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Mortgage Banking and Mortgage Loan Servicing Industry Standard Practices and Procedures


     By Don Coker Banking Consultant & Banking Industry Standard Procedures, et al., Expert Witness

PhoneCall Don Coker at (770) 852-2286


Expert Witness: Don Coker
The author explains some of the industry standard practices and procedures in use in the mortgage banking and mortgage loan servicing industries.
This discussion does not intend to be all-inclusive regarding industry standard practices and procedures; but rather it is in response to requests for me to address some specific areas that tend to recur as problem areas that often result in litigation.

Some Basic Operating Principles of the Mortgage Banking Process

First, let’s look at some of the steps in how mortgage loans are originated and serviced.

It is universally agreed among financial and investment professionals that a first mortgage lien on an owner-occupied home is considered to be one of the highest quality loan investments into which an investor can invest their funds. This is due to the fact that a homeowner will place the highest financial priority on preserving the ownership of their home. In addition, and notwithstanding the obvious downward trend in home values that we are presently experiencing (here in mid-2009, the general long-term trend in home values is definitely upward, providing the investor with collateral that generally increases in value over the longer term, if not always in the shorter term.

Several different parties can be involved in the mortgage origination and investment process. A borrower may go directly to a lender, or to a mortgage broker who takes the mortgage to a mortgage lender, or to a mortgage banker who originates the mortgage, packages the mortgage with other similar mortgages, and then sells the portfolio of mortgages to an investor institution.

The lender that originally makes the loan may then sell the loan to another lender, sometimes referred to as an “investor.” This market for mortgage loans is referred to as the “secondary mortgage market.”

When a lender sells a mortgage loan to an investor, the lender may sell the mortgage loan and continue to service the mortgage loan (i.e., collect the payments, handle the escrows, handle payoffs, etc.), or the lender may sell the mortgage loan “servicing released” which means that the investor that purchases the mortgage loan simply adds the loan to their existing portfolio and services it along with their other mortgage loans.

There are numerous investment vehicle structures that have been devised in order to sell mortgages in the secondary market. For example, an investor financial institution may sell a portfolio of mortgage loans to Fannie Mae or Freddie Mac, or pool loans together into a pooling and servicing agreement wherein various entities serve as Depositor, Seller, Servicer, Credit Risk Manager, and Trustee.

Most mortgage loans are “conforming” loans, i.e., loans that conform to Fannie Mae and Freddie Mac lending criteria. The reason that lenders like to originate conforming mortgage loans is to “commoditize” the loans so as to facilitate their sale and purchase by investor institutions throughout the secondary market in a somewhat fungible manner. Conforming loans are originated on standard Fannie Mae or Freddie Mac forms, and they are serviced according to the requirements described in the Fannie Mae and Freddie Mac servicing guidelines.

Loan Underwriting

Most mortgage loans are “conforming” loans which means that they “conform” to the requirements of Fannie Mae or Freddie Mac, and can be sold to one or the other of those two mortgage loan purchasers.

Non-conforming mortgage loans generally are more difficult for a mortgage banker or other investor to sell since they lack the fungible characteristic mentioned above. For that reason, it is typical for lenders to price non-conforming loan higher than conforming loans.

The general process of underwriting a mortgage loan consists of obtaining a credit report and verifications of employment, deposits, mortgage, and any other pertinent factors that are required in order to obtain a clear picture of the current financial history of the prospective borrower. Running down all of the aspects of this underwriting process is beyond the scope and intention of this article.

In the final analysis, the borrower’s finances must be such that he or she will be able to conform to the payment and debt to income ratios set out by Fannie Mae and Freddie Mac, or in the case of a non-conforming loan, the ratios established by the non-conforming lender.

Appraisals

Most of the general public thinks that when a lender receives an appraisal of a prospective collateral property, the lender is obligated to accept the value stated in the appraisal. That is untrue. Lenders are free to use a higher or lower value in their underwriting, except that they cannot assume a value in excess of the appraised value if they are considering a high loan-to-value ratio loan.

It is important that lenders carefully scrutinize appraisal reports in order to insure that the appraiser followed standard practices in arriving at the collateral’s appraised value. For example, the lender should make sure that the comparables are located relatively close by and that the adjustment factors are reasonable.

