Please advise how to respond to this error. We had a customer call in last week regarding the receipt of late notice on their mortgage loan. They told us they were paid ahead a month and should not have received a notice. When reviewing the loan file we see that the payment was made on December 17, 2015 as a principal payment. Because it is less than a year are we required to correct or could it be determined to be untimely or unduly burdensome, i.e. 1098 would have been incorrect and all payments received since would have to have interest and principal adjusted?

Untimely notices of error or information requests (§§ 1024.35(g)(1)(iii) and 1024.36(f)(1)(v))
A notice of error or information request is untimely if it is delivered to you more than one year after:
 You transfer the loan in question.
 The mortgage loan is “discharged,” which means the debt and all corresponding liens have been extinguished or released.

I don't think you can argue unduly burdensome under 1024.36, because that only applies to requests for information. This would qualify as an error under 1024.35(b)(2):

1024.35(b) For purposes of this section, the term “error” refers to the following categories of covered errors: 2. Failure to apply an accepted payment to principal, interest, escrow, or other charges under the terms of the mortgage loan and applicable law.

I would definitely correct this error - not just because you are still within the timeframes of 1026.35, but also because of the ramifications being accused of violating the Fair Credit Reporting Act or UDAAP. Many core systems allow you to reverse and reapply past payments, automatically splitting to principal and interest correctly, so hopefully minimal manual calculation will be needed.