QUESTION
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?
ANSWER
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
Managing Director
Lenders Compliance Group
