June 25, 2024

3 Common Mortgage Loan Servicing Errors You Can Avoid

Consumer protection agencies and advocates are taking a closer look at mortgage servicers’ practices from both a regulatory compliance perspective and an equity and fairness perspective. Already, financial institutions have increased vigilance on rules like TILA-RESPA Integrated Disclosures (TRID). Now, the Consumer Financial Protection Bureau (CFPB) has directed its examiners to evaluate whether servicing and collection practices raise Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) concerns.

To protect your financial institution from regulatory scrutiny, familiarize yourself with regulatory requirements related to mortgage servicing. Applying these requirements equally to all borrowers throughout the loan life cycle can help you avoid common, yet costly, errors.

Examples of issues we see when reviewing servicing practices include:

Force-Placing Hazard Insurance

One common mistake occurs when a servicer could maintain the borrower’s existing policy but instead force-places hazard insurance. A large servicer is prohibited from force-placing hazard insurance if the borrower has an escrow account and the servicer can maintain the borrower’s existing hazard insurance policy.

Closing an Escrow Account Too Soon

The borrower must have received the escrow account closing notice no later than three business days before the escrow account closure when the borrower requests that the account be closed. If the servicer cancels the escrow account, the borrower must have received the escrow account closing notice no later than 30 business days before closure. Additionally, if the notice is not provided in person, the borrower is considered to have received the notice three business days after delivery or placed in the mail. Be sure to allow enough time to elapse following the delivery of an escrow account closing notice.

Emailing or Texting Delinquent Borrowers

A large servicer must make a good faith effort to make live contact with a delinquent borrower by the 36th day of delinquency. They must also continue to make live contact attempts each month for as long as the borrower remains delinquent. Today, with e-mail and texting being the most popular form of communication, servicing staff may be tempted to contact delinquent borrowers using one of these electronic methods. Remember that sending an e-mail or text is not “live.” Live contact includes talking on the phone or meeting the borrower in person.

Remaining aware of these common mistakes can keep your organization out of the eagle eye of regulatory agencies. Extra vigilance at the front end can save your financial institution time and effort down the road.

The Anders Banking and Financial Institutions team work with a variety of entities in the lending industry to ensure compliance with federal regulations. Learn more about how advisors can keep your institution in compliance, and the associated fees, by requesting a meeting below.

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