Predatory mortgage servicing (predatory servicing) is a pejorative term used to describe abusive, unfair, deceptive, or fraudulent mortgage servicing practices of some mortgage servicers during the mortgage servicing process. There is no legal definition in the United States for predatory mortgage servicing. However, the term is widely used[1] and accepted by state and federal regulatory agencies[2] such as the FDIC, OTS, OCC, FTC and Government Sponsored Enterprises (GSEs) such as Fannie Mae and Freddie Mac.[3]
The term is believed to have been coined in a 1999 white paper titled 20th Century Loan Sharks[4] from Americans Against Mortgage Abuse. The paper's author, Nye Lavalle, described four stages of predatory mortgage practices that included: Stage 1 -- Predatory Mortgage Securitization; Stage 2 -- Predatory Mortgage Origination/Lending; Stage 3 -- Predatory Mortgage Servicing; and Stage 4 -- Predatory Mortgage Foreclosure. The term "predatory servicing" was used in Lavalle's report against Bear Stearns and EMC Mortgage that same year.[5][6][7][8]
While there are no specific laws against predatory mortgage servicing abuses,[9] there are local, state, and federal laws against many of the specific practices commonly identified as predatory mortgage servicing abuses, and various state and federal agencies use the term as a catch-all term for many specific illegal activities in the mortgage servicing industry. Predatory mortgage servicing is not to be confused with predatory lending which is used to describe the unfair, deceptive, or fraudulent practices of mortgage brokers and lenders during the mortgage loan origination process.[10]
Predatory mortgage servicing typically occurs on subprime, Alt-A, scratch and dent, and toxic mortgages that are being serviced by special or default servicers or servicers and lenders that are financially in trouble. There are many motives for predatory servicing practices and a report titled Misbehavior and Mistake in Bankruptcy Mortgage Claim by Katherine M. Porter, professor of law at the University of Iowa details the effects and damages caused by servicing abuses.[11] The landmark report has been cited by several state and federal judges in decisions related to predatory mortgage servicing and foreclosure practices.
In mortgage securitization transactions, the mortgage servicer forwards the borrower's payment of principal and interest to the certificate holders (investors) of the special securitized trust that owns and holds the promissory notes secured by the mortgages and deeds of trust. The mortgage servicer, however, is allowed to retain late fees, BPO fees, inspection fees, and other fees charged or assessed to a borrower's account. In addition to the fee income, the servicer is allowed to retain the net liquidation proceeds of any foreclosure sale (net after foreclosure expenses and principal balance to investors). This provides an incentive to unscrupulous servicers who aggressively interpret mortgage documents to add additional fees[12] to a borrower's mortgage account. Many times, the additional fees added on create an event of default allowing the mortgage servicer to foreclose on the property. This practice is commonly referred to as manufacturing a default or manufactured default.
