The borrower is strongly advised to consult his/her loan servicer for any adverse findings that may be discovered in an examination of his/her loan modification agreement.
The modification agreement that is the subject of this
examination was among the documents that were presented for chain of title
examination on September 8, 2022. This report
and the Amortization Spreadsheet were prepared on September 14, 2022.
SUMMARY
1. The subject loan was granted by Standard Pacific Mortgage, Inc. on December 19,
2014 for $475,619.00 for 360 months with interest fixed at 4.250% p.a.
2. The loan was modified for the first time with RoundPoint Mortgage Servicing Corp.
effective January 1, 2017 for $530,933.68 for 360 months with interest fixed at 4.500%
p.a. It was modified for the second time with RoundPoint Mortgage Servicing Corp.
effective January 1, 2020 for $601,099.63 for 360 months with interest fixed at 3.750%
p.a.
3. The lender has charged the borrowers twice for interest for the period December 1 to 31,
2019 which amounted to $1,878.44; first, by compounding it with the new principal
balance as of January 1, 2020 and again, by making it a part of the first installment that
was due also on January 1, 2020.
4. There was a gap of three years between the first and the second modifications, yet the
balance of the second modified loan represents an increase of $70,165.95 or 13% over
the first modified loan.
The balance of the loan prior to the second modification is not stated in the agreement. It
is understood that the increase represents unpaid and deferred interest, fees, escrow
advances and other costs as of January 1, 2020.
A detailed accounting of the unpaid and deferred interest, fees, escrow advances and
other costs that were added to the loan balance in order to arrive at the modified loan
balance is not part of or attached to this agreement.
5. The total amount that the borrowers will have to pay under the modification agreement is
$1,002,164.40 or 167% of the modified principal balance. This is not disclosed in the
agreement.
6. The agreement contains a provision that signifies that this loan transaction does not
partake of the nature of a new loan or a refinancing which is believed to be the basis for
the lender for not furnishing the borrowers a disclosure statement under the Truth-in-
Lending Act.
No explanation was found as to why a loan transaction that is not a refinance and which
only involves a reduction in annual percentage rate does not fall within the scope of
the purpose of the law which is to “promote the informed use of consumer credit by
requiring disclosures about its terms and cost.”
MAIN REPORT
Premises
The subject loan was granted on December 19, 2014 by Standard Pacific Mortgage, Inc. for $475,619.00. The term was for 360 months to mature on January 1, 2045 with interest fixed at 4.250% p.a.
The borrowers first entered into a Loan Modification Agreement with RoundPoint Mortgage Servicing Corp. that took effect on January 1, 2017. The modified amount was $530,933.68 and the term was 360 months. The maturity date was December 1, 2046.
The borrowers entered into a second Loan Modification Agreement with RoundPoint Mortgage Servicing Corp. that took effect on January 1, 2020. The modified amount is $601,099.63 and the term is 360 months. The maturity date is January 1, 2049. The modified amount is levied interest at 3.750% p.a. for the entire term of the agreement. Monthly payment for principal and interest is $2,783.79. This second Loan Modification Agreement is the subject of this examination.
The mortgaged property is in Wesley Chapel, Florida. This agreement was recorded in Pasco County on December 19, 2019.
The Fixed Rate Note was endorsed by Standard Pacific Mortgage, Inc. to RoundPoint Mortgage Servicing Corp. The Mortgage was assigned by MERS as Nominee for Standard Pacific Mortgage, Inc. to RoundPoint Mortgage Servicing Corp.
Basic Features
The parts of the agreement that contain provisions relevant to this examination are reproduced below.
Section 3 of the agreement states that the modification effectivity date is January 1, 2020 and that the first modified payment is due also on January 1, 2020.
Section 3A states that the maturity date is December 1, 2049.
Section 3B states that the New Principal Balance of the note is $601,099.63. This balance includes unpaid and deferred interest, fees, escrow advances and other costs that will be past due as of modification date.
Section 3C states that interest at 3.750% p.a. will begin to accrue on December 1, 2019 and that the modified monthly payment is $2,783.79 for interest and principal.
Examiner’s Comments
Double-Charging of Interest
1. The First Instance
1.1. The Amount Charged
Section 3B of the agreement states that the new principal balance includes all
amounts and arrearages that will be past due as of the modification effectivity date
including unpaid and deferred interest, fees, charges, and other costs. The new
principal balance of $601,099.63 as of January 1, 2020 therefore includes interest for
the month of December, 2019.
Any unpaid interest that has been added to or compounded with the principal always
includes the interest for the month immediately prior to the compounding. This is
because payment for any arrears is applied first, to fees and/or costs and then to past
due interest and last, to past due principal. As for interest, payment is first applied to
the earliest period or month/s wherein interest is unpaid thereby leaving the interest
for the latter month/s still unpaid if the payment is not sufficient to cover all unpaid
interest. Thus, if any unpaid interest will be added to the principal, this interest will
always include that of the month immediately prior to the compounding. In this case,
that month is December, 2019.
Section 3C of the agreement states that interest at 3.75% p.a. will begin to accrue on
the new principal balance as of December 1, 2019.
