After borrowers get mortgage loans with a lender, the loans are often transferred or sold to a mortgage servicer who manages the loan. Your servicer is often not the bank that loaned you the money. Mortgage servicers have to follow federal rules relating to payment processing, information requests, late payments, and loss mitigation. These rules help protect borrowers from foreclosure. Sometimes servicers make costly mistakes, so it’s good to know what these rules are and how to find and address errors.
Written by Attorney William A. McCarthy.
Updated November 26, 2021
Most homebuyers work closely with their mortgage lender but may not know what happens to the loan after it closes. For example, who do you contact if you’re charged an improper late fee? A mortgage servicer handles your loan account when your payments begin, and the servicer may or may not be the original lender.
This article explains what you need to know about mortgage servicers, including some serious errors they can make and what you can do to fix them. It also covers important rules servicers must follow to make sure your payments are properly handled and you’re treated fairly in the event of a default.
What's a Mortgage Servicer?
A mortgage servicer is a company that manages your loan after the loan closes and the proceeds are dispersed. A mortgage lender, on the other hand, is a financial institution that loaned you the money. Servicers include banks, credit unions, non-bank mortgage lenders, and other financial institutions that service loans.
Banks sometimes service the loans they originate, but lenders often sell their loans along with the servicing rights to another financial institution. Banks may even separate a loan from the servicing rights by transferring just the mortgage servicing rights (MSRs) to a third party that specializes in servicing mortgages. The bank will pay a fee to the new servicer.
Mortgage loans are commonly bought and sold on the secondary mortgage market. Many real estate loans are purchased by Fannie Mae and Freddie Mac, mortgage companies created and backed by the federal government. Because neither company services its loans, the servicing function has to be performed by third parties. Large servicers that are responsible for thousands of loans typically handle loans owned by Fannie Mae and Freddie Mac.
What Does a Mortgage Servicer Do?
Your servicer may change over the life of your mortgage but their role remains the same. Some typical functions of a mortgage servicer include:
Collecting and processing mortgage payments.
Tracking the amount you’ve paid toward principal and interest.
Managing escrow accounts for homeowner’s insurance and property tax payments.
Providing tax forms, such as those for total interest paid.
Assisting with questions regarding the loan and providing the information you request.
Sending late payment notices.
Assisting with foreclosure avoidance strategies if you’re past due on payments.
Filing judicial or nonjudicial foreclosure documents in the event of default.
What if you don’t know who your loan servicer is and you have questions or need information? Your servicer’s telephone number and address should be on your monthly mortgage statement or coupon book. You can also search the Mortgage Electronic Registration System (MERS) to see if your loan is registered with MERS. The mortgage banking industry created this system to keep track of mortgage transfers and loan servicer changes.
What if you don’t like your loan servicer? As with most types of businesses, some are better than others. Unfortunately, you can’t request a new one if there’s a problem. But there are rules they must follow and ways you can address problems.
Common Errors Servicers Make
A home loan is a huge responsibility and you want your payments to be handled properly. But loan servicers can make mistakes that cost you time and money. Some common errors to watch out for are:
Improper late fees or other charges.
Mortgage payments that were improperly recorded or applied to the wrong account.
Incorrect interest computations.
Incorrect principal balance computations.
Incorrect escrow account balance.
Misallocated payments for property taxes and homeowner’s insurance from the escrow account.
Using improper tactics when it comes to late payments and the foreclosure process.
Errors are more likely to happen when the lender sells your loan and a new company takes over your account. So pay special attention to your statements if your loan is sold. The new servicer might not receive all of your account information or there may be a delay in processing payments. If you aren’t properly notified of the transfer, you could also send your payments to the wrong address.
If you suspect that your servicer made an error or you need to verify any information, you can request information from your servicer. They’re required to follow a lot of rules and one of those is responding to requests for information promptly and correcting errors.