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Abusive or predatory mortgage servicing practices
There are many mortgage servicing practices which have been called abusive and labeled with the term "predatory mortgage servicing practices." There is a great deal of dispute between servicers, lenders and consumer groups as to what exactly constitutes "unfair" or "predatory" mortgage servicing practices, but the following were cited in the AAMA report as red flags for predatory servicing abuses:[13]
- Billing borrowers on a bill & receipt system;
- Changing, redacting, altering, replacing, whiting out, misstating, mislabeling or mischaracterizing transactions in a borrower’s loan or escrow account history that are different than other histories in time or the master loan history and general ledger;
- Sending mix and match loan and transactions histories from different sources;
- Charging property inspections, used as collection measures, to a borrower’s account when the servicers has charged the borrower a late fee;
- Charging the borrower’s account with any fee without first providing notice and demand to the customer for such fee so at to affect interest amortization and allocation;
- Creating false, fraudulent or dummy bookkeeping transactions in a borrower’s loan or escrow account;
- Delaying the posting of payments made by the borrower prior to late fee assessment date so as to assess and charge a late fee to the borrower;
- Demand of excessive prepayment penalties;
- Demand of expenses and fees not obligated for;
- Failing to identify charges made to a borrower’s account on their statements;
- Failing to post or report a customer’s good credit to credit agencies;
- Failing to provide accurate loan balance amounts and loan payoff amounts;
- Failing to stop credit reporting for 60 days after receiving a written dispute;
- Force placing an insurance policy on a borrower’s property when a borrower has their own insurance;
- Holding funds in suspense and not crediting them to account so as to increase calculations of escrow balances and payments around escrow analysis and adjustment dates;
- Holding payments in suspense/unapplied accounts and not notifying the borrower of such actions or reflecting the credit of the payment in any payment or escrow balances on loan statements, demand letters or notices sent to the borrower;
- Instructing the borrower not to send in any payments while their complaints or disputes are investigated and then charging them a late fee;
- Mislabeling or concealing charges made to a borrower’s account on their statements;
- Not reporting disputed accounts as disputed to credit reporting agencies
- Ordering BPOs or appraisals on a customer’s property and then charging their account;
- Over-calculating and then over-demanding escrow payments;
- Over-calculating and then over-demanding principal and interest payments;
- Placing debts, charges, payments and fees that were previously discharged by a federal bankruptcy court back into the borrower’s account as a misc. Escrow adjustment;
- Placing non-recoverable corporate advances unto a borrower’s escrow account;
- Placing non-recurring items and expenses not previously owed or demanded into the borrower’s escrow account;
- Providing fraudulent, altered or incomplete account histories to the borrower;
- Providing the borrower with notices of inflated payoffs or demands;
- Refusing to accept payments from the borrower when borrower is disputing charges to his or her account;
- Refusing to accept the borrower’s own hazard insurance that meets lender’s requirements;
- Refusing to accept the borrower’s own hazard insurance without payment of a fee;
- Refusing to or not manually recalculating loan payments, amortization schedules, principal and interest allocations; late fee assessments and other accounting adjustments from the date in which errors, mistakes or problems were made to the date identified;
- Refusing to provide loan or account histories to the borrower;
- Refusing to send borrowers payment coupons to their designated “mailing” address, not the property address;
- Sending borrowers payment coupons after the due date of the loan;
- Threatening to improperly ruin a customer’s credit reputation;
- Use of abusive & threatening collection practices;
- Using “property inspections” as collection measures;
- Using the wrong date for interest calculations on loans;
- Using the wrong due date on payment notices;
- Using the wrong index for application of interest for arm loans; and
- Using the wrong late fee assessment date on payment notices.
Helpful websites
http://www.msfraud.org/ http://www.livinglies.files.wordpress.com/
References
- ^ http://www.mortgagebankers.org/files/Conferences/2008/2008LIRC/LIRC08GeneralLitigationandClassAct.pdf
- ^ http://www.scribd.com/doc/14459600/Turning-a-Blind-Eye
- ^ http://www.freddiemac.com/service/msp/pdf/responsible_practices.pdf
- ^ http://www.scribd.com/doc/13625416/AAMA-Report
- ^ Predatory Grizzly "Bear" Attacks Innocent, Elderly, Poor, Minorities, Disabled & Disadvantaged!; Lavalle, Nye; AAMA; 1999, February
- ^ http://www.msfraud.org/Articles/predbear.pdf
- ^ 20th Century Loansharks; Lavalle, Nye; AAMA; 1999, July
- ^ http://www.jdsupra.com/post/documentViewer.aspx?fid=197d1b59-e33e-47e0-92b0-d61992e9ed22
- ^ http://www.accessmylibrary.com/coms2/summary_0286-22183264_ITM
- ^ http://www.businessweek.com/magazine/content/06_52/b4015147.htm?chan=top+news_top+news+index_businessweek+exclusives
- ^ http://money.cnn.com/2007/11/28/news/companies/countrywide_foreclosure/
- ^ http://seattletimes.nwsource.com/html/realestate/2003522241_guttentag14.html?syndication=rss
- ^ http://www.scribd.com/doc/13625416/AAMA-Report
See also
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