Many creditors and servicers seem unaware that the new mortgage loan servicing rules in Regulation Z will take effect on October 1.

These new rules, applicable to creditors that service their own mortgage loans as well as to third-party servicers who do so for others, prohibit three practices in connection with loans secured by the consumer’s principal dwelling:

  • The "prompt crediting"rule prohibits a servicer from failing to credit a payment to a consumer’s account as of the date of receipt.
  • The "anti-pyramiding" rule prohibits a servicer from "pyramiding" late fees, that is, imposing a late fee on a consumer who makes a timely payment in an amount that would otherwise equal or exceed the full payment due but for a previously assessed late fee.
  • The "payoff statement" rule prohibits a servicer from failing to provide, within a reasonable time of receiving a consumer’s request, an accurate statement of the amount then required to pay the loan in full.

The "prompt crediting" rule is especially tricky. Under that rule, a servicer is not required to post mortgage loan payments on a particular date, but the servicer is required to credit the payment "as of"the date of receipt. A servicer that receives a payment before its due date but does not post it until afterward will be in compliance with the rule as long as the delay does not result in the imposition of a late fee, additional interest, or any similar penalty, such as a default rate of interest, and as long as the delay does not result in the reporting of negative information to a consumer reporting agency. Also, the "date of receipt"of a loan payment is not the date the funds are actually collected; instead, it is the date the check or other payment instrument actually reaches the servicer.

The "prompt crediting" rule permits a servicer to specify requirements for the borrower to follow in making payments. However, the servicer must do so in writing, for example, by separate notice or by a notice on the payment coupon, and the requirements must be reasonable, which means that most borrowers should be able to make conforming payments. Reasonable requirements include specifying that:

  • Payments be accompanied by the account number or payment coupon
  • Payments be received by a designated cut-off hour (a 5 p.m. cut-off is automatically deemed reasonable)
  • Different cut-off hours apply to payments made by mail and in person
  • Only checks or money orders may be sent by mail
  • Payment be made in U.S. dollars
  • Payments be sent to one particular address, such as a post office box 

Servicers that have not already provided written notice of such requirements should do so immediately because of the consequences. If a servicer fails to specify requirements for consumers to follow in making payments, then payments may be made at any location where the servicer conducts business and at any time during the servicer’s normal business hours (whatever those hours might be). Likewise, payments may be made by cash, money order, draft, check, or other similar instrument in properly negotiable form or by electronic fund transfer if the servicer and consumer have so agreed. Moreover, servicers that violate the "prompt crediting" rule, especially creditors that service their own loans, also run the risk of individual and class action lawsuits, under the Truth in Lending Act and Regulation Z, seeking liability for actual damages and statutory damages.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). For more information, please contact Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com; Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; John L. Culhane, Jr., 215.864.8535 or culhane@ballardspahr.com; Barbara S. Mishkin, 215.864.8528 or mishkinb@ballardspahr.com; or Mark J. Furletti, 215.864.8138 or furlettim@ballardspahr.com.


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