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A homeowner who renegotiated a subprime mortgage loan didn't realize that it came with a catch.
His monthly payment went down partly because it no longer included an escrow account to cover property taxes and insurance--even though the broker had said that it did.
It didn't dawn on the homeowner that he'd been deceived until a property tax bill for $4,500 arrived in the mail, said Diane Cipollone, director of Training for the National Fair Housing Alliance. He had to choose between paying his mortgage or paying the tax bill.
The homeowner, who was one of Cipollone's clients several years ago, wasn't the only such victim. The majority of subprime loans didn't have an escrow account for taxes and insurance, she said. And deceptive mortgage loan practices such as this helped to trigger the foreclosure crisis.
Today, escrow accounts are required for most first lien loans, and mortgage loan applicants must receive written disclosure of the account at least three business days prior to closing, she said in a recent webinar done on behalf of the National Crime Prevention Council.
Cipollone outlined several other deceptive mortgage practices during her online presentation, discussed the laws enacted to help prevent them, and urged victims to report unfair treatment.
Among the abuses that made her list was the failure by some loan servicers, who are responsible for the day-to-day management of mortgage loan accounts, to ignore a request to pay off an existing loan after a client refinances it. The borrower's refinancing can then fall through, leaving him stuck with a mortgage he can't afford.
The Dodd-Frank Wall Street Reform and Consumer Protection Act Title XIV, also known as the Mortgage Reform and Anti-Predatory Lending Act, now requires servicers to send an accurate payoff balance within a reasonable time to the lender. It should not be later than seven business days after receipt of written request from or on behalf of the borrower, Cipollone said.
Another abuse occurs when a servicer fails to pay a homeowner's mortgage loan, property taxes or insurance bills on time if they'd received payment before the deadline. The homeowner then gets slapped with late fees and a negative credit report--factors that could spiral into a foreclosure.
Dodd-Frank now requires mortgage loan servicers to credit payment to a loan account on the same day that it arrives.
"Most reputable servicers will date-stamp payments when received," Cipollone said.
Borrowers who are paying property taxes and homeowners' insurance themselves can run into trouble if their servicer asks for proof of payment or a copy of their policy and they fail to respond or say they didn't pay their tax bill or let their insurance lapse.
The service provider has the right to charge the borrower for what is known as "forced-placed hazard insurance" or "lender-placed insurance." Not only is this type of insurance extremely expensive, but it just protects the lender, Cipollone said.
"It could be double what the client would have paid on a monthly basis," she said. "Then the monthly mortgage payment is increased. This could be several hundred dollars a month. If the client can't pay, they have to default."
Some abusive servicers would refuse to remove the insurance and continue to charge for it after the borrower finally sends in proof of payment. There were so many instances of this type of abuse that it had to be addressed by law, Cipollone said.
Servicers are now required to correct their records within 15 days of receipt of confirmation of borrower's existing policy. They also must terminate the lender-placed policy and refund insurance fees paid by the borrower while the borrower's insurance in effect.
If borrowers or their advocates think that they've been charged a penalty, late fee or some other fee by mistake, or if they have other problems with the servicing of their loan, they should fire off a letter to the Qualified Written Request, or QWR, address on the back of their monthly mortgage statement, Cipollone said.
It should be dated and include the loan number and property address, a brief statement of issue and the borrower's signature. Cipollone recommended that the letter be sent by registered mail, although that isn't required by law.
Under federal law, mortgage servicers must send a written acknowledgment within 20 business days of receiving the inquiry. Then, within 60 business days, the servicer must correct the borrower's account or determine that it is accurate. The servicer also must send a written notice of the action it took and why, as well as the name and phone number of someone to contact.
"The QWR is a vehicle to correct errors on servicing, but not on the origination, of a loan," Cipollone said. "It has a very narrow purpose, but it's a very important purpose because it requires the servicer to respond."
Cathy Jett: 540/374-5407