Published on January 09, 2018
Written by Kathleen Nystrom
Relationships are the single greatest advantage that community financial institutions have as they compete for business with the nation’s largest mortgage lenders. Your institution needs to ensure borrowers continue to have the experience they expect from you.
For the borrower, a great mortgage experience is one that contains no surprises and where transitions happen smoothly.
There is no better way to erode that experience – and thereby your relationship with the borrower – than with a clunky transition from origination to servicing. So, how can you best ensure borrowers’ first contact with servicing is a positive one?
It’s important to look at the processes that facilitate borrowers to the servicing department, such as escrows or first payments. Here are some best practices that will help eliminate surprises for your borrower or for your servicing department:
Industry professionals will know that escrow payments are the portion of a mortgage payment that is set aside in an escrow account to pay for property taxes, homeowner's insurance, and mortgage insurance. Mortgage lenders must disclose to the borrower the amount and frequency of escrow payments to be collected; the amount and frequency of escrow payments to be paid out; and the two-month cushion to be maintained in the escrow account, according to Real Estate Settlement Procedures Act. If the information disclosed in the borrowers’ initial escrow statement is out of date or incorrect, then the document is not compliant. You will have disclosed incorrect information to the borrower.
If the initial escrow statement misreports the payment amounts or due dates, it also sets up servicing for a negative first interaction with the borrower. When escrow payments differ in any way from what was reported at closing, the servicing projections will be off. That means the borrower’s escrow account will either have a shortage, deficiency, or surplus.
From there, the negative consequences only multiply. Property tax and insurance must be paid. If they are not, you can have a lapse in coverage or liens filed on your collateral by the county. If you are a relationship lender and your error has caused the borrower to be short on escrow, you may end up paying for the shortage.
At Servion Mortgage, we require that the closing agent pay any taxes or insurance dues within 60 days of the closing. That way, we do not have to scramble to make tax or insurance payments from escrow once the loan is setup, nor do we risk a late payment. This practice helps further reduce the risk of negative interactions with borrowers.
Educating the borrower about their escrow payments will also help avoid confrontations with servicing down the road. The borrower should be made aware that their property taxes can increase. Lenders do not control local governments’ decisions to increase property taxes. The best way for borrowers to manage property tax expenses is to be involved in policy decisions at their local level.
Lenders can also educate borrowers to alert servicing prior to changing insurance carriers. If the borrower switches carriers without notifying the servicing department, it can result in an incorrect payment to the borrower's old insurance company. This again create negative conversations with borrower; either servicing will have to collect funds from the borrower or it will have to absorb the cost of paying the premium to the new insurance company.
Adopting best practices like these will help your institution to provide the experience borrowers expect from a relationship lender – from origination all the way through to servicing.
Please feel free to reach out to me if you have questions on these or other best practices that affect borrowers in mortgage servicing.