Closings

Mortgage lenders rely on title companies or other closing professionals to close mortgage loans in accordance with the lender’s closing instructions.
In the mortgage origination frenzy of the last few years, many problems occurred in the closing of loans that never should have been closed. The mortgage banking and mortgage lending industries rely upon the expertise of title insurance companies to make sure that mortgage loan closings are carried out properly. Mortgage lenders send their loan funds to a title insurance company and rely on the title insurance company to be their eyes and ears in properly closing loans. Most of the time, this system works well. However, in some instances, it fails miserably, with costly results.
When a lender sends closing funds to an agent of a title insurance company, including funds intended to pay for a Closing Protection Letter and a Title Insurance Policy, and then the lender receives a Closing Protection Letter and a Title Insurance Policy, then it is my opinion as an experienced mortgage lending professional that this constitutes a reasonable and industry standard practice and procedure for obtaining a Closing Protection Letter and coverage by a Title Insurance Policy.
Let’s examine some of the problems that I have seen surface in the last year or two:
● I have seen title insurance companies try to deny coverage even though they issued a Closing Protection Letter and a Title Insurance Policy citing the name of the borrower, the name of the lender, and the address of the property. In my professional opinion, adding all of these descriptive and informational identifying items to a title insurance company’s standard forms, and forwarding them to their closing agent or to the lender clearly indicate the title insurance company’s desire and intention to provide the protections paid for by the lender.
● In some cases, title companies try to weasel out of being responsible for coverage since the signature on the title policy they issued is not an original signature. However, it is a widely known practice in the title insurance industry that many policy forms are issued with preprinted or facsimile signatures; and those signatures are considered to be as valid as if they were originals. It has been my experience that this is a common practice in the title insurance industry since the reality of how the real estate lending business is practiced is that closings can take place anywhere in the country, thus making it difficult as well as impractical for an original signature to appear on every title policy document. In order to deal with this everyday problem, it is common for title insurance companies to issue valid documents with a pre-printed signature or a typed signature. As a longtime mortgage lending professional and former banking regulator who has been involved in the origination of over 36,000 mortgage loans, if I were involved in a real estate loan closing involving a Closing Protection Letter and Title Insurance Policy provided by a known title insurance company and bearing a preprinted or facsimile signature, then I would consider them to be valid documents would afford the lender all of the protections for which they had paid.
Let’s look at some of the duties and responsibilities that title insurance companies have to the parties that rely on the closing protection letters and title insurance policies that they issue:
● It is fundamental that a title insurance company owes a duty to all of the insured parties relying on its title insurance policies and closing protection letters to accurately determine the title status of properties it insures.
● It is also fundamental that a title insurance company owes a duty to all of the insured parties relying on its title insurance policies and closing protection letters to only hire qualified people to serve as its authorized agents, approved attorneys, and settlement agents.
● It is my professional opinion that a title insurance company owes a duty to all of the insured parties relying on its title insurance policies and closing protection letters to avoid obvious conflicts of interest among the parties that are involved as borrowers and closing staff.
● A title insurance company owes a duty to all of the insured parties that rely on its title insurance policies and closing protection letters to ensure that its designated settlement agents and approved attorneys are properly trained in how to do their job correctly.
● Likewise, a title insurance company owes a duty to all of the insured parties that rely on its title insurance policies and closing protection letters to ensure that its designated settlement agents and approved attorneys are continually trained in how to do their job correctly.
● A title insurance company owes a duty to all of the insured parties that rely on its title insurance policies and closing protection letters to ensure that its designated settlement agents and approved attorneys properly secure their official forms and insurance policy documents from access by unauthorized third parties so as to ensure that only authentic title insurance policies are issued.
● A title insurance company owes a duty to all of the insured parties that rely on its title insurance policies and closing protection letters to ensure that its designated settlement agents and approved attorneys are knowledgeable and aware of the importance of the proper management of funds that flow through their office.
● A title insurance company owes a duty to all of the insured parties that rely on its title insurance policies and closing protection letters to ensure that its designated settlement agents and approved attorneys properly manage their business bank accounts through which funds are handled to fund loan closings. This includes insuring that the bank account is properly secured and access to it is properly controlled.
● A title insurance company owes a duty to all of the insured parties that rely on its title insurance policies and closing protection letters to regularly conduct onsite inspections and audits of their designated settlement agents and approved attorneys to ensure that they are conforming with prudent business practices in the management of their office including the security of important forms, access to their business bank account, and other important security matters.
● A title insurance company has a heightened duty to all of the insured parties that rely on its title insurance policies and closing protection letters to ensure that all of its designated authorized agents, settlement agents and approved attorneys who work almost exclusively in the office of one client lender, maintain a proper relationship with that lender and do not jeopardize or compromise the integrity of the insurance company.
● Title insurance companies are responsible for obtaining and verifying a completed and signed application from potential authorized agents, settlement agents, and approved attorneys before they approve them to represent the title insurance company.
● A title insurance company is responsible for properly supervising and overseeing the work of their designated authorized agents, settlement agents, and approved attorneys that represent the company in dealing with the public.
● A title insurance company should perform periodic inspections and audits of the office procedures of their designated authorized agents, settlement agents, and approved attorneys in order to ensure that they are conforming with prudent business practices in the management of the their office including the security of important forms, access to their business bank account, and other important security matters.
It is my opinion that a title insurance company that does not follow these industry standard practices and procedures that I have observed in over forty years of dealing with title insurance companies is violating industry standards of good faith, fair dealing, honesty in fact, and commercially reasonable practices that make it highly likely that they could be the proximate cause of damage to a party relying on their expertise in closing and funding loans, their closing protection letters and their title insurance policies. Furthermore, failure to follow these industry standard practices and procedures increases the likelihood that fraud can be committed.

