Mortgage Note Investing: Compliance and Servicing 101
Let’s discuss compliance and servicing basics as it relates to mortgage note investing.
Most institutional note buyers run compliance checks through a vendor. And it’s worth knowing some high-level information should you encounter issues when potentially selling a loan to an institutional buyer. It’s also not a bad idea to run compliance checks when buying certain loans for yourself. We’ll start by discussing the Truth in Lending Act or TILA. TILA prescribes uniform methods for computing the cost of credit, for disclosing credit terms, and for resolving errors on certain types of credit accounts. A Truth in Lending disclosure statement provides information about the costs of one’s credit, including the APR or annual percentage rate. The loan estimate form took effect on October 3rd, 2015, and replaced the Truth in Lending disclosure statement for most loans.
Another hot topic with compliance and servicing is the high-cost loan. Historically these transactions have been referred to as HOEPA loans or Section 32 loans. The Home Ownership and Equity Protection Act or HOEEPA was enacted in 1994 as an amendment to the Truth in Lending Act. The objective was to address abusive practices in refinances and closed-end home equity loans with high-interest rates or high fees. In a note sale, the topic of Regulation Z or RENZ occasionally comes up. RENZ defines a higher-priced mortgage loan as a loan on a primary home with an APR that exceeds the average prime rate by one and a half percent or more for first liens or by three and a half percent or more for junior liens or second liens. Again, it’s merely a good idea to be aware of compliance topics and consider compliance checks through a reputable vendor before buying a loan.
Let’s shift gears and talk about loan servicing. It’s challenging to manage assets without managing the servicer of those assets effectively. Loan servicers fulfill a lot of functions depending on the level of servicing. There are two major categories of servicing, standard servicing and special servicing. A standard servicing is typically associated with performing loans. Specialty servicing is generally associated with non-performing loans.
What is standard servicing consist of? This would be your payment posting, disbursement of funds to the lender, reporting, and pay off and reinstatement letters all pretty basic stuff. The loan setup costs generally range from about $45-$150 per file depending on whether the loan is an adjustable-rate mortgage or a HELOC. Where if it has escrows or impounds or if it’s an active BK, has a forbearance plan or complex loan modification, or if it’s a partial note sale. The monthly servicing costs generally range from about $15-$35 per month. So those are the basics of standard servicing. Activities associated with specialty servicing include sending late notices, borrower outreach calls, skip tracing to find a borrower, coordination of foreclosure and bankruptcy relief, facilitating forbearance agreements, short sale coordination, and even managing eviction details. So much more complicated than the standard servicing. Setup costs generally range from about $45-75. The monthly servicing costs range typically from about $65-95 per month, depending on how high touch the servicing is in terms of loan workouts and outreach by the servicer.
It’s essential to be aware of compliance topics and use a reputable vendor to complete compliance checks before you buy loans. There are two main types of loan servicing standard servicing, and specialty servicing, and each consists of activities that are critical to servicing your loan.
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