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Keeping an eye on loan abuse
Deceptive mortgage loan practices have prompted changes to the law to protect consumers.

Date published: 12/23/2012


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.

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