Loan Documents and Forms

In order for a mortgage loan to be a conforming loan, it must be originated on standard Fannie Mae or Freddie Mac forms as written for the specific state in which the collateral property is located.

Even non-conforming mortgage loans are usually written on the same standard Fannie Mae and Freddie Mac forms that are used for conforming mortgage loans.

This article contains three excerpts from these standard Fannie Mae and Freddie Mac loan documents (See the Payments, Insurance, and Taxes sections of this article).

Warehouse Lending

When a mortgage banker closes a mortgage loan for a borrower, it is typical for that mortgage loan to be funded by the mortgage banker’s warehouse line of credit where it is held until a sufficient volume of mortgage loans are accumulated and can be delivered to an investor. Thus, the newly closed mortgage loan is “warehoused” until it reaches the initial investor that either contracted in advance with the mortgage banker to buy loans; or alternatively, the mortgage banker may be closing mortgage loans into the warehouse loan with plans to later sell the loans, maybe enhancing the profit on the sale compared to what could have been obtained on a loan sale commitment entered into prior to closing the mortgage loans.

This warehousing situation does not affect a borrower’s payments or other terms of the mortgage loan, and a borrower may not ever know that their loan was warehoused if the originating mortgage banker winds up servicing the loan anyway, as is quite often the case. In any event, the temporary warehousing of the mortgage loan has no effect on the mortgage loan or the borrower.

Warehouse lines are usually “evergreen” loans, which means that when loans are sold out of the warehouse line’s collateral, then the mortgage banker is free to close another mortgage loan into the warehouse line, so that the line’s balance goes up and down.

Loan Payments

Since payment terms are controlled by the note and mortgage (or deed-of-trust), and all conforming loans use Fannie Mae and Freddie Mac forms, and most non-conforming single-family residential mortgage loans use Fannie Mae and Freddie Mac forms as well, payment terms are fairly standard across the single-family mortgage industry.

In terms of collections of delinquent payments, lenders must rely upon the terms of the note and mortgage (or deed-of-trust), the laws of the state in which the property is located, and the terms of the Seller Servicer Agreement that exists between the loan servicer and the owner of the loan. Of course, a loan servicer is required to meet certain notice requirements that are set out in the laws of the state in which the collateral property is located before it can proceed with the foreclosure of the collateral property.

Borrowers sometimes try to forestall foreclosure by making partial payments, but the normal terms of promissory notes allow the lender to obviate continuing collection problems and accelerate the principal balance due on the loan. That is, the lender can require that the entire balance be repaid, which typically would require the borrower to refinance.

