There is a relatively new practice in banking that is startling millions of consumers - the selling of the right to service a home mortgage. Unless Congress establishes minimum standards for the practice, many Americans could be in for a nasty shock.When people take out mortgages they generally expect to do business with the bank that granted the loan. Increasingly, this doesn't happen.
Instead, local banks turn around and sell the contract to service the loan. Last year alone, lenders sold servicing contracts on more than $120 billion in mortgages.
Thus, without warning or notification, many people find themselves doing business with an unfamiliar bank in a different state, and often under different terms than those agreed to originally.
This violates the most rudimentary notions of fair play and, in some instances, has led to actual fraud.
This transfer of servicing, without consent or notice, not only treats the borrower unfairly but also increases the borrower's risks. There are many instances of fraud in which consumers have been advised to send payments to sham operations.
Late payments have been assessed when borrowers have failed to receive timely notification of a change in servicers. In some cases, foreclosures have been initiated.
Questions often go unanswered, payments unaccountably rise, and insurance terms change. Local real estate taxes or insurance premiums go unpaid.
The transfer of mortgage servicing also violates principles of good bank management. The phenomenon reflects a preoccupation with accounting principles that artificially enhance profit margins and short-term cash flow.
The consumer is somehow left out of the equation, as banks play Ping-Pong with mortgages for a quick financial kill. Moreover, a borrower may experience many transfers over the life of the mortgage.
At the very least, the consumer must have meaningful discolsure. Buyers must be warned of the practices of the lending institutions they are considering so that they may make informed choices.
The industry purports to support disclosure, but the requirements it backs are meaningless. Current industry guidelines, which the industry offers as a model, provide only for notification at the time of transfer.
This helps borrowers make timely payments but is absolutely useless in helping them make informed choices. Consumers have a right to know how their mortgage may be serviced before they sign a contract.
A bill has been introduced that would require lenders to apprise borrowers at the time of mortgage application of the possibililty of the loan's servicing being transferred to another institution and of the bank's policy and past practice of transferring loan servicing.
The bill would also require the lender to notify the borrower in a timely fashion of any change in servicing. Applicants would be required to sign a statement that they had read and understood the disclosures.
The mortgage banking industry objects to disclosing the lender's past practices and the requirement that the consumer acknowledge this disclosure.
The industry feels that it has sufficient voluntary safeguards and that the acknowledgment will just add another costly and unnecessary step to an already complicated and confusing process.
These assertions fly in the face of reality. In the mortgage industry, "let the buyer beware" must be replaced by "make the buyer aware."
The proposed legislation takes a common-sense step toward insuring that consumers are not forgotten in this game of mortgage merry-go-round.
(John J. LaFalce, Democrat of New York, is chairman of the House Committee on Small Business.)