Topic: Delinquent Borrowers
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We have a borrower with two commercial loans secured by first liens on residential rental property. When the borrower fell behind on her payments last year, we allowed her to make interest-only payments for one month and then resume making the regular principal and interest payments. The arrangement was documented with a letter signed by the borrower. The borrower recently fell behind again, and we are contemplating allowing her to make interest-only payments for three months, after which she will resume making full principal and interest payments. We also would document this arrangement with a letter signed by the borrower. Are there any regulatory implications with respect to modifying a loan repayment in this fashion?
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We are not aware of any significant regulatory implications with this transaction, although your bank may be required to provide a copy of an appraisal or other written valuation if one was prepared in connection with the customer’s request for temporarily modifying the loan repayment terms (which we understand is not the case here). Resources…
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We have a loan that was charged off approximately thirty years ago. The bank never foreclosed on the property and the has borrower passed away. The borrower’s estate was not probated, and two of his four children were unwilling to quitclaim the property to the bank. We have been paying the taxes on the property and receive crop income from the person who leases and farms the property. All crop income received has been held in a separate escrow account, and we have used the bank’s own funds to pay the property taxes. What can we do with the escrowed income?
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We strongly recommend reviewing the loan documents with bank counsel to determine if the bank has a right of setoff in the crop income, based on the terms of those loan documents. The statute of limitations for enforcing a promissory note in court is ten years from the date a default occurred. However, each subsequent…
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Our bank has a customer making payments on a Chapter 13 bankruptcy plan. The bank’s claim is related to an auto loan, and the Chapter 13 trustee has indicated that the secured portion of the claim has been paid in full. The trustee is distributing the customer’s plan payments among the unsecured creditors, and the amount the bank is receiving is insufficient to cover the customer’s monthly loan payment. Can we assess late charges on the loan?
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No, we do not believe your bank can assess late fees, even though such fees may be allowed by the terms of the loan agreement, because your bank’s claim is “undersecured,” meaning the value of the collateral (the vehicle securing the loan) is less than the value of your bank’s claim (the unpaid loan amount).…
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One of our customers is making payments under a confirmed Chapter 13 bankruptcy plan. The plan requires the customer to make certain payments to the Chapter 13 trustee to be distributed to the bank. If we have not received the payments, or receive late or incomplete payments, can we report the customer’s loan account as delinquent to a credit bureau? The customer has advised that they are current on all plan payments due to the trustee.
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Yes, if a delinquency exists on an account under the terms of the original loan agreement, a bank may report the account as delinquent. Although a bankruptcy filing triggers an automatic stay that prohibits a creditor from engaging in any activity that might be construed as an attempt to collect on a debt, the stay…
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We have a higher-priced mortgage loan that is in foreclosure. There are not enough funds in the escrow account to pay the hazard insurance policy premiums. Do we have to keep paying the premiums? The borrower has not responded to our notices about the escrow account shortage or a request to discuss the possibility of finding a cheaper insurance policy. We qualify as a small servicer, but we typically do not force place hazard insurance because we have a blanket insurance policy to protect our collateral interest whenever a borrower’s hazard insurance policy lapses.
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No, neither federal nor state law requires your bank to continue paying the premiums or to force-place the insurance. However, you should review the terms of both your loan documents and your blanket policy to ensure that you haven’t committed to force-place insurance before making a claim against the blanket policy. Regulation X requires your…
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We received a non-wage garnishment for a business customer and froze its account. Subsequently, the customer presented a check from a third party made payable to the customer. Can the customer sign the check over to our bank to cover the customer’s loan payment, which is nearly 30 days past due?
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Yes, we believe that the customer may sign its check over to your bank to make its loan payment. The Illinois garnishment law creates a lien on the debtor customer’s property held by your bank as of the day you received the writ of garnishment. Illinois courts have interpreted this to mean that the only…
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A customer obtained a higher-priced residential mortgage loan in 2011. The borrower has never requested to cancel the escrow account. Two years ago, the borrower entered into a contract for deed with a buyer for the home securing the loan. The customer provided proof that he canceled his homeowner’s insurance policy and that the buyer had obtained a new policy and was paying the premiums. But we never updated our system, and we continued to deduct insurance payments from the borrower’s loan payments and place them in escrow, without paying out any insurance premiums. Now there is an excess of funds in the escrow account, and we are facing two issues. First, can we terminate the escrow account? The borrower is in a nursing home, appears to be incapacitated and has executed a power of attorney, but the agent under the power of attorney has refused to terminate the escrow fund. Second, can we use the excess funds in the escrow account for the borrower’s loan payment, which is now overdue?
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While we address your specific questions below, we strongly recommend consulting with an attorney, as your bank could face liability under the Real Estate Settlement Procedures Act (RESPA), and possibly other laws, for the failure to discontinue collecting amounts for the cancelled homeowner’s insurance. Additionally, if the property securing the loan is subject to a…
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We are considering adding the HUD notice to our past due notices (which go out roughly twelve days after the loan becomes past due). Do you see any issues with adding HUD’s verbiage to our past due notices?
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No, we are not aware of issues that would prevent your institution from providing the HUD homeownership counseling notice with your past due notices. The HUD homeownership counseling notice may be combined with other notices, such as your past due notice, and it may be provided at any time within 45 days after an eligible…
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In Illinois, if a borrower gets married during a foreclosure, does the bank have to start the foreclosure process over? What about in other states? In this case, we do not know if the new spouse is on the title to the property being foreclosed.
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No, we do not believe that it is necessary under Illinois law to re-start the foreclosure process when the mortgagor gets married. Instead, your bank simply may add the new spouse as a party to the existing foreclosure proceedings. It is difficult to determine what specific interest, if any, the new spouse has in the…
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An auto loan borrower left his vehicle at a repair shop and failed to pay for the repairs. The repair shop has since moved the vehicle to a storage facility. The repair and storage fees are around $30,000, which exceeds the vehicle’s value. Are the liens for the repair and storage services junior to our lien? We have the vehicle title, which shows our lien, and we have not received any communications from the storage facility.
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The repair shop may be able to assert a common law artisan’s lien for its repair work, which would have priority over your bank’s earlier perfected security interest in the vehicle, but not for the storage fees. Illinois courts have held that a common law lien for repair services has priority over a secured lender’s…