As an example, the following excerpt is from a standard Multistate Fixed Rate Note – Single Family – Fannie Mae/Freddie Mac Uniform Instrument promissory note Form 3200:

“1. BORROWER’S FAILURE TO PAY AS REQUIRED
“(A) Late Charge for Overdue Payments
If the Note Holder has not received the full amount of any monthly payment by the end of ___________ calendar days after the date it is due, I will pay a late charge to the Note Holder. The amount of the charge will be _____% of my overdue payment of principal and interest. I will pay this late charge promptly but only once on each late payment.
“(B) Default
If I do not pay the full amount of each monthly payment on the date it is due, I will be in default.
“(C) Notice of Default
If I am in default, the Note Holder may send me a written notice telling me that if I do not pay the overdue amount by a certain date, the Note Holder may require me to pay immediately the full amount of Principal which has not been paid and all the interest that I owe on that amount. That date must be at least 30 days after the date on which the notice is mailed to me or delivered by other means.
“(D) No Waiver By Note Holder
Even if, at a time when I am in default, the Note Holder does not require me to pay immediately in full as described above, the Note Holder will still have the right to do so if I am in default at a later time.
“(E) Payment of Note Holder’s Costs and Expenses
If the Note Holder has required me to pay immediately in full as described above, the Note Holder will have the right to be paid back by me for all of its costs and expenses in enforcing this Note to the extent not prohibited by applicable law. Those expenses include, for example, reasonable attorneys’ fees.”

The same basic requirements appear in paragraphs 1, 2, and 22 of the standard Security Deed (tantamount to a mortgage or a deed-of-trust) as they appear in my home state of Georgia on the following form: Georgia - Single Family – Fannie Mae/Freddie Mac Uniform Instrument, Form 3011.

Insurance Coverage of the Collateral Property

Lenders and all mortgages require that a borrower keep the collateral property insured in an amount that will at least cover the loan balance owed to the lender, and that the loss payee clause of the insurance policy reflects the lender as their interest may appear. For example, this means that in the case of a total loss, the lender would receive sufficient funds from the insurance company to repay the remaining debt on the collateral property, including all accrued interest, late fees, delinquent property tax amounts, etc.

If a lapse of insurance coverage is detected, by either the lender itself or an insurance tracking company that has been engaged by the lender to monitor the insurance status of the properties securing a mortgage company’s loans, the blanket insurer is notified that coverage is needed for the particular property. Then the coverage begins retroactively to when the previous insurance coverage ended.

The process of a loan servicer, mortgage banker, or lender obtaining insurance coverage to cover an uninsured collateral property if referred to as “force placing” insurance, or a Lender Placed Policy (“LPP”), and the coverage is referred to as Lender Placed Insurance (“LPI”)

Good lending practices dictate that all standard loan documents, including those of Fannie Mae and Freddie Mac, require borrowers to provide insurance coverage for the property that is collateral for the mortgage loan; and standard loan documents also allow the lender or loan servicer to provide insurance coverage for the collateral property if the borrower breaches his or her contractual duty to do so on their own.

Of course, the reason for LPP or LPI is that the owner of a mortgage loan – the lender - must be continuously covered by insurance. Insurance coverage that protects the value of the collateral securing the loan is, in effect, alternative collateral. Just as no lender would make a mortgage loan without collateral, no lender would make a mortgage loan without sufficient insurance covering the collateral. Likewise, mortgage investors require this same coverage and require mortgage companies that service their loans, such as a loan servicer or a mortgage banker, to maintain a blanket insurance policy that provides insurance coverage in case their borrowers fail to maintain their insurance policies as required.

The requirement for the borrower to maintain insurance coverage appears in paragraph 5 of the security instrument, such as a mortgage, deed-of-trust, or a Georgia Security Deed, and which I have excerpted and cite here:

