Home Loan Practices That Should Be Illegal
The home loan origination field lends itself to predatory practicing. Due to the complicated aspects of the process, borrowers are easily confused.
Sadly, too many firms that service mortgages for consumers take advantage of this fact. With that in mind, here are a few practices we believe should be outlawed in order to protect hopeful owners:
Mandatory Provision of Complete and Comprehensible Monthly Statement. The law should require servicers to provide easy-to-understand monthly statements showing everything that transpired during the month that affected the borrower’s account. This should include balance changes and their sources, payments, disbursements, mortgage rate adjustments, and fees.
Rationale: In the absence of comprehensible monthly statements, predatory practices can go unnoticed by the borrower indefinitely.
No Suspension of Payments Because of an Escrow Shortage. Servicers should be prohibited from placing scheduled mortgage payments of principal and interest in suspense accounts when only the escrow payment is short.
Rationale: This pernicious practice results in unnecessary delinquencies and late payments, and can lead down a slippery slope to collections and ultimate foreclosure.
No Profits From Loans in Collection. On services purchased from third parties in connection with a loan in collections, such as legal fees and property inspections, servicers should be barred from marking up third-party fees, receiving payments for referral of business, or purchasing the services from affiliated entities.
Rationale: Profiting from home loans in collections provides an incentive to move borrowers to that status unnecessarily. It also increases the cost to borrowers struggling to return to good standing by paying back arrears.
Mandatory Reporting to Credit Bureaus. Servicers would be required to report payment history on all their accounts.
Rationale: Servicers should not be able to cripple the ability of borrowers to refinance profitably by not reporting good payment records to the credit bureaus.
No Conversions to Simple Interest. On purchased servicing contracts, the purchasing servicer should not be permitted to convert a mortgage to simple interest merely because the note does not explicitly prevent it.
Rationale: Simple-interest mortgages, which accrue interest daily, are more problematic for borrowers than standard monthly accrual mortgages. If a borrower did not negotiate a simple-interest mortgage at origination, a later conversion to simple interest following the transfer of servicing is unconscionable.
Mandatory Disclosure of Policy Toward Crediting Extra Payments. Servicers should disclose exactly what their procedures are for crediting extra payments to the loan balance.
Rationale: Borrowers making extra payments of principal have the right to this information so that they can plan their schedule of extra payments in the most advantageous way.