Question. Our mortgage has been with the same lender for several years. Recently, we received a letter from a new lender advising us that we are immediately to start making our mortgage payments to this new company. Should this be a concern to us? Can the new lender change any of the terms or conditions of our existing loan? How do we know for sure that the new lender is in fact legitimate?
Answer: The simple answer is that unless you receive a similar letter from your current lender, do not pay that new company, but continue making your regular payments to the old lender.
Every day at settlements conducted in my office, I hear questions such as this: What is the likelihood that my lender will sell my loan? Do I have any right to insist that the loan should not be sold? Does it really matter to me if the loan is sold so long as I get the best deal from the bank initially? Should I care? Does anybody regulate the sales of these loans?
Lenders have been selling their loans for years in the secondary mortgage market. Organizations such as the FannieMae and FreddieMac purchase large packages of loans from lenders. Oversimplified, they buy these loans at a discount, thereby giving the individual lender more cash to be available to generate new mortgage loans.
The originating lender usually (although not always) "services" the loan. This means that you, the borrower, will continue to make your monthly payments to that lender, even if they do not currently own the legal papers. The servicing lender gets a small fee for their work.
There have been serious problems with these mortgage sales. Indeed, there have been a number of documented fraud cases, whereby an unscrupulous individual obtains the names and addresses of homeowners, and sends them a letter advising the borrower that effective immediately the loan payment should go to this unscrupulous lender. The names and addresses of borrowers are generally publicly available from the Land Records where the deeds of trust are recorded.
Picture the following scenario. You have a loan with the ABC mortgage company, which is a legitimate lender. All of a sudden, you get a letter from the XYZ company, advising you that effective immediately you are to make your new mortgage payment to the XYZ company. You would be surprised at the number of very gullible people in the United States that blindly follow the XYZ company's instructions, without any investigation.
After one or two months of receiving mortgage checks, the XYZ company folds its camp. It moves on to another state, and the scam begins anew.
As a result of these mortgage scams, in 1990, Congress determined to regulate the assignment, transfer or sale of mortgage loans. As part of the National Affordable Housing Act, certain provisions were added to the Real Estate Settlement Procedures Act (RESPA).
The law is quite complex, but oversimplified here are some of the protections afforded to individual borrowers whose loan has been sold, transferred or assigned to a new lender.
- At the time a potential borrower applies for a mortgage loan from a federally regulated lender, that lender must disclose to the borrower their policy on assigning or selling loans. The Department of Housing and Urban Development has developed a model disclosure statement which must be used by all federally related mortgage lenders.
- If a mortgage lender does in fact assign, sell or transfer your loan, both the transferor (your current lender) and the transferee must make certain disclosures. These disclosures include the effective date of the transfer, the name, address and telephone number of the transferee, and an appropriate contact number at both the transferor's and transferee's offices. This will afford the borrower the opportunity to ask questions and confirm the transfer.
- More importantly, this disclosure statement must state that the transfer does not affect any term of the security instrument other than the servicing provision. This means that although your loan has been sold, and you must start paying the new lender (the assignee), the basic terms of your note and deed of trust cannot be changed. They remain in full force and effect whether the original lender holds your paper or some third party holds your documents.
Congress also was concerned about payments made during the transition period when a loan is transferred. The 1990 law specifically provides a 60-day grace period if the borrower misdirects payments. For 60 days from the effective date of the transfer, as long as the borrower makes the payment on time in accordance with the terms of the note, no late fee can be charged. The payment cannot be deemed late for any purpose whatsoever, even if that payment is misdirected.
In other words, if you send your payment on time to the old lender when it has been transferred to a new lender, for the first 60 days no penalty or other late charge can be imposed on you. This is very important, since it also means that neither the old lender nor the new lender can report you as being late or delinquent to a credit reporting bureau.
Congress also created a complaint resolution mechanism in the 1990 law. If you, the consumer borrower, have a question or a complaint about the transfer of your loan, you have the right to send a written request to the lender. Please note that in order for the complaint resolution mechanism to be effective, you have to send a separate correspondence, and cannot merely jot a note on your mortgage payment coupon when you return your check.
Your lender must either take action or respond to your letter within 20 business days of receiving your correspondence. Furthermore, the lender has 60 business days from the date of receipt of the request to either correct the problem and give the borrower notice that the problem has been corrected, or give reasons in writing why the account is correct or the information requested by the borrower is unavailable. The lender is required to conduct an investigation before it responds to your letter.
Finally, Congress added incentives to make sure that lenders would comply with this new law. If a lender violates the law, an individual consumer can recover any actual damages, and any additional damages that a court might allow if the court finds that there is a pattern or practice of non-compliance with the RESPA provisions. The damages are limited to $1,000 per individual consumer. Furthermore, if the consumer files a lawsuit in court, the court can award reasonable attorney's fees if the consumer prevails.
If a class action is filed against a lender, each member of the class (if successful) is entitled to actual damages as well as up to $1,000 additional damages, again if the court determines there is a pattern or practice of non-compliance with the requirements of this section. However, Congress imposed a cap on the total liability of a mortgage lender, which is the lesser of $500,000 or one percent of the net worth of the mortgage lender.
These are obviously technical issues. The bottom line is that you really do not have to worry about your loan if your current lender sells or transfers your loan to another lender. Obviously, you want to make absolutely sure that this is not a scam, and that it is a legitimate transfer. Contact both lenders and make sure that you have something in writing from both the old and the new lender before you send your next mortgage payment check.
In fact, in recent months, I have seen a joint letter from both the old and the new lender, advising of the sale of the mortgage documents. In my opinion, this is an efficient way to advise borrowers of the transfer.
But remember that it is a two-way street. No lender can change the terms of your loan. But neither can you. The sale or transfer or your loan should not be considered in any way as an excuse on your part to delay the normal payment beyond its due date.