“5. Property Insurance. Borrower shall keep the improvements now existing or hereafter erected on the Property insured against loss by fire, hazards included within the term “extended coverage,” and any other hazards including, but not limited to, earthquakes and floods, for which Lender requires insurance. This insurance shall be maintained in the amounts (including deductible levels) and for the periods that Lender requires. What Lender requires pursuant to the preceding sentences can change during the term of the Loan. The insurance carrier providing the insurance shall be chosen by Borrower subject to Lender’s right to disapprove Borrower’s choice, which right shall not be exercised unreasonably. Lender may require Borrower to pay, in connection with this Loan, either: (a) a one-time charge for flood zone determination, certification and tracking services; or (b) a one-time charge for flood zone determination and certification services and subsequent charges each time remappings or similar changes occur which reasonably might affect such determination or certification. Borrower shall also be responsible for the payment of any fees imposed by the Federal Emergency Management Agency in connection with the review of any flood zone determination resulting from an objection by Borrower.
“If Borrower fails to maintain any of the coverages described above, Lender may obtain insurance coverage, at Lender’s option and Borrower’s expense. Lender is under no obligation to purchase any particular type or amount of coverage. Therefore, such coverage shall cover Lender, but might or might not protect Borrower, Borrower’s equity in the Property, or the contents of the Property, against any risk, hazard or liability and might provide greater or lesser coverage than was previously in effect. Borrower acknowledges that the cost of the insurance coverage so obtained might significantly exceed the cost of insurance that Borrower could have obtained. Any amounts disbursed by Lender under this Section 5 shall become additional debt of Borrower secured by this Security Instrument. These amounts shall bear interest at the Note rate from the date of disbursement and shall be payable, with such interest, upon notice from Lender to Borrower requesting payment.
“All insurance policies required by Lender and renewals of such policies shall be subject to Lender’s right to disapprove such policies, shall include a standard mortgage clause, and shall name Lender as mortgagee and/or as an additional loss payee. Lender shall have the right to hold the policies and renewal certificates. If Lender requires, Borrower shall promptly give to Lender all receipts of paid premiums and renewal notices. If Borrower obtains any form of insurance coverage, not otherwise required by Lender, for damage to, or destruction of, the Property, such policy shall include a standard mortgage clause and shall name Lender as mortgagee and/or as an additional loss payee.
“In the event of loss, Borrower shall give prompt notice to the insurance carrier and Lender. Lender may make proof of loss if not made promptly by Borrower. Unless Lender and Borrower otherwise agree in writing, any insurance proceeds, whether or not the underlying insurance was required by Lender, shall be applied to restoration or repair of the Property, if the restoration or repair is economically feasible and Lender’s security is not lessened. During such repair and restoration period, Lender shall have the right to hold such insurance proceeds until Lender has had an opportunity to inspect such Property to ensure the work has been completed to Lender’s satisfaction, provided that such inspection shall be undertaken promptly. Lender may disburse proceeds for the repairs and restoration in a single payment or in a series of progress payments as the work is completed. Unless an agreement is made in writing or Applicable Law requires interest to be paid on such insurance proceeds, Lender shall not be required to pay Borrower any interest or earnings on such proceeds. Fees for public adjusters, or other third parties, retained by Borrower shall not be paid out of the insurance proceeds and shall be the sole obligation of Borrower. If the restoration or repair is not economically feasible or Lender’s security would be lessened, the insurance proceeds shall be applied to the sums secured by this Security Instrument, whether or not then due, with the excess, if any, paid to Borrower. Such insurance proceeds shall be applied in the order provided for in Section 2.
“If Borrower abandons the Property, Lender may file, negotiate and settle any available insurance claim and related matters. If Borrower does not respond within 30 days to a notice from Lender that the insurance carrier has offered to settle a claim, then Lender may negotiate and settle the claim. The 30-day period will begin when the notice is given. In either event, or if Lender acquires the Property under Section 22 or otherwise, Borrower hereby assigns to Lender (a) Borrower’s rights to any insurance proceeds in an amount not to exceed the amounts unpaid under the Note or this Security Instrument, and (b) any other of Borrower’s rights (other than the right to any refund of unearned premiums paid by Borrower) under all insurance policies covering the Property, insofar as such rights are applicable to the coverage of the Property. Lender may use the insurance proceeds either to repair or restore the Property or to pay amounts unpaid under the Note or this Security Instrument, whether or not then due.”

Sometimes, there are instances where a lender is unable to documented the existence of adequate insurance, or unable to reach the borrower to verify whether they are making arrangements for the continuation of their existing insurance or the initiation of a replacement policy. When there appears to be an insurance problem, and a lender cannot make contact with a borrower, then the lender needs to make sure that their efforts and findings are clearly logged into the lender’s records in case they are needed later on if further problems pop up.

