In todays email:

• 🤓 Note servicing rules and regulations

• 👊 What makes a good mortgage note servicer

• 😬 Why you should not service your own loans

Note Servicing Rules and Regulations

I have always been a DIY person and the one thing I will not do or even consider doing is servicing my own mortgage notes. Mortgage note servicing is subject to various rules and regulations to ensure fair and transparent practices in the lending and servicing industry. These rules are designed to protect the rights of borrowers and promote a stable and efficient mortgage market. The rules are constantly changing and you have to have the proper licensing in order to be compliant. The cost to have a third party servicer is small, so there's no reason to waste your time servicing your own notes.

Look at all these rules:

1. Real Estate Settlement Procedures Act (RESPA):

   Enforced by the Consumer Financial Protection Bureau (CFPB), RESPA regulates the disclosure of settlement costs and prohibits certain practices such as kickbacks and referral fees. Servicers are required to provide borrowers with various disclosures and monthly statements.

2. Truth in Lending Act (TILA):

   Administered by the CFPB, TILA is aimed at promoting the informed use of consumer credit by requiring disclosure of key terms and costs associated with lending. Also, when you buy a note you have to send a TILA letter telling the borrower that you now own the note. The servicer can do this for you to stay compliant.

3. Fair Debt Collection Practices Act (FDCPA):

   The FDCPA, enforced by the Federal Trade Commission (FTC), sets rules for the collection of debts, including mortgage debts. Servicers must adhere to fair and ethical debt collection practices, and they are prohibited from engaging in deceptive, unfair, or abusive practices.

4. Homeowners Protection Act (HPA):

   Also known as the Private Mortgage Insurance (PMI) Cancellation Act, HPA establishes rules regarding the cancellation of private mortgage insurance. Servicers are required to provide borrowers with information about when and how they can request the cancellation of PMI.

5. Fair Housing Act (FHA):

   Administered by the Department of Housing and Urban Development (HUD), the FHA prohibits discrimination in housing-related transactions based on race, color, religion, sex, national origin, disability, and familial status. Servicers must ensure compliance with fair housing laws.

6. Dodd-Frank Wall Street Reform and Consumer Protection Act:

   Dodd-Frank introduced significant reforms to the financial industry, including measures to address mortgage lending and servicing practices. The act created the CFPB to oversee and enforce consumer protection laws, including those related to mortgages.

7. State Regulations:

   In addition to federal laws, mortgage servicing is subject to state-specific regulations. States may have their own rules governing foreclosure procedures, loan modifications, and other aspects of mortgage servicing.

That being said, you should definitely be aware of and understand to a certain level many of these rules and regulations since they will be helpful for you to manage your notes. However, leave the nitty-gritty up to the servicing companies and if necessary get a creditor attorney on your team.

What makes a good mortgage note servicer?

A good mortgage servicer is essential for the smooth management of a lender’s mortgage loan. Lenders rely on mortgage servicers to handle various aspects of their loans, from processing payments to providing assistance during challenging financial situations. Here are some characteristics and practices that make a mortgage servicer effective:

1. Clear Communication:

   A good servicer communicates clearly with borrowers, providing information about the terms of the loan, changes in interest rates, and any other relevant details. Transparency is crucial to building trust with borrowers.

2. Responsive Customer Service:

   A responsive customer service team that can address borrower inquiries and concerns in a timely manner is essential.

3. Accurate and Timely Record-Keeping:

   Accurate and up-to-date record-keeping is critical for processing payments, maintaining loan information, and providing accurate statements to borrowers. This helps prevent errors and ensures that borrowers have a clear understanding of their financial obligations.

4. Efficient Payment Processing:

   A good servicer efficiently processes loan payments and credits them to the borrower's account promptly. This includes handling principal, interest, taxes, and insurance payments accurately and in accordance with the loan agreement. Also, it is important for the servicer to have various payment methods such as pay online, by ACH, moneygram, wire, etc.

5. Loss Mitigation and Workout Options:

   When borrowers face financial challenges, a good mortgage servicer offers a range of loss mitigation options, such as loan modifications, forbearance, or repayment plans. Now it is ultimately up to you (the mortgage note owner) to decide but the servicer can help you with the paperwork.

6. Compliance with Regulations:

   Compliance with all applicable federal and state regulations is a fundamental requirement for a mortgage servicer. This includes adherence to rules outlined in RESPA, TILA, and other relevant laws to protect the rights of borrowers.

7. Transparency in Fees and Charges:

   A good servicer is transparent about any fees or charges associated with the loan. You the lender should be informed about any changes in fees.

8. Effective Escrow Management:

   For loans with escrow accounts, a good servicer effectively manages and disburses funds for property taxes, homeowner's insurance, and other escrow related expenses. This helps borrowers avoid surprises related to these costs.

