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Testimony of Julia Gordon Senior Policy Counsel, Center for ...
Testimony of Julia Gordon
Center for Responsible Lending
Before the U.S. House of Representatives
Committee on Financial Services
Subcommittee on Insurance, Housing and Community Opportunity
H. Mortgage servicers engage in a range of predatory and illegal
practices both in the foreclosure process and leading up to foreclosure.
For at least a decade, community-based organizations, housing counselors and advocates
nationwide have documented a pattern of shoddy, abusive and illegal practices by
mortgage servicers whose staff are trained for collection activities rather than loss
mitigation, whose infrastructure cannot handle the volume and intensity of demand, and
whose business records are a mess.44
The most egregious of these abuses include:
Misapplication of borrower payments, which results in inappropriate and
unauthorized late fees and other charges, as well as misuse of borrower funds
improperly placed in “suspense” accounts to create income for servicers.
Force-placing very expensive hazard insurance and charging the borrower’s
account when the borrower’s hazard insurance has not lapsed, often driving an
otherwise current borrower into delinquency and even foreclosure.
Charging unlawful default- and delinquency-related fees for property monitoring
and broker price opinions.
Failing or refusing to provide payoff quotations to borrowers, preventing
refinancing and short sales.
Improperly managing borrower accounts for real estate tax and insurance
escrows, including failure to timely disburse payments for insurance and taxes,
causing cancellation and then improper force-placing of insurance as well as tax
delinquencies and tax sales.
Abuses in the default and delinquency process, including failing to properly send
notices of default, prematurely initiating foreclosures during right to cure periods
and immediately following transfer from another servicer and without proper
notices to borrowers, initiating foreclosure when borrower is not in default or
when borrower has cured the default by paying the required amount, and failing to
adhere to loss mitigation requirements of investors.
These practices have become so ingrained in the servicing culture that they are now
endemic in the industry. The harm to which borrowers have been subjected as a result of
these abuses cannot be overstated. Numerous homeowners are burdened with
unsupported and inflated mortgage balances and have been subjected to unnecessary
defaults and wrongful foreclosures even when they are not delinquent. Countless
families have been removed from their homes despite the absence of a valid claim that
their mortgage was in arrears.
Perverse financial incentives in pooling and servicing contracts explain why servicers
press forward with foreclosures when other solutions are more advantageous to both
homeowner and investor. For example, servicers are entitled to charge and collect a
variety of fees after the homeowner goes into default and can recover the full amount of
those fees off the top of the foreclosure proceeds.45 The problem of misaligned
incentives is compounded by a lack of adequate resources, management, and quality
What's more, recent legal proceedings have uncovered the servicing industry’s stunning
disregard of basic due process requirements.46 Numerous servicers have engaged in
widespread fraud in pursuing foreclosures through the courts and, in non-judicial
foreclosure states, through power of sale clauses. It is becoming more and more apparent
that servicers falsify court documents not just to save time and money, but because they
simply have not kept the accurate records of ownership, payments and escrow accounts
that would enable them to proceed legally. The public is also now learning what
foreclosure defense attorneys have asserted for years: the ownership of potentially
millions of mortgages is in question due to "innovations" and short-cuts designed to
speed the mortgage securitization process.47
As noted above, the illegal practices of servicers during the foreclosure process are not
simply a technical problem. Due process when taking private property is a cornerstone of
our legal system, and case after case reveals that this is not just a question of dotting the
I’s and crossing the T’s, but of unnecessary and even wrongful foreclosures. The rules
that the banks have broken in their rush to foreclose were put in place specifically to give
people a fair chance to save their homes, and without them, homeowners are powerless to
save their homes.