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Lender, Investor and Servicing companies must be licensed to do a modification.
A loan modification is a document used to modify the original terms of a loan. In a modification a lender can agree to reduce the interest rate, reduce the principal balance, convert a rate from an adjustable to a fixed rate, reduce the interest rate and extend or reduce the length of the original term.
Some of the reasons investors, lenders and servicing companies have been scrutinized and even faced penalties are for the following:
Failing to process the application in a timely manner
Effective January 10, 2014, federal mortgage servicing rules were changed to reduce these delays. If a Mortgage Servicer receives a request for a loan modification and the Mortgagor sends in a hardship application, the Servicer must review and notify the borrower of receipt of the application within 5 days as well as notifying the Borrower of any information that is missing which would enable the servicer to come to a decision on the modification. Once all required documentation has been received the Servicer has 30 days to make a decision.
Telling a Homeowner they have to be in default
It used to be common practice for Lenders/Servicers to tell a Homeowner they had to be in default before their loan would be considered for a Modification. However, this is not necessarily true.
To qualify for a Modification the Homeowner may either be behind or simply in danger of falling behind.
Requiring a Homeowner to resubmit information
Servicers have been known to request additional information throughout the application process, such as paystubs or profit and loss statements due to this information becoming quickly outdated. Based on the federal guideline this information is good for 90 days and should not be requested again unless this time frame has lapsed.
Using incorrect income for processing a modification
When evaluating a Homeowner for a modification a servicer will look at the principal balance of the loan, the value of the property and the borrower’s income. Servicers have made decisions on whether to foreclose on a property based on the overall value even if a Homeowner qualified for the modification. Many Servicers have been penalized or have even had to forfeit the property back to the Homeowner.
Servicing transfers in the middle of a modification
Servicing transfers are common in the mortgage industry. In some cases in the new servicer has not honored the modification agreement. The agreement must be honored because a modification is a recorded document changing the original terms of the loan.