Does a non-performing note have to be with a servicer?

Question

Do all non-performing notes have to be boarded with a servicer BEFORE they are worked out? The non-performing notes have some of the highest monthly fees. (usually around $30/month) For non-performing loans which may never work out or ones that are in long workout states such as NY, this amount can add up quickly if you have a number of these notes and they are not generating any income. If you have someone other than the servicer work out the loan, is there any law that states that these non-performing notes have to be boarded with a servicer? Can I wait until AFTER I get a workout (if it ever happens) before boarding the note? Can I just deboard some of these notes that have little chance of working out from the servicer and tuck them away for safe keeping just in the off chance that the property sells or re-fis?

I am aware that some sellers will not sell you a note unless you have a servicer to transfer it to.

Dion DePaoli · Answer

Sandy,

You already know the answer here you just don't want to believe it.

YES. All loans, regardless of performance need to be boarded with a servicer. Compliance and regulation is far to great for any street level investor to come close to complying with.

First lien NPN servicing fees for normal servicing is $75 to $100 per month. The $30 you mention sounds either like a second lien or the limited service program by FCI. I am not a fan of the limited service program for investors. I see more file issues in those files since the acts are carried out by investors and they typically don't know what they are doing nor understand the regulations. Improper communication, lack of servicing activity and collections can devalue the note. Even if it eventually reinstates. Do something improper to reinstate a loan and the fact the borrower is paying again doesn't diminish the risk of that error, In most cases, it will actually increase the penalty as fines for improper servicing activity include refunds of interest over large amounts of time for borrowers.

Anyone who disagrees with the stance above simply hasn't had enough experience in investing in loans and frankly I am happy to tell them that to their face.

It is illegal to work on a loan if you are not (a) the Mortgagee; or (b) licensed as an MLO working for a licensed servicer or collection company. A random person can not just work on your loans for you. That will get you both in trouble.

Notes should not just be "tucked away". Continuity of contact for collections needs to be maintained. If you stop collection efforts on a loan you give power to the borrower to defend against any further collection claims. In other words, you will invalidate your own loan by lack of trying to collect. We see this way more than we should with new note investors and these note investment guru groups. It is a train wreck.

When you bid a loan you should be taking into consideration the cost to service the loan over time. Anything less and you have succumb to the guru sales pitch of why you need to pay more for a loan. The costs of default servicing along with required advances is exactly what drives the discount in the first place. It is not magic, it is math.

Moral of the story, there is a much greater risk to not boarding loans than there is to boarding loans. If you can't afford the servicing you paid too much for the loan. It is really that simple.

Paul Birkett · Answer

Sandy, you are doing great homework and this is a great question. The answer, like most things in the note space is "it depends". There are federal laws that suggest that you can self-service a small number of loans. From memory you are ok up to 500 loans but I haven't checked recently.

However, there are also state-specific rules that govern the purchase and servicing of loans. IL and about 11 other states require a debt buyer to have a licence. Similarly, 14 states require you to be licensed to service a loan. Servicing itself is defined broadly in some states and narrowly in others.

Enforcement of the rules is very strict in some states and less strict in others.

The compliance risk is simply not worth the trouble in my view, so we made the decision to go to 3rd party servicing on all our loans.

You can try to self-service and then move to a Servicer once borrower contact is made.....but I wouldn't advise it unless you are in a state where self-servicing is allowed. Needless to say, if you are going to self service...make sure you know what you are doing on theRESPA, FDCPA and math fronts

good luck!

Brandon Wong · Answer

Thank you for the insightful response. I also want to make a distinction. Madison does the bulk of my servicing and they are very good. Its the loans in markets like DC where they are not licensed that I get tripped up with other servicers. I've had good results building strong relationships with borrowers as I feel like thats the piece I can improve upon when compared to the banks. That being said it will present challenges in scaling my business and I want to strive to be more systems oriented and compliant. I will incorporate the principles you've described.

