Payment Shock Notices

Question: As a servicer, we issue a payment shock notice. I have always thought that this notice was a requirement. But I am being told that issuing a payment shock notice is optional and not a requirement. Are we required to issue a payment shock notice? Answer: The payment shock notice is optional. Issuing the payment shock notice is not a regulatory requirement. As such, it has been viewed by HUD as a “best practices” action. The payment shock notice is usually issued when there is an adjustment in escrow that causes a higher monthly payment, such higher payment usually attributable to an increase in property taxes. HUD outlined its reasoning for not requiring the Payment Shock Notice back in 1998, when it amended Regulation X’s section on Escrow Account Procedures in a Final Rule. [63 Federal Register, Volume 63:13, 3214, 3233, 3237-3238, 1998, Rules and Regulations] As HUD stated in the Final Rule: “With regard to the ‘payment shock’ problem, the Department determined…that extensive additional regulatory changes are not required and could prove detrimental to consumers. Instead, the Department determined that this problem would be better resolved by identifying and sharing best practices of servicers.” (Emphasis added.) In part, HUD stated there was a problem involving “…disbursements for items such as property taxes [that] will increase substantially in the second year of the escrow account and where ‘payment shock’—the consumer's experiencing of a substantial rise in escrow payments—will result. The Department has chosen to address this matter by recommending (but not mandating) a best practice for servicers: A voluntary agreement to accept overpayments.” (Emphasis added.) Thus, HUD had identified a problem with respect to applying an escrow account procedure under Regulation X, and sought to remedy it in the Final Rule.  Jonathan Foxx, former chief compliance officer for two of the country’s top publicly-traded residential mortgage loan originators, is the president and managing director of Lenders Compliance Group, a mortgage risk management firm devoted to providing regulatory compliance advice and counsel to the mortgage industry. He may be contacted at (516) 442-3456 or by e-mail at [email protected]