MORTGAGE SERVICING MISTAKES TO AVOID IN 2023

In its most recent Supervisory Highlights publication, the CFPB focused on mortgage servicing errors that resulted in unlawful “junk” fees charged to borrowers and were cited as UDAAPs and Regulation Z violations by examiners.  These unwarranted fees were the result of inadvertent mistakes that mortgage servicers can avoid by performing scheduled audits of statements and fees and implementing appropriate controls.

1. EXCESSIVE LATE FEES

Examiners found that servicers charged late fees that exceeded the maximum late fee specified in the loan agreements.  Servicers charged the maximum allowable late fees under state law, which frequently exceeded the specific caps in the loan documents.  This mistake was cited as both a UDAAP issue and a Regulation Z violation because periodic statements issued by these servicers included inaccurate late payment fee amounts that exceeded the amounts allowed by the loan agreements.

2. UNNECESSARY PROPERTY INSPECTIONS

Servicers routinely pass through the cost of required property inspections to delinquent borrowers.  However, examiners found that in some cases servicers repeatedly sent property inspectors to visit properties despite having been previously informed that the property address was incorrect.  Servicers didn’t inform borrowers of the bad addresses, causing the borrower to rack up unnecessary property preservation fees.  Examiners cited these charges to borrowers for repeat property preservation visits to known bad addresses as an unfair act or practice.

3. MISREPRESENTING MORTGAGE INSURANCE PREMIUMS

Examiners found that servicers sent monthly periodic statements and escrow disclosures that included monthly borrower-paid private mortgage insurance (PMI) premiums for borrowers with lender-paid PMI.  Borrowers made overpayments that included these PMI premium amounts even when they did not actually have borrower-paid PMI on their accounts. The examiners found this practice to be a UDAAP violation because the statements and disclosures were misleading, and it is reasonable for  borrowers to rely on their servicer’s calculations of their monthly payment amount.

4. EXCESS PMI PAYMENTS

Under the Homeowners Protection Act (HPA), servicers must automatically terminate PMI when the principal balance of the mortgage loan reaches 78 percent of the original value of the property based on the applicable amortization schedule, so long as the borrower is current. Examiners found that servicers violated the HPA by failing to cancel PMI when required, resulting in overpayments of PMI by borrowers.

5. FEES FOR FHA BORROWERS AFTER CARES ACT FORBEARANCE

Mortgage servicer examiners found that servicers engaged in unfair acts or practices by failing to waive certain late charges, fees, and penalties accrued outside forbearance periods as required by HUD when the borrower entered a permanent COVID-19 loss mitigation option.

6. DECEPTIVE LATE FEES

Borrowers received periodic statements in their last month of forbearance that mistakenly listed a $0 late fee amount.  The servicers then charged late fees for a late first payment after exiting forbearance. Examiners found that this practice was deceptive because borrowers’ reliance on the information in the statement was reasonable, and perhaps these borrowers would have made a timely payment if not for their belief that no late fee would be charged.

In response to these findings, the servicers waived and/or refunded erroneous charges to borrowers and took corrective actions such as updating policies and procedures and implementing enhanced controls.  Servicers should review internal controls for procedures to catch these types of errors so that appropriate corrective measures can be implemented as soon as possible.

The information contained herein is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this blog should be construed as legal advice from Shumaker Williams P.C. or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. This blog is current as of the date of original publication.