9. Technology and Online Services:

   Offering online account access, mobile apps, and other technological tools can enhance the borrower's experience. This includes providing easy access to statements, payment history, and the ability to make online payments.

10. Proactive Communication During Transitions:

    If the servicing of a loan is transferred to a new servicer, a good servicer ensures a smooth transition and proactively communicates the change to borrowers in compliance with the rules and regulations.

11. Fair and Ethical Practices:

    A good mortgage servicer conducts business with fairness and ethics. This includes avoiding predatory practices, treating borrowers with respect, and ensuring that collections activities are conducted in compliance with relevant laws.

For a small monthly fee of $20-$50 a month (depending whether there’s escrow, etc.) it is well worth the additional costs since it saves a ton of time and effort in having all these tasks done for you. Now sometimes the fees can be higher if the mortgage note goes into bankruptcy or foreclosure, but in my opinion well worth it.

Why you should NOT service your own loan.

While some individuals may be tempted to service their own mortgage notes (handle all aspects of managing the loan themselves), there are several reasons why this is not advisable for most lenders. Here are some considerations:

1. Complexity of Loan Administration:

   Mortgage servicing involves various complex tasks such as processing payments, managing escrow accounts, and ensuring compliance with legal and regulatory requirements. It requires a good understanding of mortgage lending practices and financial management.

2. Regulatory Compliance:

   Mortgage servicing is subject to a myriad of federal and state regulations, including RESPA, TILA, and other consumer protection laws. Staying compliant with these regulations requires a thorough knowledge of the legal landscape, and non-compliance can lead to serious consequences.

3. Escrow Management:

   For mortgages with escrow accounts, managing property taxes, homeowner's insurance, and other related expenses can be intricate. Mistakes in escrow management can result in financial issues, including potential legal and regulatory repercussions.

4. Loan Modification and Loss Mitigation:

   If a borrower encounters financial difficulties and needs to explore options such as loan modification or forbearance, having an experienced servicer is crucial. Professionals can guide lenders/note owners through the process and help find solutions, whereas self-servicing may lack the necessary expertise.

5. Communication and Customer Service:

   Mortgage servicers often provide customer service support for lenders. Handling inquiries, resolving issues, and communicating effectively with borrowers require a level of infrastructure and expertise that you may find challenging to replicate.

6. Risk of Legal Issues:

   Legal issues can arise in mortgage servicing, particularly in the context of foreclosure proceedings. Handling legal matters without the proper licensing, knowledge and expertise can lead to serious consequences for the you the note owner.

7. Time and Resource Commitment:

   Servicing a mortgage is a time-consuming task that requires ongoing attention and resources. Individuals may find it challenging to balance mortgage servicing responsibilities with other personal and professional commitments.

8. Technology and Industry Changes:

   Mortgage servicing involves the use of technology and staying up-to-date with industry changes. Keeping abreast of technological advancements and evolving industry standards can be challenging for an individual without dedicated resources. Plus it is very expensive!

9. Specialized Software and Systems:

   Mortgage servicers often use specialized software and systems to manage loan portfolios efficiently. Individuals may not have access to such tools, and attempting to create or replicate them independently could be impractical. There are software systems you can buy but steep learning curve and very costly.

10. Possible Credit Reporting and Documentation:

    Proper documentation of all transactions are crucial in mortgage servicing. Failing to report accurately or maintain proper documentation can have adverse effects on a borrower's credit and legal standing. Although most of my services do not report to credit agencies, the borrower can ask for a VOM (verification of mortgage) and you (as lender/note owner) must have all your accounting accurate and up to date.

For these reasons, most lenders/note buyers find it more practical and efficient to rely on professional mortgage servicers who have the expertise, infrastructure, and resources to manage loans effectively while ensuring compliance with applicable laws and regulations. If you are considering self-servicing, it's important to carefully weigh the challenges and risks involved and seek professional advice.

Note Income Masterclass coming in Dec 2023.

Many newsletter subscribers have expressed an interest in learning how to make money in the mortgage note space and therefore I have decided to hold a master class in December 2023. I will send out a separate email with the exact date/time with a link to sign up for the masterclass. The Masterclass will be recorded so you can watch it at a later time if not able to attend live.

In the class we will discuss the following:

• Note Overview - Why notes? Discuss types of real estate notes, how it works, where to invest, etc.

• How Profit - Income sources. Discuss what are the profit centers in note investing.

• Buying Process - Steps to buying notes. Discuss the process and due diligence for buying a note and the note sale agreement.

• Team Needed - Outsourcing. Discuss who you need to get on your team to be able to properly underwrite, value, buy, service, mitigate, etc your notes.

• Critical Docs - Due diligence docs. Discuss the important docs like the note, mortgage, assignments, allonges, title policy, etc.

We would love to get your feedback and your thoughts! Let us know which topics are of interest or where you need more clarity. Just respond to this email directly 😌 or email [email protected].