Three federal laws shape how a residential note is serviced. RESPA and its Regulation X govern servicing transfer notices, escrow, error disputes and the run-up to foreclosure. TILA and its Regulation Z govern statements, payment crediting, payoff figures and the notice a new owner sends. The FDCPA governs debt collection, mostly by third parties. Which parts reach your note depends on the loan and who services it, so treat this page as a map and have an attorney or licensed servicer confirm the details.
Nothing here is legal advice. These rules carry exemptions and thresholds, and states add their own on top. Licensing is a separate question, covered under whether you need a license to buy notes.
Which notes these rules are aimed at
The federal servicing rules were written mainly for consumer loans secured by a home: a mortgage or deed of trust on a one-to-four unit dwelling, made to a person for personal or family use. A note secured by commercial property, investment land or a business often falls outside them, though not always, and state law can still apply.
Seller-financed notes sit in an awkward spot. A person who carried back paper on the sale of their own house may not count as a “creditor” or a covered servicer under these laws, because the definitions turn on how many such loans a person makes or handles. An investor who buys several notes, or a large servicing company, is far more likely to be covered. The counting rules are not simple, so ask an attorney to apply them to your facts. Even where a rule may not strictly reach you, the next buyer of your note will judge the file against it.
RESPA and Regulation X
The Real Estate Settlement Procedures Act’s servicing provisions, written into Regulation X by the Consumer Financial Protection Bureau (CFPB), are the ones a note owner meets after closing.
- Servicing transfer notices. When the party collecting payments changes, the old and new servicer must each tell the borrower in writing within set time limits, and for a period after the transfer a payment sent to the old servicer cannot be treated as late. The step-by-step version is in servicing transfer after you buy a note.
- Escrow accounts. Where the servicer collects money for taxes and insurance, Regulation X calls for an annual escrow analysis and caps the cushion that can be held.
- Errors and information requests. A borrower can write to dispute an error or ask for information about the loan, and the servicer must acknowledge and answer within deadlines.
- Force-placed insurance. If the hazard insurance lapses, a servicer that buys a replacement policy and charges the borrower for it has to send warning notices first.
- Delinquency and loss mitigation. Servicers must contact a late borrower early and follow set procedures when the borrower asks for help such as a modification. Regulation X also generally bars a servicer from making the first notice or filing for foreclosure until the borrower is more than 120 days delinquent.
Regulation X has a small servicer category that is exempt from several of these duties. The exemption is partial, and the 120-day foreclosure rule is one that still reaches small servicers. Ask your servicer which category it operates under.
TILA and Regulation Z
The Truth in Lending Act is about disclosure. At origination it brings in the loan terms and, since Dodd-Frank, the ability-to-repay and loan originator rules that decide whether a seller-financed note was written legally, a question taken up in Dodd-Frank, the SAFE Act and note value. After origination, Regulation Z adds rules a servicer works with every month.
- When a mortgage loan is sold or transferred, the new owner must tell the borrower in writing within 30 days, giving its name and contact details, the transfer date and who can act for it. It is separate from the RESPA notice and can apply even when the servicer stays the same. It only reaches owners who acquire more than a set number of loans, so ask whether it applies to you.
- Most servicers of closed-end home loans must send a periodic statement showing the amount due, how past payments were applied, fees charged and contact details. Small servicers are exempt from this one.
- A payment must generally be credited as of the day it arrives, so slow processing cannot create a late charge.
- A servicer must give an accurate payoff figure within a limited number of business days of a written request.
The FDCPA and Regulation F
The Fair Debt Collection Practices Act, implemented by the CFPB’s Regulation F, covers debt collectors collecting consumer debts. In general a creditor collecting its own loan is not a debt collector under the federal act, and a servicer that took on a loan while it was current is usually outside it too. That can change when a loan was already in default at the time it was acquired or handed to a servicer, or when collecting debts is the main business of whoever is doing it. Courts up to the Supreme Court have argued over these lines, so get an attorney’s view on your note.
Where the act applies, the core duties are these:
- Send a validation notice stating the debt and the borrower’s right to dispute it.
- Contact the borrower only at reasonable times and places, and not at work if told the employer objects.
- Make no threats, false statements or charges the note and the law do not allow, and do not harass.
- Honor a written request to stop contact, subject to narrow exceptions.
State law often goes further. Some states, California among them, apply collection rules to creditors collecting their own debts. The safe habit for any note owner is to collect as if the FDCPA applied.
An owner with a servicer, worked through
Hiring a licensed servicer moves most day-to-day compliance onto a company that does it for a living, but you still make the decisions it carries out, and those have to fit the rules too.
An illustrative case with round numbers. You buy a performing first-lien note on an owner-occupied house: $90,000 balance, $760 a month. The seller collected the payments personally, and you board the loan with a licensed servicer. In the first month the seller sends a goodbye letter, the servicer sends a hello letter, and the new-owner notice goes out if the rule applies to you. The borrower mails one payment to the seller out of habit; it is forwarded and credited as on time, with no late fee. Six months later a payment is missed. The servicer calls, logs the contact and discusses options, and no foreclosure step is taken inside the 120-day window. All of it shows up later as a clean file.
What lands on you if you service it yourself
If you collect payments yourself, nobody is checking the list above for you. Keep a ledger showing each payment, the date received and the split between principal and interest. Credit payments the day they arrive, charge no fee the note does not allow, and put every arrangement with the borrower in writing. Ask your tax adviser which year-end interest figures you must issue, and see how income from notes is taxed. Have an attorney check any default or collection letter before it goes out. Doing this yourself and hiring it out are compared in note servicing for investors.
Questions to settle before you buy a residential note
- Is the property the borrower’s home, and how many units does it have?
- Who has been servicing the loan, and can I see the payment ledger and the notices already sent?
- Does my servicer operate as a small servicer, and which duties does it treat as exempt?
- Does the new-owner notice rule apply to me, and who will send it?
- What does the property’s state add to the federal rules?
Take these to your attorney with the due diligence checklist for note buyers. If you join the buyer list, each note summary we send states who has been collecting and what payment record exists, which is where most of these questions begin.
Related questions
Do RESPA and TILA apply to a seller-financed note?
Sometimes. The servicing rules are aimed at consumer loans secured by a home, and whether an individual seller or a small investor is covered turns on definitions and loan counts in the regulations. Ask an attorney to apply them to your note, and expect the next buyer to judge the file against them either way.
Is a note owner a debt collector under the FDCPA?
Usually not when collecting its own loan, but it can be, for example where the loan was already in default when it was acquired or collecting debts is the main business. Some states apply collection rules to creditors as well, so get an attorney's view.
Does hiring a servicer make me compliant?
It moves most day-to-day compliance to a company that does it for a living, but not all of it. You still make the decisions the servicer carries out, and you may owe the new-owner notice yourself.
What is the small servicer exemption?
A category in the federal servicing rules that excuses smaller servicers from some duties, such as periodic statements and parts of the loss mitigation rules. It is partial, and the 120-day foreclosure rule still applies. Ask your servicer which category it operates under.