Thus, the amount of $601,099.63 is the sum of (a) the balance of the loan before the
interest for December, 2019 was added to it, plus (b) the interest for December, 2019
which is 3.75% p.a. (0.3125% for one month; 0.003125 in decimal terms) of the
balance before the addition.
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The above computation shows that the amount of $1,872.58 as unpaid interest for the
month of December, 2019 was added to the loan balance in of $599,227.05 order to
arrive at the balance as of January 1, 2020 of $601,099.63 (This computation
assumes that the balance of $599,227.05 already includes the unpaid fees, charges,
and other costs).
1.2. The Date of Charging
The first instance of double-charging occurred on the effectivity date of the
agreement when the interest for the month of December, 2019 was added to the
principal. The agreement states that its effectivity date is January 1, 2020. It was
signed by the borrowers on November 25, 2019 and by the lender’s representative
on December 16, 2019.
1.3. The Date of Payment
By including all amounts and arrearages in the new principal balance, the status of
the loan is updated to “current”. The unpaid interest as of January 1, 2020 is now
considered paid, but instead of the borrowers’ cash being depleted, their debt is
increased. This arrangement was initiated by the lender.
2. The Second Instance
2.1. The Amount Charged
Interest in the amount of $1,878.44 is the product of multiplying $601,099.63, the
amount of modified principal, by 3.75% (or 0.0375), the rate of interest per annum
and dividing the result by 12 months. This amount is affirmed by the lender through
the Amortization Spreadsheet, as demonstrated below:
(This spreadsheet was prepared using the amounts specified by the lender in the
agreement. The application of these amounts carries the implication that the
payments will be made by the borrowers as scheduled in the agreement.)
a. The amount of monthly installment of $2,783.79 as specified in the agreement,
includes the interest of $1,878.44 for the first month as computed above, leaving
$905.35 to reduce the principal. The payment of $905.35 is then deducted from
$601,099.63, the balance of the modified principal, leaving a balance of
$600,194.28 (see Amortization Spreadsheet, Month No. 1).
b. In the second month, the same amount of monthly installment of $2,783.79
includes the interest of $1,875.61 for the second month ($600,194.28 multiplied
by 0.0375, divided by 12), leaving $908.18 to reduce the principal. The payment of
$908.18 is then deducted from $600,194.28, the balance from the first month,
leaving a balance of $599,286.09 (See Amortization Spreadsheet, Month No. 2).
c The same procedure in paragraphs 2.1.a. and 2.1.b. above is repeated from
Month No. 3 until the end of the term of the agreement.
d. Finally, the affirmation by the lender of the amount of $1,878.44 comes at the end
of the amortization spreadsheet wherein, after the repeated application of the
procedures of computation stated in this paragraph on the amounts specified by
the lender in the agreement, the loan will be fully paid. There will be a rounding-
off difference of -$2.58 (see Amortization Spreadsheet, Month No. 360).
The proof of the affirmation is that the loan will be fully paid as computed using
the amounts specified by the lender. There would not have been such affirmation had
this computation resulted in a negative balance (overpayment). Thus, the lender
really intended to include the interest for the month of December, 2019 in the January
1, 2020 installment.
2.2. The Date Charged
The Amortization Spreadsheet is based on the dates and amounts stated in the
agreement. Thus, the effectivity date stated in Paragraph 1.2. also applies.
2.3. The Date of Payment
The second payment occurred when the borrower paid the first monthly installment.
This installment is assumed to have been paid unless the lender can show proof that
its non-payment is one of the causes of its current collection efforts and/or action to
foreclose.
3. Conclusion
In the first instance of interest charging, interest for the month of December, 2019 in the
amount of $1,872.58 was added by the lender to the loan balance in order to arrive at the
modified balance of $601,099.63 as of January 1, 2020. This interest is considered paid
by the borrowers on January 1, 2020 when it was made part of the modified loan balance.
In the second instance of interest charging, the lender made the interest for December,
2019 amounting to $1,878.44 part of the first installment that was due on January 1, 2020.
Payment occurred when the borrower paid the first monthly installment. The first
installment is assumed to have been paid because almost three years have passed since
it became due and the loan is still current.
In loan modifications, unpaid interest as of the effectivity date of the modification
agreement is added to the principal in order to arrive at the modified balance. This will
include the interest for the month immediately preceding the effectivity date. A double-
charging of interest occurs when the first monthly payment is made to fall due on
modification effectivity date. The interest double-charged will also be for the month
immediately preceding the effectivity date of the agreement.
This double-charging can therefore be avoided by moving the due date of the first
payment one month after effectivity date. In doing so, the interest component of the first
payment would be the interest covering the month starting from the date of loan
modification or loan granting up to the day immediately before the due date of the first
payment. This is the usual practice for new loans and in some loan modifications and
reflects the fact that the lenders and servicers knew how to avoid double-charging their
borrowers.
Comparison
The features of the first modified loan are herein compared with those of the original loan and the features of the second modified loan are compared with those of the first modified loan.
