Collecting on a delinquent consumer mortgage loan has changed dramatically in the last several years. Gone are the days of the Wild West where you could collect on a loan in pretty much any legal way you want. Unless you follow these steps, you can find yourself and your company in a world of trouble.
Following the great mortgage market crash of the late 2000s, Congress and regulatory authorities passed numerous laws and statutes such as Dodd Frank to complicate how note holders do business. They put stringent requirements on how a loan is collected and, if these requirements aren’t followed closely, the note holders and servicers can find themselves facing civil and even criminal penalties.
The collection process is known as a “Waterfall” with the servicer having to follow very specific steps in order to remain in compliance. We’ll touch on the high points of the collection waterfall in this article, but there are many, many more rules to follow to keep yourself out of trouble.
First of all, no longer can you go it alone. You have to obtain a very expensive servicing license, or you have to hire a servicer to do the collection and compliance on your loan portfolio. This is true in most instances. Your servicer can be a huge help when it comes to collecting on large portfolio. It will free you up to work ON your business, not work IN your business. It’s not all bad news. The servicer must follow the waterfall on your behalf. In basic terms, here are the steps when a borrower first becomes delinquent that your servicer must take.
Initial Contact: The servicer is required to attempt initial contact with the borrower before the account becomes 20 days past due. It is expected that the servicer will attempt to ascertain that the information they have for the borrower is correct, what the reason is for the delinquency, determine if that issue is temporary or permanent, and attempt to make a realistic satisfactory arrangement to right the ship.
Notify Credit Reporting Agencies: The servicer is required to ensure that they provide at least three credit reporting agencies with the updated and correct reporting information on all accounts.
Certified Letter: Prior to a loan becoming 60 days past due, the servicer is required to send the borrower a certified letter impressing upon them the importance of keeping their account up to date. The letter should inform the borrow that delinquency can adversely impact their credit rating and it must request an interview to discuss possible solutions for the issue. The servicer should update all information such as employment and income status if possible.
Property Inspections: Before a property becomes 60 days past due and before initiating any liquidating action (such as foreclosure), the servicer must arrange to have the someone visit the property to ascertain the property’s physical condition, occupancy status, and, if abandoned, take appropriate steps to secure the property and take necessary action to prevent the property from falling into disrepair. These inspections should continue at least monthly on all properties.
Liquidation: Once the account becomes 90-days past due and the borrower has been unresponsive, the servicer must move to liquidating the collateral. Provided all state laws are met, the servicer will move forward with foreclosure proceedings.
Of course, the rules and regulations can be quite complex, which is a good reason to have a licensed servicer handle the portfolio. Investing in loans can be very lucrative, but you must ensure that the waterfall is following in order to remain compliant.