The robo-signing mess is just the tip of a very big iceberg when it comes to problems that are endemic in the loan servicing industry. Congress may be focusing the immediate attention on the problem of faulty foreclosure paperwork, but there are many other concerns that make a number of common loan servicing practices uncomfortably predatory.
One of the major areas that can lead to abuse is that servicers actually profit by loans going into collections. There is very little incentive for servicers to cooperate on requests for a loan modification or a Short Sale simply because they make more by keeping the loan in the collection process. Servicers will sometimes purchase loans in collections from affiliated companies. The extra fees tacked on make it even more difficult for homeowners to climb out of the delinquency.
When loans are in default homeowners will generally let the insurance lapse, and the servicer will purchase another policy, called a forced-placed policy, often at several times the cost of the standard homeowner insurance. Often the servicer will have a financial relationship with the premium insurance carrier. Who loses? In the end it is usually the investor who holds the note on the defaulted property.
When the homeowner fails to make an escrow payment servicers will often place the scheduled principal and interest payment in a suspense account when only the escrow payment has been shorted, leading to a delinquency credit record and interest payments even though the basic payment has been made.
Some servicers will convert loans into simple interest when they purchase a group of loans as long as the original note does not prohibit that. Simple interest loans accrue daily rather than monthly and can be more costly and difficult for the homeowner.
Servicers often fail to report favorable payment history to the credit bureaus making it harder for homeowners to qualify for refinance. One wonders if that is, in fact, what the servicers have in mind.
Servicers are not required to give statements in any certain way. They are often incomprehensible and unhelpful in telling the homeowner what is needed regarding balances, escrow amounts, rate adjustments, fees, etc. As long as statements are allowed to be virtually unreadable, the abuses mentioned above can go on with little notice.
Since the Dodd-Frank reforms concentrated on loan origination none of the potential abuses of servicers were addressed. With originations mortgage shoppers have a choice; with servicing homeowners have no choice.
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