Normally, when a homeowner makes a mortgage payment, the servicer places the money in escrow and then distributes it to the relevant parties (the creditor, the insurance company, the government, and itself as a fee). Problems can arise with partial mortgage payments. Instead of placing it in escrow, making a partial distribution to the creditors, and notifying the homeowner of the deficiency, it places the money in a “suspense account.” Before the Consumer Financial Protection Bureau (CFPB) came along, suspense accounts were a harbinger of needless foreclosure and other shenanigans. So, what are they?
Suspense accounts function as their name suggests: They’re temporary accounts that banks or corporations create when they receive money that they can’t directly place in the intended account. For example, a bank will keep a deposit to an account with a wrong account number in suspense until it can resolve the problem.
Homeowners encounter suspense accounts when a change in their monthly payments catches them unawares. In most circumstances, that would be a rise in property taxes or insurance premiums, or a change in interest rates on adjustable mortgages. There might be notice from a party other than the servicer, but that might not filter down to the payment system between the homeowner and the servicer.
Once an underpayment happens, the homeowner is technically delinquent on the account, even if unintentionally. In the past, the servicer could fail to notify the homeowner and assess late penalties. Most importantly, so long as the homeowner didn’t correct the payment, he or she would fall into a cycle of chronic underpayments, which could lead to large shortfalls. It’s at this point that the servicer might declare the mortgage in default and initiate a foreclosure, even though with proper notice the homeowner would have corrected the underpayment, possibly preemptively.
Fortunately for homeowners, the CFPB enacted some rules regulating mortgage underpayments and suspense accounts several years ago. One, full mortgage payments must be credited on the date they are received, even if they don’t cover late fees. Two, although servicers can place payments in suspense accounts, they must credit the borrower once the payment is completed. These rules prevent servicers from classifying underpaid mortgages as delinquent until borrowers pay the required penalty fees.
At the same time, though, borrowers still need to ensure that their mortgage payments align with what they owe for the home, insurance, taxes, etc. If any of those change, and a payment is insufficient, then the borrower will be behind on his or her mortgage. Most homeowners can probably catch up on their payments, but it is a preventable type of mortgage deficiency.
If you’ve fallen behind on your mortgage, or if you are facing foreclosure, then talking to an experienced New York bankruptcy lawyer can help you assess your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
