Senior loan not escrowed at origination for taxes and insurance

12 Replies

I recently purchased a performing senior lien. While the audit was being performed by my servicing company they found that the loan was not escrowed for taxes and insurance at origination. They went on to inform me that because the loan is considered an "HPML" (high priced mortgage loan) and was not escrowed for at least 5 years it violated the terms of service agreement and they could no longer service it. They've given me a short amount of time to either transfer the servicing to my LLC or find another servicing company that can assist me.

I’d be lying if I said “I’m not worried”.

I’ve spent a lot of time trying to research my options but all I could find were mortgage servicing companies that deal with hedge funds and REIT’s. 

I am not sure what my options are or where to go from here any help or insight would be greatly appreciated. 

Loans without tax and insurance escrows are not uncommon.  The servicer having an issue with it seems a bit strange to me.  No need to be worried though.  Transfer your loan to a servicer which caters more to small investors.  Madison management or FCI are good choices.  

Originally posted by @Mike Hartzog :

Loans without tax and insurance escrows are not uncommon.  The servicer having an issue with it seems a bit strange to me.  No need to be worried though.  Transfer your loan to a servicer which caters more to small investors.  Madison management or FCI are good choices.  

Thank you for answering my question. I’ll definitely give Madison management a call. Interesting that you mention FCI as an alternative because that’s who is currently servicing this note. It’s technically in the pre-boarding stage but their “specialty servicing team” contacted me regarding being unable to continue. Is there’s something I should be telling FCI that they may not be aware of?

§ 1026.35 Requirements for higher-priced mortgage loans.

(a)Definitions. For purposes of this section:

(1) “Higher-priced mortgage loan” means a closed-end consumer credit transaction secured by the consumer's principal dwelling with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set:

(i) By 1.5 or more percentage points for loans secured by a first lien with a principalobligation at consummation that does not exceed the limit in effect as of the date the transaction's interest rate is set for the maximum principal obligation eligible for purchase by Freddie Mac;

(ii) By 2.5 or more percentage points for loans secured by a first lien with a principalobligation at consummation that exceeds the limit in effect as of the date the transaction's interest rate is set for the maximum principal obligation eligible for purchase by Freddie Mac; or

(iii) By 3.5 or more percentage points for loans secured by a subordinate lien.

(2) “Average prime offer rate” means an annual percentage rate that is derived from average interest rates, points, and other loan pricing terms currently offered to consumers by a representative sample of creditors for mortgage transactions that have low-risk pricing characteristics. The Bureau publishes average prime offer rates for a broad range of types of transactions in a table updated at least weekly as well as the methodology the Bureau uses to derive these rates.

(b)Escrow accounts -

(1)Requirement to escrow for property taxes and insurance. Except as provided inparagraph (b)(2) of this section, a creditor may not extend a higher-priced mortgage loan secured by a first lien on a consumer's principal dwelling unless an escrow account is established before consummation for payment of property taxes and premiums for mortgage-related insurance required by the creditor, such as insurance against loss of or damage to property, or against liability arising out of the ownership or use of the property, or insurance protecting the creditor against the consumer's default or other credit loss. For purposes of this paragraph (b), the term “escrow account” has the same meaning as under Regulation X ( 12 CFR 1024.17(b)), as amended.

Yes, yes, I ran into the same issue on a loan we purchased from a seller carry back. He self-serviced his loans so it was not an issue for him. I had to move the loan from FCI to a different servicer who didn't care about compliance. This is another check list item we've added to our due diligence process especially for loans that are seller carry back originated after 2013. 

Originally posted by @Bob Malecki :

Yes, yes, I ran into the same issue on a loan we purchased from a seller carry back. He self-serviced his loans so it was not an issue for him. I had to move the loan from FCI to a different servicer who didn't care about compliance. This is another check list item we've added to our due diligence process especially for loans that are seller carry back originated after 2013. 

 Bob, what I'm afraid of is running into compliance issues. I've only started note investing since August of 2017 and haven't encountered this situation yet. This admittedly is the steepest part of my learning curve to date. When you say the "servicer didn't care about compliance" do you mean they would service the note even though escrow was not established at origination? If so, does that violate any laws or regulation currently in place?

@Don Konipol

"(b)Escrow accounts -

(1)Requirement to escrow for property taxes and insurance. Except as provided inparagraph (b)(2) of this section, a creditor may not extend a higher-priced mortgage loan secured by a first lien on a consumer's principal dwelling unless an escrow account is established before consummation for payment of property taxes and premiums for mortgage-related insurance required by the creditor, such as insurance against loss of or damage to property, or against liability arising out of the ownership or use of the property, or insurance protecting the creditor against the consumer's defaultor other credit loss. For purposes of this paragraph (b), the term “escrow account” has the same meaning as under Regulation X ( 12 CFR 1024.17(b)), as amended."

Your post was extremely informative. What I'm wondering is how did this loan pass origination, get sold, then bought,  if it violated the requirement quoted above? In summary, no escrow should have meant no loan or am I missing something?

Originally posted by @Micah A. :
Originally posted by @Bob Malecki:

Yes, yes, I ran into the same issue on a loan we purchased from a seller carry back. He self-serviced his loans so it was not an issue for him. I had to move the loan from FCI to a different servicer who didn't care about compliance. This is another check list item we've added to our due diligence process especially for loans that are seller carry back originated after 2013. 

 Bob, what I'm afraid of is running into compliance issues. I've only started note investing since August of 2017 and haven't encountered this situation yet. This admittedly is the steepest part of my learning curve to date. When you say the "servicer didn't care about compliance" do you mean they would service the note even though escrow was not established at origination? If so, does that violate any laws or regulation currently in place?

 Well, as I understand it, if the servicer is audited (which FCI definitely is), they will be fined for servicing a non compliant loan. Some of the small servicers are not subject to as much federal scrutiny and the audits

Originally posted by @Bob Malecki :
Originally posted by @Micah A.:
Originally posted by @Bob Malecki:

Yes, yes, I ran into the same issue on a loan we purchased from a seller carry back. He self-serviced his loans so it was not an issue for him. I had to move the loan from FCI to a different servicer who didn't care about compliance. This is another check list item we've added to our due diligence process especially for loans that are seller carry back originated after 2013. 

 Bob, what I'm afraid of is running into compliance issues. I've only started note investing since August of 2017 and haven't encountered this situation yet. This admittedly is the steepest part of my learning curve to date. When you say the "servicer didn't care about compliance" do you mean they would service the note even though escrow was not established at origination? If so, does that violate any laws or regulation currently in place?

 Well, as I understand it, if the servicer is audited (which FCI definitely is), they will be fined for servicing a non compliant loan. Some of the small servicers are not subject to as much federal scrutiny and the audits

Interesting, does this put me at risk as the note purchaser? I purchased through FCI Exchange and elected FCI Lender Services for my servicer.

Originally posted by @Tracy Z. Rewey :
Originally posted by @Micah A.:
Interesting, does this put me at risk as the note purchaser?

 Hello Micah,  You might try a small servicer like Allied Servicing in Spokane WA or Note Servicing Center, Inc. in Chowchilla, CA.

 I’ve actually reached out to Note Servicing Center and they’ve responded by asking which state the loan is located in. They said they don’t service loans in all states. If they aren’t able to accommodate me my next attempt will be with Allied Servicing. 

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