Predatory mortgage servicing
Encyclopedia
Predatory mortgage servicing (predatory servicing) is a pejorative
term used to describe abusive, unfair, deceptive, or fraudulent mortgage servicing practices of some mortgage servicers during the mortgage servicing process. There is no legal definition in the United States for predatory mortgage servicing. However, the term is widely used and accepted by state and federal regulatory agencies such as the Federal Deposit Insurance Corporation
, Office of Thrift Supervision
, Office of the Comptroller of the Currency
, Federal Trade Commission
and Government Sponsored Enterprises (GSEs) such as Fannie Mae and Freddie Mac.
The term "predatory servicing" was used in Lavalle's report against Bear Stearns
and EMC Mortgage that same year.
While there are no specific laws against predatory mortgage servicing abuses, there are local, state, and federal laws against many of the specific practices commonly identified as predatory mortgage servicing abuses, and various state and federal agencies use the term as a catch-all term for many specific illegal activities in the mortgage servicing industry. Predatory mortgage servicing is not to be confused with predatory lending
which is used to describe the unfair, deceptive, or fraudulent practices of mortgage brokers and lenders during the mortgage loan origination process.
Predatory mortgage servicing typically occurs on subprime, Alt-A, scratch and dent, and toxic mortgages that are being serviced by special or default servicers or servicers and lenders that are financially in trouble. There are many motives for predatory servicing practices and a report titled Misbehavior and Mistake in Bankruptcy Mortgage Claim by Katherine M. Porter, professor of law at the University of Iowa
details the effects and damages caused by servicing abuses. The landmark report has been cited by several state and federal judges in decisions related to predatory mortgage servicing and foreclosure
practices.
In mortgage securitization transactions, the mortgage servicer forwards the borrower's payment of principal and interest to the certificate holders (investors) of the special securitized trust that owns and holds the promissory notes secured by the mortgages and deeds of trust. The mortgage servicer
, however, is allowed to retain late fees, BPO fees, inspection fees, and other fees charged or assessed to a borrower's account. In addition to the fee income, the servicer is allowed to retain the net liquidation proceeds of any foreclosure sale (net after foreclosure expenses and principal balance to investors). This provides an incentive to unscrupulous servicers who aggressively interpret mortgage documents to add additional fees to a borrower's mortgage account. Many times, the additional fees added on create an event of default allowing the mortgage servicer
to foreclose on the property. This practice is commonly referred to as manufacturing a default or manufactured default.
Pejorative
Pejoratives , including name slurs, are words or grammatical forms that connote negativity and express contempt or distaste. A term can be regarded as pejorative in some social groups but not in others, e.g., hacker is a term used for computer criminals as well as quick and clever computer experts...
term used to describe abusive, unfair, deceptive, or fraudulent mortgage servicing practices of some mortgage servicers during the mortgage servicing process. There is no legal definition in the United States for predatory mortgage servicing. However, the term is widely used and accepted by state and federal regulatory agencies such as the Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
, Office of Thrift Supervision
Office of Thrift Supervision
The Office of Thrift Supervision was a United States federal agency under the Department of the Treasury that charters, supervises, and regulates all federally- and state-chartered savings banks and savings and loans associations. It was created in 1989 as a renamed version of another federal agency...
, Office of the Comptroller of the Currency
Office of the Comptroller of the Currency
The Office of the Comptroller of the Currency is a US federal agency established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks and the federal branches and agencies of foreign banks in the United States...
, Federal Trade Commission
Federal Trade Commission
The Federal Trade Commission is an independent agency of the United States government, established in 1914 by the Federal Trade Commission Act...
and Government Sponsored Enterprises (GSEs) such as Fannie Mae and Freddie Mac.
The term "predatory servicing" was used in Lavalle's report against Bear Stearns
Bear Stearns
The Bear Stearns Companies, Inc. based in New York City, was a global investment bank and securities trading and brokerage, until its sale to JPMorgan Chase in 2008 during the global financial crisis and recession...
and EMC Mortgage that same year.
