New 'Predatory' Laws Take Aim at Servicing Practices

Increasingly, "predatory lending" laws that are being passed by states include prohibitions on specific servicing practices as well as onerous penalties that apply not only to "high-cost" loans but to other home loans as well.

In essence, the fervor to penalize lending abuses is now spilling over to the servicing arena, with results that could cause some mortgage servicers to stop doing business in states with particularly burdensome laws.

Attorney Laurence Platt of Kirkpatrick & Lockhart, Washington, D.C., said many of the state laws emerging over the past few months include two tiers of provisions, one pertaining to "high-cost" or "high-risk" loans and another applying to all home loans.

The servicing prohibitions, and the large penalties, are being included in the portion of the laws that apply to all loans.

For instance, in the state of Arkansas, a loan could be voided entirely if the servicer charged a $25 payoff fee.

Mr. Platt says there is no rational relationship between the risk to the consumer and the size of the penalties under the new laws. Rather, they seek "to punish to the point of torture servicers that make a mistake."

Illinois, New Jersey and Arkansas are among the states that have passed predatory laws that impose punitive penalties for loan servicing violations.

The laws are imposing penalties "that make it unrealistic for a commercial enterprise to take the risk," Mr. Platt said, predicting that some of the best and most respected servicers will cease doing business in certain states as a result.

"There is just not enough profit in the business to face those kinds of risk," he said.

Mr. Platt advises lenders to take caution in charging fees to consumers for loan servicing actions and make sure the fees are authorized and legal in the context of the new laws.

For servicers, the new Illinois law restricts the collection of late payment fees on such loans, and requires that each payment be posted on the same day it was received.

Specifically, the Illinois law prohibits lenders from charging a late payment fee that exceeds 5% of the past due payment, and a late payment fee can only be assessed for a loan that is at least 15 days past due.

The law also requires servicers to advise delinquent borrowers about the availability of counseling before they initiate judicial foreclosure proceedings. And it requires servicers to defer foreclosure during the notice period as well as restricting what fees may be imposed upon a borrower whose loan reinstates.

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