Sharp eyes on the part of the debtor spotted the unapplied suspense balance, and diligence on the part of his attorney, saved one homeowner $27,000.
Mortgage payments during Chapter 13
During his Chapter 13 case, the borrower continued to make monthly payments on his mortgage. But the loan servicer for Bank of America dumped payments into a “suspense account” rather than apply them to the loan balance.
And when it came time to refinance the loan and exit bankruptcy, the servicer “forgot” it was holding a pot of money, unapplied. Some drone in the servicer’s operation sent a payoff demand to escrow for the principal amount, without crediting the suspense account balance. At the close of the refinance, the inflated demand was paid.
But thanks to relatively new bankruptcy rules, the borrower was getting monthly statements during the bankruptcy that showed the suspense balance. He spotted the thousands of dollars in the suspense account. Understandably, he howled.
Getting suspense balance applied
But howling wasn’t enough. When letters to the servicer got no response, a two prong attack got the servicer’s attention, and ultimately, the money returned.
The Consumer Finance Protection Bureau accepts complaints online against mortgage lenders and their servicers. A complaint was lodged, and CFPB forwarded it to the servicer.
In the bankruptcy court, debtor’s attorney got a court order for the servicer to produce its records on the loan.
I’m not sure which strategy was the one that made the difference, but the borrower got his money back and the servicer paid the attorney’s fees incurred trying to correct the servicer’s “mistake”.
Law requires prompt crediting of payments
Federal Regulation Z provides that no servicers shall fail to promptly credit payments received. If a payment is less than a full monthly payment, it may be held in a suspense account. Once the funds in the suspense account equal a monthly payment, those funds must be credited to the loan. 12 CFR 1026.36(c)(1).
The regulation further requires that funds in a suspense account appear on the monthly statement.
The Bankruptcy Code also addresses servicing failures in Section 524(i), making willful failure to properly credit payments received “under a plan” a violation of the discharge, if the failure causes “material injury”.
Two points stand out for me, beyond the general “servicers are lousy at loan servicing“:
- The monthly mortgage statement that included a line for funds in the suspense account contained the evidence of the problem.
- This servicer was not motivated to address the issue until significant pressure from outside institutions (CFBPB and the bankruptcy court) made inquiries.
Be prepared to exercise your rights.