Examiner's Comments
There was a gap of three years between the first and the second modifications, yet the balance of the second modified loan represents an increase of $70,165.95 or 13% over the first modified loan.
The balance of the loan prior to the second modification is not stated in the agreement. It is understood that the increase represents unpaid and deferred interest, fees, escrow advances and other costs as of January 1, 2020.
A detailed accounting of the unpaid and deferred interest, fees, escrow advances and other costs that were added to the loan balance in order to arrive at the second modified loan balance was not part of or attached to this agreement.
Payments
The total amount that the borrowers will have to pay under the modification agreement is computed as follows.
Examiner’s Comments
The total amount that the borrowers will have to pay under the modification agreement is $1,002,164.40 or 167% of the modified principal balance. This is not disclosed in the agreement.
See Amortization Spreadsheet.
Disclosure
The following provision signifies that this loan transaction does not partake of the nature of a new loan or a refinancing which is believed to be the basis for the lender for not furnishing the borrowers a disclosure under the Truth-in-Lending Act.
12 CFR § 226.20 on Subsequent Disclosure Requirements states that “a refinancing occurs when an existing obligation is satisfied and is replaced by a new obligation undertaken by the same consumer. A refinancing is a new transaction requiring new disclosures to the consumer” and that “a reduction in the annual percentage rate with a corresponding change in the payment schedule” “shall not be treated as a refinancing” (abridged). https://www.law.cornell.edu/cfr/text/12/226.20
On the other hand, 12 CFR § 226.1 states that “the purpose of this regulation is to promote the informed use of consumer credit by requiring disclosures about its terms and cost.” https://www.law.cornell.edu/cfr/text/12/226.1
Examiner’s Comments
No explanation was found as to why a loan transaction that is not a refinance and which only involves a reduction in annual percentage rate does not fall within the purpose of the scope of the law which is “to promote the informed use of consumer credit by requiring disclosures about its terms and cost.”
Some borrowers who are more familiar with ways of institutionalized lending would not need as much effort and assistance as others would in order to be fully informed of the costs of their respective uses of credit. In other words, the need to be furnished such quality of credit information as would inform a borrower about the terms and cost of his/her credit depends on the borrower. The need to be fully informed is not dictated by the type of credit, or whether a loan transaction is a refinance or a modification.
Moreover, the lack of disclosure could have left the borrowers unaware that (a) the balance of the second modification is 13% higher than the balance of the first modification despite the gap of three years between the first and the second modifications, and (b) the total amount that they will have to pay on the loan under the second modification agreement is 167% of the second modified balance.
AMORTIZATION SPREADSHEET
Monthly amortizations based on the agreement are shown in detail in a spreadsheet. The amounts do not include payments intended for the escrow account. Selected pages of the spreadsheet are shown in the following pages for the purpose of explanation. A complete copy is attached to the printed report.
Line 1 shows the start of monthly amortizations in equal amounts to be applied to interest based on the diminishing balance of the principal and the principal. The interest rate and amount of monthly instalments for the entire term of 360 months are 3.750% p.a. and $2,783.79.
The first payment that became due on January 1, 2020 covered (a) interest for the period December 1 to 31, 2019, based on the balance of $601,099.63 at 3.750% p.a.; and (b) a reduction of the balance of $601,099.63 by the remainder of $2,783.79 minus (a).
Page 1 shows that, assuming the monthly instalments have been paid as scheduled, after the 30th payment, of the monthly instalments totalling $83,513.70, $55,085.71 or 65.96% has been applied to interest and $28,427.99 has reduced the balance by 4.73%.
Line 33 above shows that, assuming the monthly instalments have been paid as scheduled, as of September 1, 2022, the loan had a balance of $569,679.74. As of this date, interest has been paid up to August 31, 2022.
Page 2 also shows that, assuming the monthly instalments have been or will be paid as scheduled, after the 60th payment, of the monthly instalments totalling $167,027.40, $107,381.93 or 64.29% has been or will be applied to interest and $59,645.47 will reduce the balance by 9.92%.
Page 3 shows that, assuming the monthly instalments have been or will be paid as scheduled, after the 90th payment, of the monthly instalments totalling $250,451.10, $156,614.96 or 62.51% has been or will be applied to interest and $93,926.14 will reduce the balance by 15.63%.
Page 6 shows that, assuming the monthly instalments have been or will be paid as scheduled, after the 180th payment, of the monthly instalments totalling $501,082.20, $282,778.69 or 56.43% has been or will be applied to interest and $218,303.51 will reduce the balance by 36.32%.
Page 9 shows that, assuming the monthly instalments have been or will be paid as scheduled, after the 270th payment, of the monthly instalments totalling $751,623.30, $368,618.79 or 49.04% has been or will be applied to interest and $383,004.51 will reduce the balance by 63.72%.
Page 12 shows that, assuming the monthly instalments have been or will be paid as scheduled, after the 360th payment on December 1, 2049, the maturity date, of the monthly instalments totalling $1,002,164.40, $401,062.19 or 40.02% has been or will be applied to interest and $601,102.21 will fully pay the loan. There will be a rounding-off difference of -$2.58.
End of article.
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