An inability of a lender to reach a borrower is sometimes documented in the lender’s records as a “UTV,” which is an industry-wide standard notation for the term “unable to verify.” The existence of these UTV entries and other similar notations in a lender’s contact records indicate that the lender attempted to locate the borrower and information on the collateral’s insurance coverage, and took the action of resolving this insurance coverage issue by adding the collateral property to their blanket policy in order to protect the collateral should there be no other coverage on the property.

A borrower is required to main adequate insurance coverage on the collateral property by the terms of their mortgage or deed-of-trust. The lender is required by its own operating policies and procedures to make sure that the collateral property is insured. And a loan servicer servicing the loan for another party who owns the loan is required by their loan servicing agreement to see that insurance coverage is maintained on the collateral property.

Any prudent lender or loan servicer that is in a situation where it is unclear whether insurance coverage is in place should comply with safe and sound lending practices and normal and acceptable industry standard procedures, and assure that coverage is in place by placing a lender placed policy on the property until the situation can be verified and clarified. Then, if it is later learned that the coverage was not needed, the charges for the LPP can be reversed.

Essentially, safe and sound mortgage banking practices, and normal and acceptable mortgage servicing industry standards, require that a mortgage servicer act on the side of safety, rather than leave the owner of the mortgage loan (as well as the borrower) open to the possibility of sustaining an uninsured loss. The simple and logical reason for this is that an LPP charge easily can be reversed but an uninsured loss cannot be undone.

It has been my experience in the banking, mortgage banking, and real estate mortgage servicing and lending industries that it is a normal practice for the insurance industry to refund premiums that were paid in error or where coverage was not needed due to double coverage or no need for coverage. Therefore, lenders often, and correctly, understand or assume that if they do obtain coverage and the coverage was not needed or was in error, that the insurance company will refund the premium.

It is my professional opinion that a lender or loan servicer who encounters a situation where they have tried but cannot determine that there is acceptable insurance coverage on a collateral property should place that property on the company’s blanket policy until the borrower can arrange replacement coverage.

Furthermore, it is my professional opinion that a lender servicing a loan for another party that actually owns the loan should place the subject collateral property on the company’s blanket policy until the borrower can arrange replacement coverage. This industry standard practice provides the collateral protection that is always required by loan servicing agreements.

Real Estate Taxes

The escrowing of funds for the payment of property taxes (and insurance) is an issue that varies from lender to lender with some allowing direct payment under certain circumstances and others requiring that all borrowers escrow. In general, the clear majority of mortgage loans do escrow funds for the payment of taxes and insurance.

If a borrower is paying their taxes directly as opposed to escrowing an amount each month for the payment of taxes, then it is possible for the borrower to fail to make the annual tax payment and thereby place the collateral property in jeopardy of being placed under a tax lien which would be superior to the first lien held by the lender.

The requirement for the borrower to timely pay the taxes due on the collateral property appears in paragraph 3 of the security instrument, such as a mortgage, deed-of-trust, or the Georgia Security Deed mentioned above, and which I have excerpted and cite here:

