Mortgage Servicers: What They Do, and Where Problems Arise
Most homeowners are familiar with their mortgage servicer — it’s the company named on every monthly statement, the one that processes payments and manages the escrow account. What is less well understood is how many legal obligations that company carries, and how often those obligations become a source of dispute.
Mortgage servicing is the management of a loan from origination until it is paid off or foreclosed. Servicers are responsible for collecting and processing payments, maintaining account records, handling escrow for taxes and insurance, evaluating borrowers for loss mitigation when they fall behind, and — when it comes to that — prosecuting foreclosures. In most cases, the servicer did not make the loan and does not own it. The loan is typically held by an investor or an entity like Fannie Mae or Freddie Mac, and the servicer manages the day-to-day relationship with the borrower under a separate agreement.
That structure creates an important dynamic: servicers are compensated through a mix of fees, payments from loan pools, float income on deposits, and revenue from affiliated businesses — and borrowers have no voice in selecting which servicer handles their loan. The rules governing servicer conduct come from the loan documents themselves, federal statutes and regulations, and investor guidelines from entities like Fannie Mae and Freddie Mac.
The following is an overview of the areas where servicing issues most commonly arise. Each will be covered in more depth in separate posts.
Loan Accounting and Payment Application
Much of what a servicer does is accounting. Payments must be applied in the order the loan documents specify — under the standard Fannie/Freddie instruments, that means interest first, then principal, then escrow, with fees only coming from whatever remains. Partial payments are often held in a suspense account until enough accumulates to cover a full installment. When payments are applied incorrectly or suspense accounts are handled improperly, the downstream effects can compound quickly: a manufactured shortfall leads to a late fee, which affects the reported account status, which can trigger additional charges.
Interest Calculation
Most conventional mortgages use the “scheduled” method: interest accrues based on the due date, not when payment is actually received. Some loans — particularly older subprime products — use daily simple interest, where every day between payments counts. The applicable method is determined by the loan documents, and disputes can arise when servicers apply the wrong method or calculate interest on balances that include items not authorized by the note.
Escrow Accounts
Escrow accounts collect monthly contributions toward property taxes and homeowner’s insurance. Common issues include incorrect escrow analyses that cause unexplained payment increases, late disbursements to taxing authorities or insurers, and overestimates of the escrow cushion the servicer is permitted to maintain. Federal law — RESPA — closely governs escrow account management, and some states impose additional requirements.
Force-Placed Insurance
When a servicer determines that a borrower’s homeowner’s insurance has lapsed, it is authorized to obtain coverage and charge the borrower for it. This force-placed insurance typically costs more than a standard policy and protects only the lender’s interest. Disputes in this area often involve force-placement on properties where adequate coverage was already in place, policies in amounts that exceed what is authorized, and questions about whether the servicer’s affiliated businesses are receiving a benefit from the arrangement.
Fees
Once a loan is in default, a range of additional charges may appear on the account. Fees are only recoverable if they are authorized by the loan documents and applicable law, and must be reasonable. Common categories include:
• Property inspection fees for drive-by checks of the property’s condition or occupancy status.
• Property preservation charges for work such as winterization, lock changes, or lawn maintenance on properties deemed vacant.
• Broker’s price opinions (BPOs) for drive-by property valuations ordered after default.
• Pay-to-pay fees charged for making a payment by phone or online.
• Attorney fees and foreclosure costs, which must be reasonable and actually incurred.
• Corporate advances, a catch-all category for servicer expenses charged back to the borrower.
Late Fees
Late fees are subject to specific requirements under the loan documents, state law, and federal regulations. Common issues include fees assessed before the grace period has actually expired, and “pyramiding” — where a current payment is applied first to a prior late fee, producing a new shortfall that generates another late fee the following month. Federal law prohibits pyramiding, and the standard Fannie/Freddie security instruments address the order in which late charges may be collected.
Loss Mitigation
Federal guidelines and investor rules require servicers to evaluate borrowers for available loss mitigation options — modifications, repayment plans, forbearance — before proceeding to foreclosure. CFPB regulations set specific procedural requirements, including timelines, required notices, and restrictions on proceeding to foreclosure while a complete application is under review. How those requirements are followed, and what happens to in-progress applications when servicing is transferred, is a common source of dispute.
Servicing Transfers
Loans are transferred between servicers regularly. Account information doesn’t always transfer cleanly — payment histories can contain errors, pending loss mitigation applications may not carry over, and fees charged by the prior servicer may not be well-documented. Borrowers sometimes find themselves needing to re-establish account standing or re-submit modification applications they had already submitted to a prior servicer.
Credit Reporting
Servicing errors often find their way into credit reports. Modified loans may continue to be reported as delinquent under original terms. Short sales may be reported as foreclosures. Debts discharged in bankruptcy may continue appearing as active obligations. Inaccurate reporting can affect a borrower’s access to credit long after an underlying issue has been resolved.
Private Mortgage Insurance
The Homeowners Protection Act requires servicers to automatically cancel PMI when a loan reaches 78 percent of the original property value, and to cancel it upon request at 80 percent. Servicers must refund unearned premiums — not just credit them to the escrow account — within 45 days of cancellation. This is an area where the legal requirements are specific and the practical errors are common.
Why This Matters in a Foreclosure Case
Servicing problems don’t just create account headaches — they can affect the validity of a foreclosure and give rise to affirmative claims under Maine and federal law. At Island Justice Law, reviewing the full servicing record is a standard part of every foreclosure defense case. When the facts support a claim, we pursue it.
If a foreclosure is pending, or if a mortgage account has unexplained charges, a payment history that doesn’t add up, or a modification that didn’t go anywhere, contact Island Justice Law for a consultation.
Call (207) 200-7077 or contact us online.
Island Justice Law represents homeowners in every county in Maine, from Fort Kent to Kittery.
This post is for informational purposes only and does not constitute legal advice.
