Recently, we increased the property taxes of a large number of borrowers. This was done in response to their real estate taxes going up, and we had to collect the additional taxes. One of the borrowers complained to the banking department. The department then sent an examiner to our office and cited us for not voluntarily notifying borrowers of the payment shock. This doesn’t sit right with us. After all, he said it was a voluntary notice. How is it that we should be hit with the banking department telling us to do something that is voluntary?
There are many aspects of mortgage banking that are voluntary. Often, these come under the rubric of “Best Practices.” Payment shock notices are in the Best Practices category. As to the banking department’s position, keep in mind that a banking department, ideally, is a consumer advocacy agency. It wants consumers protected, and Best Practices are part of the means toward protection.
A payment shock notice is a voluntary notice that a lender or servicer may provide to a borrower to alert the borrower to the potential for a substantial increase in the property taxes for a home. For instance, take the case of new construction. A newly constructed home may have its first year’s property taxes based on the unimproved value or only the improved value. However, there can be a substantial increase in property taxes once the taxes are fully based on the improved value.
I think what you should think about – and, if acceptable, included in your policies and procedures – is implementing the Best Practices approach that accounts for payment shock. I understand your concern about having to be admonished by the banking department for not issuing a voluntary notice. But this is a long-settled matter under the Real Estate Settlement Procedures Act (RESPA).
Indeed, this issue goes back to 1998, when HUD issued a final rule embracing the need for a payment shock notice, provided voluntarily by the issuer. It reasoned at the time that this practice should be adopted to ensure that “consumers are informed of the payment shock problem and given an opportunity to avoid it.” [63 FR 3214, 3233, 3237-3238 (1998)]
HUD’s view consists of two basic premises:
- Notifying borrowers in advance and providing an opportunity to make voluntary payments ahead of schedule to avoid payment shock; and,
- Offering consumers extended repayment plans, even beyond those required under RESPA, to make up substantial shortages associated with payment shock. [Idem]
These two premises reflect the actual practices that lenders and servicers had been implementing for a long time – even before the final rule was issued back in 1998. Such practices continue today. The payment shock notice does not need a government requirement to be actionable, since widespread implementation is obviously in the best interests of consumers, lenders, and servicers.
Jonathan Foxx, PhD, MBA
Lenders Compliance Group