers, as defined an

Mortgage Servicing and Loan Modifications: 11.2.5.5 Loss Mitigation Documents

Many servicing problems revolve around the failure to properly evaluate the homeowner for loss mitigation options. In these cases, advocates should submit a request for information under RESPA asking for the relevant loss mitigation documents.45 These may include items mailed to or received by the borrower, underwriting documents, investor guidelines, internal notes regarding loss mitigation, property valuations, call logs and recordings, and any loss mitigation agreements.

Mortgage Servicing and Loan Modifications: 11.2.5.6 Pooling and Servicing Agreement

Pooling and servicing agreements (PSAs) broadly govern the securitization of residential mortgage loans, including the formation of the trust (which becomes the owner of the loans), the servicing of the loans in the trust, and the duties of various parties to the trust agreement. The PSA may outline the loss mitigation or workout options available to the servicer and the parameters of the servicer’s authority to implement those options. If a borrower is denied for a loss mitigation option based on “investor guidelines,” the servicer might be referring to the PSA.

Mortgage Servicing and Loan Modifications: 11.2.5.7 Transfer of Servicing Notice

Lenders are required at the time of application for most mortgage loans to disclose to each applicant whether the servicing of the loan may be assigned, sold, or transferred at any time during the term of the mortgage.49 If the servicing of a mortgage is transferred after the mortgage loan is made, both the former and the new servicer must notify the borrower in writing of the transfer.50 Since many servicing problems occur at or near the time of transfer of servicing, the information contained in t

Mortgage Servicing and Loan Modifications: 11.2.5.8 Bankruptcy Notices

If the borrower filed a chapter 13 bankruptcy case to cure a mortgage default after December 1, 2011, Bankruptcy Rules 3001 and 3002.1 require the servicer to disclose prepetition default fees and arrearage amounts on the initial proof of claim, send notices of any mortgage payment changes, send notices of any fees and expenses that are charged to the borrower’s account during the case, and file a response at the end of the case indicating whether the borrower has fully cured the default.51 This information produced during the bankruptcy case,