While there are no specific laws against predatory mortgage servicing abuses, there are local, state, and federal laws against many of the specific practices commonly identified as predatory mortgage servicing abuses, and various state and federal agencies use the term as a catch-all term for many specific illegal activities in the mortgage servicing industry. Predatory mortgage servicing is not to be confused with predatory lending
Predatory lending
Predatory lending describes unfair, deceptive, or fraudulent practices of some lenders during the loan origination process. While there are no legal definitions in the United States for predatory lending, an audit report on predatory lending from the office of inspector general of the FDIC broadly...
which is used to describe the unfair, deceptive, or fraudulent practices of mortgage brokers and lenders during the mortgage loan origination process.
Predatory mortgage servicing typically occurs on subprime, Alt-A, scratch and dent, and toxic mortgages that are being serviced by special or default servicers or servicers and lenders that are financially in trouble. There are many motives for predatory servicing practices and a report titled Misbehavior and Mistake in Bankruptcy Mortgage Claim by Katherine M. Porter, professor of law at the University of Iowa
University of Iowa
The University of Iowa is a public state-supported research university located in Iowa City, Iowa, United States. It is the oldest public university in the state. The university is organized into eleven colleges granting undergraduate, graduate, and professional degrees...
details the effects and damages caused by servicing abuses. The landmark report has been cited by several state and federal judges in decisions related to predatory mortgage servicing and foreclosure
Foreclosure
Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...
practices.
In mortgage securitization transactions, the mortgage servicer forwards the borrower's payment of principal and interest to the certificate holders (investors) of the special securitized trust that owns and holds the promissory notes secured by the mortgages and deeds of trust. The mortgage servicer
Mortgage servicer
A mortgage servicer is the company that borrowers pay their mortgage loan payments to. Mortgage servicers either purchase or retain mortgage servicing rights that allow them to collect payments from borrowers in return for a servicing fee...
, however, is allowed to retain late fees, BPO fees, inspection fees, and other fees charged or assessed to a borrower's account. In addition to the fee income, the servicer is allowed to retain the net liquidation proceeds of any foreclosure sale (net after foreclosure expenses and principal balance to investors). This provides an incentive to unscrupulous servicers who aggressively interpret mortgage documents to add additional fees to a borrower's mortgage account. Many times, the additional fees added on create an event of default allowing the mortgage servicer
Mortgage servicer
A mortgage servicer is the company that borrowers pay their mortgage loan payments to. Mortgage servicers either purchase or retain mortgage servicing rights that allow them to collect payments from borrowers in return for a servicing fee...
to foreclose on the property. This practice is commonly referred to as manufacturing a default or manufactured default.
See also
- United States housing bubbleUnited States housing bubbleThe United States housing bubble is an economic bubble affecting many parts of the United States housing market in over half of American states. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and may not yet have hit bottom as of 2011. On December 30, 2008 the...
- Causes of the United States housing bubbleCauses of the United States housing bubbleThis article reviews the causes of the United States housing bubble.-Housing tax policy:In July 1978, Section 121 allowed for a $100,000 one-time exclusion in capital gains for sellers 55 years or older at the time of sale. In 1981, the Section 121 exclusion was increased from $100,000 to $125,000...
- Mortgage-backed securities
- Consumer fraud
- Mortgage discriminationMortgage discriminationMortgage discrimination or mortgage lending discrimination is the practice of banks, governments or other lending institutions denying loans to one or more groups of people primarily on the basis of race, ethnic origin, sex or religion...
- Poverty industryPoverty industryThe term poverty industry refers to a wide-range of money-making activities that attract a large portion of their business from the poor. Businesses in the poverty industry often include payday loan centers, pawnshops, casinos, liquor stores, tobacco stores, and credit card companies. Illegal...