When a customer makes an extra principal payment on a mortgage (or any loan), is there something that states that we have to reduce the amount of the next month payment the amount of the extra payment. For example:
Customers payment is $800/month
The customer pays $1000 for the October 1st payment
Is it required by some regulation that the Nov 1st payment be $600 or can we just apply the extra $200 to principal and not have it adjust the next payment amount?

Thank you in advance.

Check your note - it should have a reference for overpayments. It is also dependent on how the interest is calculated.

For a first mortgage, the borrower is generally provided an amortization schedule of the payments. And generally, there are no changes to the payment amount through the life of the mortgage. The only process I've seen for changing the payment is a "re-casting" that is done if the FI offers rate buydowns on existing mortgages or through a TDR process.

Follow the terms of your note.

I was not talking about all the future payments changing, I was just saying that if a customer paid extra one month, would that extra amount go towards the next payment amount, not all future amounts changing.

I read the note, it just states that the borrower must notify the bank on how they want the prepayment applied, I didn't know if there was some regulation or something the CFPB put out on how that we needed to apply the prepayment amount. I mean its not like the CFPB not to tell us how to do something. Thank you for the help.

I have seen excess payment held in a suspense account until a sufficient funds were received to make the next full payment. It's not actually changing the payment for a single month though.

You may want to see how the Closing Disclosure states you will handle partial payments, which IMO the additional $200 is a partial payment toward the next payment due since the borrower did not specify it as a prepayment.

I'd consider redrafting this provision of your standard notes. At a minimum, there should be a default action that takes effect when the customer provides no instructions -- even something like "if we don't hear from you, we will apply the overpayment in any manner we choose." If you decide to "deputize" yourself to make this decision, it wouldn't hurt to self-impose an obligation to notify the customer as to the handling of the overage.

I know everyone already pointed you back to your Note and that you re-read that. However, if you are using any of the standard Fannie Mae documents then i would also point you to the Mortgage or Deed of Trust. For example, the standard mortgage has two lengthy sections all about payments:
1. Payment of Principal, Interest, Escrow Items, Prepayment Charges and Late Charges
2. Acceptance and Application of Partial Payments
This is far more information on how payments are accepted than what you will find in the Note. With that said, you might find some of the language a bit ambiguous. For example, it states the "Lender may accept and either apply or hold in suspense Partial Payments in its sole discretion in accordance with this Section 2."
If the borrower makes a full $1000 payment when their actual contractual payment is $800 our practice is to apply the extra amount to the principal and not hold it in suspense to be applied to the next payment. Since the mortgage allows for either, lenders really need to choose a practice and stick to it. Consistency is key.

Eric, the problem with the servicer applying it as a payment to principal, is there might be an issue if the customer was thinking, "I'm going to be on a month's cruise in February, so I'll pay $200 extra for 5 months to cover the February payment." Customer gets a text message while on the cruise that his payment is late.

Make sure what you re doing is covered by contract to avoid ambiguity/ he said-she said.

...which can easily lead to a waste of staff time dealing with customer inquiries, dissatisfaction, disputes, and possibly formal complaints.

You can get all of those things when a borrower wanted their payment to go to principal to reduce their remaining balance as well. I do not think there is necessarily a better way to do this. Where you are going to get criticized is if 1) you have inconsistent disclosures on what will be done, 2) worse, you don't do what you say you will do, and 3) you're not consistent in what you do. Even if you're Note/DoT give you flexibility, I would certainly be clear and consistent in your practices.

Does the disclosure on your CD lock you into a specific partial payment policy for the life of that loan? Language says "may," but we've never changed policies, and I've never looked into it.

Rocky...I totally agree that could happen. But, as Inherent states, it kind of goes both ways and the borrower may have thought it was going to principal and instead if was being held in suspense. Either way, the confusion can lead to the staff time and borrower frustrations mentioned by Richard. That said, we know from experience that when a typical borrower pays extra on their monthly payment the VAST majority of them intend for it to pay down principal and do not intend for it to be held in suspense waiting for their February cruise. With flexibility in the note/mortgage, we apply the practice that leads to the least amount of borrower issues and apply it consistently.

Eric, your note (contract between parties) and supplemental documents (mortgage, security agreement) need to be specific. That is better than a court or regulator deciding who is right.

IMHO, in other words, however it's interpreted, chances are 60%/40% that someone will be unhappy unless it's clearly spelled-out.

We have a scenario where borrower made their monthly payment and posted. A few days later, they made a principal only payment. We just received notice that the satisfied monthly payment is being returned NSF by the bank with their deposit relationship. Our system will not allow the principal payment to post if the scheduled monthly payment has not been satisfied. Closing disclosure indicates we may accept partial payments and apply them to the loan, but does not say we will hold them in a separate account until the rest of the payment is made.

The note says they can prepay, however the noteholder may apply the prepayment to accrued and unpaid interest before applying to the principal amount of the note. So do we have an issue if we just take the partial payment and apply towards their scheduled payment?

I think it is up to you as to whether to post the second payment as a partial payment or not depending on your normal procedures. Not sure in this day and age how a payment can come back days later for NSF.

It comes via our loan payment portal. I don' t know all of the details but wondered the same thing.

I should also mention that regardless of what you put on your LE or CD, your note and security agreement prevail as far as the application of payments are concerned.