November 6, 2006, Revised November 15, 2008

Why Borrowers Need Monthly Mortgage Statements

"I noticed an on-line petition to require all mortgage lenders to provide borrowers with monthly statements of their account. Is this a good cause?"

Yes, because borrowers don’t choose the firm that services their mortgage, they can’t fire the firm for cause, and their existing legal protections are weak.

A law requiring servicers to provide monthly statements that update the account and explain all changes in it, will not eliminate servicing abuses, but it will help borrowers who are alert to protect themselves. It won’t help borrowers who sleep at the switch, they need other legal protections which will be the subject of another column.

Mortgage Servicing Hazards

Here are a few things that can happen to borrowers which, in the absence of monthly statements, they might not find out about in time to prevent irreparable financial damage.

1. The servicer doesn’t pay taxes or insurance on time, which results in a lien being placed on the property or insurance being cancelled.

2. Because the borrower does not make the full escrow payment, the servicer places the entire payment in a suspense account, reports the borrower as delinquent and charges a late fee.

3. The servicer deliberately delays the posting of the payment, resulting in a late fee, which is then deducted from the following month’s payment, which makes that payment late.

Note: In scenarios 2 and 3 above, the borrower can make the mortgage payment every month after the first month, yet be marked late and delinquent month after month without becoming aware of it.

4. On the pretext that the borrower’s insurance isn’t adequate, the servicer purchases a hazard insurance policy on the borrower’s home from an affiliated firm, at a price three times as high as the competitive price. The servicer then adds the cost to the borrower’s balance, recalculates the payment based on the new balance, and places the payment in a suspense account when it does not include the increased amount (see item 2).

5. The borrower makes extra payments to principal but they are not credited until the end of the year. Until then, the servicer enjoys the interest.

6. The borrower falls two or more payments behind and finds his account transferred to collections, at which point the servicer begins piling on the costs: property inspection fees, broker price opinions, attorney fees, collection notice fees, and more.

Information That Should Be in the Monthly Mortgage Statement

Monthly statements must include everything the borrower needs to know. This includes notice that taxes and insurance premiums were paid, and when. If a borrower does not make the full escrow payment and the lender raids his mortgage payment, this should appear on the statement. If the borrower is charged for a late payment, the statement should show when the payment was credited (the borrower knows when it was paid). If the lender purchases insurance for a borrower who already has insurance, the premium should appear on the statement, as should any other fees billed to the borrower. If the borrower makes an extra principal payment sometime during the month, the statement should disclose when exactly it was credited to his balance. If the borrower’s account goes to collections, all the related fees should appear on the statement.

Government Should Not Specify the Content

I believe monthly statements should be mandated by law but Government should not prescribe the exact content. That would be a mistake, because the list of items that are relevant is different for different types of mortgages and it changes over time. We know from the sad experience of disclosure rules in the loan origination side of this business that Government does a poor job of keeping abreast of changing markets.

Rather, the Government should simply require that the monthly statements show anything that transpired during the month that affected the borrower’s account, including (but not limited to) balance changes, payments, disbursements, and costs. There should also be a requirement that statements meet a minimum standard of readability.
Disclosures Should Cover Borrowers in Bankruptcy

It is essential that the disclosure requirements explicitly cover borrowers who have filed for bankruptcy. In auditing the accounts of borrowers in bankruptcy, Marie McDonnell has found that servicers who issue monthly mortgage statements terminate the statements when a borrower files for bankruptcy. This leaves the borrower extremely vulnerable to overcharges, which McDonnell says she invariably finds in her audits.