Loan servicing, like many businesses, is also susceptible to scams. If you’re notified that your loan account has been transferred and you must make payments to another company, confirm that the new company is legitimate. You don’t want to find out you’ve been scammed by learning that you’re behind on your payments and you’ve been paying a scammer.
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Rules Servicers Should Follow
The Consumer Financial Protection Bureau (CFPB) is responsible for establishing mortgage servicing rules to protect homeowners and to help them avoid a foreclosure sale. The rules include:
Payment processing: Servicers are required to credit your loan payment on the date the payment is actually received.
Responding to and correcting errors: Servicers are required to investigate and respond to a qualified written request for information (or to correct an error) within 30 days.
Notification of transfer: If the company handling your loan changes, both the old company and the new company must send you a written notice telling you about the transfer.
Early intervention & loss mitigation options: Servicers are required to contact you within a certain number of days after each missed payment to inform you of your loss mitigation options to avoid a foreclosure. The options may include a forbearance agreement, repayment plan, loan modification, short sale, or deed-in-lieu of foreclosure.
These aren’t the only rules keeping servicers in line. Servicers of loans that are backed by the Federal Housing Administration (FHA) must follow additional loss mitigation rules set by the U.S. Department of Housing and Urban Development (HUD).
If servicers have followed all the above rules and can still proceed with the foreclosure process, they must follow additional rules.
No dual tracking: Servicers can’t start a foreclosure proceeding if a borrower has already submitted an application for a loan modification or other alternative to foreclosure and that application is pending. They can’t pursue both “tracks” at the same time.
No foreclosure sale until alternatives are considered: If they offer an alternative to foreclosure like forbearance, they must give a borrower time to accept the offer before moving forward with foreclosure.
If your servicer initiates foreclosure proceedings, you’ll want to consider your foreclosure defenses. You might be able to delay or dismiss the foreclosure if the servicer has violated federal law, including failing to comply with the CFPB’s rules. If you believe your servicer made a mistake with your loan, violated a rule, or isn’t treating you fairly, you have options. You can get help from an experienced foreclosure attorney or a legal aid organization. You can also file a complaint with the CFPB. If you have a government-backed mortgage and you’re facing foreclosure, you can also reach out to a HUD housing counselor for help.
Mortgage Servicers’ Restrictions Due to COVID-19 Pandemic
On June 28, 2021, the CFPB issued a mortgage servicing COVID-19 rule (2021 Rule) to give borrowers additional assistance to deal with financial hardship during the pandemic. The 2021 Rule is effective August 31, 2021, through December 31, 2021. It includes the following temporary rules for servicers:
They are required to provide certain borrowers with additional information after they’re contacted about missed payments. This includes more information about available forbearance programs.
They are required to offer certain borrowers streamlined loan modifications.
They must comply with special COVID-19 loss mitigation safeguards to ensure a borrower has the opportunity to apply for the safeguards before foreclosure.
They must make sure at least one of three new procedural safeguards has been met before referring delinquent accounts for foreclosure.
The foreclosure moratoriums under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which have expired, generally applied to federally backed mortgage loans like FHA and USDA loans. The temporary 2021 Rule applies to a broader category of mortgage loans. The 2021 Rule will likely prevent servicers from doing foreclosure sales until after December 31, 2021.
After you get a mortgage loan with a lender, that loan is often transferred or sold to a mortgage servicer. The servicer’s job is to handle the administrative tasks of your loan, including receiving and allocating payments and following up on late payments. Your servicer is often not the bank that loaned you the money. Many lenders use a third party to service the loans they originate.
Servicers make mistakes that can cost borrowers time and money. It’s good to keep an eye out for some of the common mistakes, especially if a new company takes over your loan account. Servicers must follow federal rules relating to payment processing, responding to your requests, late payments, and loss mitigation. These rules are in place to protect homeowners from foreclosure. There are even some temporary pandemic-related amendments to the rules that provide further safeguards. Knowing what servicers can and can’t do can potentially save a lot of time and money. It may even save your house.