A "loan modification" is a permanent change to the terms of a mortgage loan. A modification will usually reduce the borrower's monthly payments to a more affordable level. To lower the payments, the servicer might agree to do one or more of the following:
- reduce the interest rate
- convert the loan from a variable interest rate to a fixed interest rate
- forbear some of the principal, or
- extend the length of the loan term.
Many different kinds of loan modifications are available. If you have a Fannie Mae or Freddie Mac mortgage, you might qualify for a modification under the Flex Modification program. Other types of loans, like FHA-insured and VA-guaranteed mortgages, have special modification programs for borrowers. And various banks offer their own in-house (“proprietary”) modifications.
But mortgage servicers sometimes make mistakes that violate the law when processing loan modification requests from borrowers. Any of the violations mentioned in this article could result in you missing out on getting a modification and maybe even lead to your home going into foreclosure.
However, you might have a defense if the servicer starts a foreclosure.
Common Servicer Errors When Processing Loan Modifications
Here are a few typical legal violations that mortgage servicers sometimes perpetrate during the loan modification process.
Not Telling the Borrower If an Application Is Complete
To get a modification, borrowers have to submit a complete loss mitigation application to their servicer. ("Loss mitigation" is the process of trying to work out a way to avoid foreclosure.)
But servicers sometimes don't tell borrowers when their application isn’t complete.
Under federal mortgage servicing laws, though, if the servicer receives your application 45 days or more before a foreclosure sale, it has to:
- review the application
- determine if the application is complete or incomplete, and
- notify you within five business days stating whether the application is complete or incomplete.
If the application is incomplete, the servicer must describe the information you need to send in to complete the application.
Not Reviewing the Application in a Timely Manner
After sending the servicer a complete application, borrowers sometimes experience lengthy delays when waiting for the servicer to make a decision about whether a loan modification is possible. But, if the servicer receives the complete application more than 37 days before a foreclosure sale, federal law requires the servicer to review the application within 30 days.
However, if you submit your application 37 days or less before a foreclosure sale, the servicer simply has to review the application in accordance with any requirements the holder or assignee of your mortgage loan established. So, the servicer must make its best effort to review your application. But it probably won’t stop a foreclosure sale.
Calculations Errors
Miscalculations can lead to a modification error. In 2018, for example, Wells Fargo admitted that it wrongfully failed to give modifications to about 625 mortgage-loan borrowers due to a computer glitch. The bank used a modification tool that automatically miscalculated attorneys’ fees when evaluating borrowers for a potential loan modification. As a result of the miscalculation, some borrowers were deemed ineligible for a HAMP modification or a modification under a government program, like one from Fannie Mae or Freddie Mac. Wells Fargo eventually foreclosed on 400 of the 625 homeowners affected.
Asking the Borrower to Resubmit Documents
Servicers sometimes lose documentation that borrowers send in as part of a loss mitigation application. The servicer might then ask the borrower to resubmit information, sometimes repeatedly.
For this reason, be sure to keep a record of what documents you send to the servicer, who you sent them to, and send it by some method that you can track. If the servicer loses your information and asks that you resubmit it, send the documentation again. But keep a detailed record. You might need to use this information as evidence later on if you decide to fight the foreclosure because the servicer didn't follow proper loss mitigation procedures.
Not Converting a Trial Modification into a Permanent Modification
Many loan modifications don’t become permanent until the borrower completes a trial period.
But, borrowers who make all trial payments sometimes can't get the servicer to put a permanent modification in place. Usually, this failure to provide a permanent modification violates the modification agreement that the servicer provides when it offers the trial period and modification.
Problems During Servicing Transfers
Servicing transfers are common in the mortgage industry. But problems often come up if the servicer changes in the middle of the modification process, like when the new servicer refuses to honor a loan modification that the prior servicer offered the borrower. Federal law lays out the following requirements to avoid issues during the transfer process.
Acknowledging an application. Under federal law, if the period to provide an acknowledgment notice hasn't expired as of the transfer date, a transferee servicer has 10 days to send an acknowledgment that it has received a borrower’s loss mitigation application and identify documents needed to complete the application (if the transferor servicer hadn’t already done so within the required five days).
Evaluating a complete application. If the borrower sent the transferor servicer a complete loss mitigation application before servicing was transferred, the transferee servicer generally has to evaluate the borrower’s application within 30 days of the transfer date, rather than the date the transferor servicer received the complete application.
Pending loss mitigation offers. The transferee servicer must allow a borrower to accept a pending loss mitigation option offered before the transfer date and honor the unexpired period for the borrower to accept the offer given by the transferor servicer.
Getting Help
If your mortgage servicer commits any of the modification errors or legal violations mentioned in this article or is otherwise improperly handling your loan modification, consider talking to a qualified foreclosure attorney who can advise you on what to do in your particular situation. You might have a defense if the servicer begins a foreclosure.
Consider also contacting an attorney or a HUD-approved housing counselor if you need more information about different ways to avoid foreclosure.