“3. Funds for Escrow Items. Borrower shall pay to Lender on the day Periodic Payments are due under the Note, until the Note is paid in full, a sum (the “Funds”) to provide for payment of amounts due for: (a) taxes and assessments and other items which can attain priority over this Security Instrument as a lien or encumbrance on the Property; (b) leasehold payments or ground rents on the Property, if any; (c) premiums for any and all insurance required by Lender under Section 5; and (d) Mortgage Insurance premiums, if any, or any sums payable by Borrower to Lender in lieu of the payment of Mortgage Insurance premiums in accordance with the provisions of Section 10. These items are called “Escrow Items.” At origination or at any time during the term of the Loan, Lender may require that Community Association Dues, Fees, and Assessments, if any, be escrowed by Borrower, and such dues, fees and assessments shall be an Escrow Item. Borrower shall promptly furnish to Lender all notices of amounts to be paid under this Section. Borrower shall pay Lender the Funds for Escrow Items unless Lender waives Borrower’s obligation to pay the Funds for any or all Escrow Items. Lender may waive Borrower’s obligation to pay to Lender Funds for any or all Escrow Items at any time. Any such waiver may only be in writing. In the event of such waiver, Borrower shall pay directly, when and where payable, the amounts due for any Escrow Items for which payment of Funds has been waived by Lender and, if Lender requires, shall furnish to Lender receipts evidencing such payment within such time period as Lender may require. Borrower’s obligation to make such payments and to provide receipts shall for all purposes be deemed to be a covenant and agreement contained in this Security Instrument, as the phrase “covenant and agreement” is used in Section 9. If Borrower is obligated to pay Escrow Items directly, pursuant to a waiver, and Borrower fails to pay the amount due for an Escrow Item, Lender may exercise its rights under Section 9 and pay such amount and Borrower shall then be obligated under Section 9 to repay to Lender any such amount. Lender may revoke the waiver as to any or all Escrow Items at any time by a notice given in accordance with Section 15 and, upon such revocation, Borrower shall pay to Lender all Funds, and in such amounts, that are then required under this Section 3.
“Lender may, at any time, collect and hold Funds in an amount (a) sufficient to permit Lender to apply the Funds at the time specified under RESPA, and (b) not to exceed the maximum amount a lender can require under RESPA. Lender shall estimate the amount of Funds due on the basis of current data and reasonable estimates of expenditures of future Escrow Items or otherwise in accordance with Applicable Law.
“The Funds shall be held in an institution whose deposits are insured by a federal agency, instrumentality, or entity (including Lender, if Lender is an institution whose deposits are so insured) or in any Federal Home Loan Bank. Lender shall apply the Funds to pay the Escrow Items no later than the time specified under RESPA. Lender shall not charge Borrower for holding and applying the Funds, annually analyzing the escrow account, or verifying the Escrow Items, unless Lender pays Borrower interest on the Funds and Applicable Law permits Lender to make such a charge. Unless an agreement is made in writing or Applicable Law requires interest to be paid on the Funds, Lender shall not be required to pay Borrower any interest or earnings on the Funds. Borrower and Lender can agree in writing, however, that interest shall be paid on the Funds. Lender shall give to Borrower, without charge, an annual accounting of the Funds as required by RESPA.
“If there is a surplus of Funds held in escrow, as defined under RESPA, Lender shall account to Borrower for the excess funds in accordance with RESPA. If there is a shortage of Funds held in escrow, as defined under RESPA, Lender shall notify Borrower as required by RESPA, and Borrower shall pay to Lender the amount necessary to make up the shortage in accordance with RESPA, but in no more than 12 monthly payments. If there is a deficiency of Funds held in escrow, as defined under RESPA, Lender shall notify Borrower as required by RESPA, and Borrower shall pay to Lender the amount necessary to make up the deficiency in accordance with RESPA, but in no more than 12 monthly payments.
“Upon payment in full of all sums secured by this Security Instrument, Lender shall promptly refund to Borrower any Funds held by Lender.”

Essentially, if a borrower fails to pay the taxes that are due on a collateral property, the lender my pay the taxes and either require the borrower to reimburse the lender, or the lender may add to the borrower’s loan balance the amount of the taxes paid.

Conclusion

This discussion of mortgage banking and mortgage lending industry standard practices and procedures is certainly not all inclusive since there are innumerable issues that occur during the life of a mortgage loan. In dealing with any issues that happen to pop up while servicing a mortgage loan, the lender or loan servicer should always choose the course that is fair to all parties and that offers continuous protection to the collateral upon which the lender, loan servicer, and property owner rely.

ABOUT THE AUTHOR: Don Coker
Don Coker provides expert witness and consulting services. Over 400 cases for plaintiffs and defendants nationwide, over 100 testimonies in all areas of banking and finance. Listed in the databases of recommended expert witness consultants of both the DRI and the AAJ.

Clients have included numerous individuals, 60 banks, and governmental clients such as the IRS, FDIC.

Employment experience with Citicorp, Ford Credit, and entities that are now JPMorgan Chase Bank, BofA, Regions Financial, and a 2-year stint as a high-level governmental financial institution regulator.

B.A. degree from the University of Alabama. Postgraduate and executive education work at Alabama, the University of Houston, SMU, Spring Hill College, and the Harvard Business School.

Clients in 27 countries for work involving 56 countries. Widely published, often called on by the media. Don Coker serves clients worldwide from his Atlanta metro area office.

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While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.
For specific technical or legal advice on the information provided and related topics, please contact the author.

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