Dion DePaoli · Answer

@Brandon WongThe golden rule is nobody will care more about your assets than you.  I would have concerns if the servicer can not efficiently process directions and carry out plans.  That is probably grounds to find a different servicer.  I don't think foreclosure is an intensive management burden and the knife cuts both ways in my experience with some attorney firms being less communicative and timely.  In those cases we have simply changed firms.  Most attorney communication is by email.  I don't feel the need to be on the phone with them often if things are progressing as expected.  Nor do I think they want to spend any amount of time on the phone and not doing their job and carrying out their tasks.Modifications, forbearance and relief requests are similar but the investor input is required on those.  I have to say the same thing, if the servicer can not efficiently send out relief packages and recover them and properly communicate and carry out plans on the loan account - what is the point of using them?  I do want to make the distinction that the expectations here is the loan is with a Servicer in their high touch default servicing program and you are probably paying around $75 or $100 per month.  Those discounted programs that are out there are simply going to give you less service that is why they are cheaper.  In general I expect the service that I am paying for and I do not find value in the lower cost options.  Proper communications by phone and mail should occur without my prompting.  I don't want to have to edit letters or draft communications.   When it comes to my newbie cringes, that is what I dislike.  I don't think newbies communicate within compliance and most do not seem to understand you are required to maintain records of that communication.  In example, I 'could' write a forced place insurance letter but I shouldn't have to.  Those are regulated letters the servicer should be able to pump out as needed.  I also can point out as perhaps a best practice for us we do a servicing review once a month.  We review all loans and give instructions and communicate the plans.  It takes a couple days soup to nuts by the time you get reports and communicate back and forth.  Then over the course of the month those plans get carried out and we review them all next month.  I think you have to help yourself help the servicer.  You don't want to be a burden you want to be a teammate.  Manage your time and their time and give them space to do their job.  I send a lot of emails as those serve as written communications, can be added to file and the reader(s) can review the content within their own managed time slots.  More time doing is better than more time talking about what we need to do.  I remember when we first used FCI with a loan pool.  Information is communicated immediately and reporting is driven by the investor not pushed out by the servicer.  I am more accustom to servicing where in general the portfolio report is pushed out by the servicer around the 12th of the month.  We review the loans and communicate by the 15th and we look for any remittance by the 17th.  I can see how a program like the former can cause an investor to touch things too many times and become inefficient with their time.  I suppose if you have only a handful of loans it is not that bad but if you have many loans that would be a pain in the behind.  I also think that system causes issues for the servicer themselves to keep up with investor demands.  Even in big servicers there are only so many employees that do any given task.  If many investors tug on the same person or team at the same time the actual work to be completed will probably suffer.  In some sense I am not overly interested in being on the phone with Billy Borrower listening to the life story of how we got here.  I tend to be more of a highlight reel type guy and then want to come up with a plan and move forward.  I do not think it is a wise use of my time to chase documents from the borrower or field those phone calls.  Updates from attorney's are usually a sentence or two.  Loans do not move at light speed so I think it is relatively easy to stay a couple steps ahead of them.  I think you also have to have realistic expectations of time for things to get done.  Like anything management it is better to be proactive rather than reactive.  So I think my point is, as investors we have to manage systems efficiently.  That includes servicing the loan.  I want to work through my servicer not for them.  I am the brain, they are the body type idea.  Time blocking and setting up schedules in this business are pretty important.  To me those only make sense as we are in an industry where the general events happens once every 30 days.  A borrower pays or does not.  So there is, to some extent, a clock to manage by already built in.  Success is then delivered by how well you manage the systems which drive the results you desire.

Brandon Wong · Answer

@Dion DePaoli Hello Dion, I've spoken with several attorneys on the matter and 100% agree with boarding all loans with a servicer.

My question is as the owner of the loan and in your experience what is best practice when it comes to actually managing foreclosure attorneys and borrower workout negotiations? I've found that many servicers simply don't do a great job of negotiating/relaying/managing information with attorneys so I typically contact the attorneys and handle the foreclosures directly. I also have the servicer forward the initial inbound calls to me after which I collect financials and once we review financials and agree on terms I hand everything back to the servicer to have them draft the agreements and collect payments, handle 1098s, etc... What are your thoughts? Am I stepping out of bounds by wanting to be more hands on with these critical elements? I know the laws vary from state to state, just wondering if you could shed some light from a higher level perspective on general best practice. Thank you for any insight.

Dion DePaoli · Answer

Sandy, if you have determined that further collection efforts will be futile you can de-board the loans.   If you put the account with a collection attorney you do not need to keep the loan boarded with the servicer.  A collection attorney would be equivalent to having the boarded with a servicer as the attorney attempts to collect.

Sandy Uhlmann · Answer

I have ALL my loans with servicers at present.  As we all know, not all loans will work out.  If I am not actively trying to collect, and have essentially written the note off as non-collectable, does it need to stay with a servicer? Or, if I choose to hire a collection attorney, in that case does the loan have to stay boarded with a servicer?

Bob E. · Answer

@Sandy Uhlmann Do not do this yourself or you will pay much more then $30 a month....

Allied servicing charged $15 for nonperforming.  I have been happy with their service.

If you have not bought anything yet you should wait, if you are asking a basic question like this you are not ready to be a buyer.  Not trying to be mean just don't want to see someone jump in and get burned.

Darren Eady · Answer

Try Note Servicing Center in Chowchilla, CA.  They have lower fees then other places.  I've used them on 6000 accounts over the past six years.

Paul Birkett · Answer

@Dion DePaoli is the expert! Get a Servicer!

Does a non-performing note have to be with a servicer?

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