This term encompasses several practices that harm borrowers, including loan servicers illegally charging borrowers extra fees, not crediting borrowers' payments or charging borrowers for insurance they already have.
The new law makes progress in regulating loan servicing, but it fails to address all the predatory loan servicing practices that harm borrowers.
Loan servicing companies collect and process mortgage payments from borrowers and submit the payments to the mortgage owners. Two key factors may lower the incentive for servicers to act in the best interests of homeowners.
First, while borrowers choose their lenders, they have no input as to what company services their loan.
Second, loan servicers are typically allowed to keep all revenue generated from the fees they charge borrowers.
Kurt Eggert, a law professor at Chapman University, has cited the example of Countrywide Financial CEO Angelo Mozilo, who allegedly bragged in 2004 that fees generated an extra $17 million to $19 million in monthly revenue.
State House Bill 1374, signed into law in August, is intended to better regulate mortgage loan servicing. The need for regulation was clear; in addition to lawsuits in North Carolina and settlements at the national level, North Carolina's commissioner of banks received 299 complaints about loan servicing in 2007, a 32 percent increase from the prior year.
Two of the most significant provisions in the law, Sections Four and Five, did not take effect until April 1. As part of the foreclosure process, Section Four requires loan servicers to disclose whether or not they met a borrower's requests for information about their loan in the two years leading up to a foreclosure. In addition, servicers are now required to provide borrowers with more information about the foreclosure process and the possibility of seeking advice from Legal Aid.
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WHILE THIS EXTRA INFORMATION MAY BENEFIT SOME BORROWERS, if they are already in the foreclosure process it may be too late.
North Carolina's current foreclosure process is heavily weighted in the lender's favor and provides little recourse to borrowers who have been subject to predatory loans or predatory loan servicing. In a case in Alamance County, a couple nearly lost their home after their loan servicer provided abysmal service and refused to accept their loan payments. Despite this, a Superior Court clerk approved the servicer's request to foreclose.
The couple appealed, and a Superior Court judge overruled the clerk and denied the foreclosure. That ruling was later upheld by the N.C. Court of Appeals. While this couple was fortunate, their story highlights the harmful effects of bad loan servicing.
Section Five of the new law addresses servicer fees, how mortgage payments are credited and borrowers' requests for information. As of April 1, if a servicer charges a fee, it must be assessed within 45 days or it is considered waived. Servicers are now required to credit a mortgage payment within one day of receiving it or to explain to the borrower within 10 days as to why a payment was not credited. In addition, servicers are required to respond to a borrower's request for information within either 10 or 25 days, depending on the type of request.
Section Five also addresses escrow accounts. Servicers are required to collect and handle a borrower's escrow payments and "to ensure that no late penalties are assessed or other negative consequences result."
While the new law is a good start, a number of abusive servicing practices are not addressed in it. The General Assembly could try to write legislation banning these practices, but there is a much simpler solution. Legislators should pass a bill giving the commissioner of banks the authority to regulate loan servicing.
With such authority, the commissioner could better track companies that engage in abusive practices and take action to protect borrowers. Loan servicers and lenders that do not engage in predatory loan servicing should welcome this oversight. It would ensure that the industry does not earn a bad reputation.
The General Assembly has a strong history of passing legislation to protect borrowers without decreasing the availability of credit. The state's1999 anti-predatory lending law has been used as model legislation elsewhere. Although last year's law will protect homeowners from some harmful servicing practices, empowering the banking commissioner is the next logical step to protect homeowners from abusive loan servicing. (Sean Coffey is a student in the master of public administration program at UNC-Chapel Hill. His master's thesis focused on House Bill 1374.)
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