04/15/08: When Your Loan is Sold
By Benny L. Kass
Q: We refinanced our home loan in March with an on-line mortgage lender. Within a couple of weeks, we received a letter from another mortgage company advising us that our May payment was to be made to them. A May payment invoice was included. I contacted the original lender, and was told that the loan was not sold. They said if and when that happens, we would receive a "goodbye letter" which has not arrived. We now have May payment invoices from both lenders, and only 2 weeks to go until the first payment is due. We contacted the second lender and they still insist they now own the loan. What should we do? We do not want this to impact on our good credit rating.
A: It will not be any consolation to you, but as more and more mortgage lenders are closing their doors, this appears to be a common problem. However, there is a federal law that protects you. The short answer: until you get a letter from both lenders advising that your loan has been sold (or assigned), you should continue to pay the first lender.
When you get a mortgage loan, your lender has two alternatives. They can keep the loan in house - called a "portfolio" loan - or they can sell or assign it to an investor. The most prominent investors here in the United States are the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae).
Why do lenders sell their loans? Many mortgage lenders do not have millions of dollars in their bank account to enable them to make all of the loans they would like to do. In order to get more cash, they sell the loan for a discount to an investor, thereby enabling them to make more loans.
The original lender makes its money in two basic ways. First, by charging various fees to the borrower - such as loan origination (points) or underwriting. If the lender is a mortgage broker, it will also get a fee, which in the trade is called a "yield spread premium" (YSP). According to Jack Guttentag, the "Mortgage Professor":
YSPs are points paid by lenders for loans carrying interest rates above the par rate. The par interest rate is the rate at zero points. Points are an upfront charge expressed as a percent of the loan. On rates below the par rate, lenders charge points whereas on rates above the par rate, lenders pay points. YSPs are also called "negative points" or "rebates.
Your lender also makes money by servicing your loan. That means that although the original lender may no longer own the loan, they continue to collect your monthly mortgage payments (including escrows for taxes and insurance) and are paid by the actual lender a servicing fee.
Over the years, there have been serious problems with these mortgage sales. And now, in this turbulent mortgage market, these problems are escalating. 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 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 regulated 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 basic terms of your note and deed of trust cannot be changed. Specifically, your interest rate terms cannot be changed. They remain in full force and effect regardless of who holds your legal 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 $1,000.00 per individual consumer. Furthermore, if the consumer files a lawsuit in court, the court can award reasonable attorney's fees if the consumer prevails.
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.
The normal procedure nowadays is for the borrower to get a joint letter from the old and the new lender, advising that the loan has been sold and where the monthly payments should now be sent.
In your situation, since you have not received a letter from your first lender, you should continue to pay that lender. But advise the new lender in writing what you are doing, and I also suggest that you send a copy of your letter to the old lender, as well as to the consumer protection office of your State's attorney general.