The CFPB’s final rules implementing the Dodd- Frank provisions regarding mortgage loan servicing will take effect January 10, 2014. That date is not as far away as it may seem. In order to determine what to tackle first, we need a good working knowledge of the requirements of the regulations and an understanding of when and to whom those requirements apply.
As we all know by now, the rules are complicated and contain many specific and technical requirements. Importantly for many community banks, however, the rules also include several exemptions and exceptions from some requirements for small servicers. In this article, we will take a look at the coverage of the new rules, the definition of “small servicer,” the particular requirements that apply to a small servicer, and, then, the additional requirements that apply to all other servicers.
Coverage. You will recall from our discussion in February that the servicing rules amend both Regulation X (RESPA) and Regulation Z (Truth in Lending). The amendments to Reg. Z apply to any dwelling secured closed-end consumer credit transaction, which could be a first or subordinate lien and may or may not involve the borrower’s principal dwelling. The Reg. Z changes include three new rules: ARM loan adjustment disclosures; periodic billing statements; and prompt payment crediting and payoff statements. The prompt payment crediting and payoff statement requirements also apply to open-end consumer HELOCs. The Reg. Z rules apply to the loan’s servicer, the creditor, if it still owns the loan, and to any assignee that has purchased and still owns the loan. This means that while only one of those parties has to comply, any of them can be liable for a violation. The one exception is the rule for prompt payment crediting which only applies to the servicer. Of course, in many cases, the servicer and creditor or owner of the loan will be one and the same.
The Reg. X amendments apply to any “mortgage loan” which is defined as a “federally related mortgage loan” covered by RESPA, subject to the usual RESPA exemptions for business purpose loans, loans secured by 25 acres or more, and construction or other temporary financing, and excluding, in this case, HELOCs. The Reg. X amendments include six new rules: force placed insurance, error resolution and information requests, servicing and information management policies and procedures, early intervention with delinquent borrowers, continuity of contact with delinquent borrowers, and loss mitigation procedures. With a couple of exceptions, the Reg. X servicing amendments will apply to a first or subordinate lien “mortgage loan.” The existing RESPA requirements for an initial servicing disclosure and for servicing transfer disclosures will continue to apply only to a first lien mortgage loan. The requirements for early intervention with delinquent borrowers, continuity of contact with delinquent borrowers, and loss mitigation procedures apply only to a mortgage loan secured by the borrower’s principal residence.
Small Servicer Defined. As noted above, the Reg. Z amendments apply to loan servicers, creditors and assignees, but there is an exemption from some requirements for a “small servicer” defined as a servicer that, together with any affiliates: (i) services 5,000 or fewer mortgage loans in a calendar year, and (ii) only services mortgage loans that it or its affiliate either originated or now owns. The number of mortgage loans being serviced is determined as of January 1 each year and is good for the rest of that year. A servicer that crosses the 5,000 threshold for the first time will have until the later of 6 months after crossing the threshold or the next January 1 to comply with any requirements for which it is no longer exempt. As a side note, the CFPB has just published proposed amendments to the new servicing rules to clarify the types of loans that must be counted in evaluating the 5,000 loan threshold. The proposal would clarify the small servicer definition and exclude timeshares and reverse mortgages as well as loans serviced on a pro bono basis for an unaffiliated entity, such as Habitat for Humanity, from the threshold determination. The CFPB is also seeking comment on whether further clarification is needed with respect to the threshold calculation in light of the differences in coverage between RESPA for federally related mortgage loans and Reg. Z for all dwelling secured loans.
Small Servicer Exceptions. There are several exemptions and exceptions to the Reg. Z and Reg. X amendments available to loans serviced by a “small servicer” as that term is defined in Reg. Z. First, creditors, assignees and servicers are exempt from the Reg. Z requirements for billing statements or payment books on loans serviced by a small servicer. Second, small servicers are exempt from the Reg. X requirements to develop and maintain written loan servicing and information management policies and procedures. Third, small servicers are exempt from the Reg. X requirements for early intervention with delinquent borrowers, continuity of contact with delinquent borrowers, and loss mitigation procedures, except that small servicers are subject to the prohibition against publishing or filing for foreclosure until the loan is at least 120 days delinquent. Finally, small servicers are exempt from the rule prohibiting the servicer from force placing insurance in situations where hazard insurance premiums are paid through an escrow account and the servicer can advance funds to pay the premium, but only if the force-placed insurance is less expensive to the borrower than the amount the servicer would have to disburse to maintain the borrower’s existing hazard insurance. Small servicers remain subject to the notice and other requirements for force-placed insurance.
Servicing Requirements for All Servicers Including Small Servicers. Even after taking into consideration the exemptions and exceptions, small servicers still have a substantial compliance burden. The mortgage servicing requirements applicable to all mortgage loan servicers, including small servicers, are as follows
- Prompt payment crediting and payoff statements. Servicers must promptly credit a “periodic payment” as of the day it is received. A payment in an amount sufficient to pay principal, interest, and escrows (if applicable) is considered to be a “periodic payment” whether or not it is also sufficient to cover any late charges, other fees or non-escrow payments a servicer has advanced. If the payment is less than a “periodic payment”, the servicer can apply it or hold it in a suspense account. Once the amount in the suspense account is enough to cover a periodic payment, it must be applied as of that date to the consumer’s loan account. Pyramiding of late fees is prohibited, meaning no late fee can be assessed based on the failure of the consumer to pay a late charge attributable to an earlier payment. In addition, creditors, assignees, and servicers are responsible for providing an accurate payoff balance to a consumer within a reasonable time, no later than seven business days, after receiving a written request.
- ARM adjustment notices. Currently, Reg. Z requires that a consumer be given notice of an interest rate adjustment for an ARM loan at least 25 but no more than 120 days before a payment at the new payment amount is due. The new amendments will require earlier and more detailed notices.Servicers, including creditors and assignees, must provide the consumer with the first adjustment notice at least 210 but no more than 240 days before the first payment at the adjusted level comes due. If the first payment at the adjusted level is due within 210 days after consummation, then the notice must be given at consummation. The notice must be in a separate and dated disclosure document. The requirements for the content of the notice are detailed and lengthy. The disclosures should be in the form of a table and in the same order and format as the model disclosures in the rule. Some information is required to appear outside and above the table.The content of the required notice includes: an explanation that the current interest rate period is ending and a change in the interest rate may result in a change in the mortgage payment; the effective date of the rate adjustment and when additional rate adjustments are scheduled to occur; any changes to loan terms or features that may occur at the same time, such as the expiration of an interest-only or payment-option feature; the current and new interest rate; current and new payment amount; date the first new payment is due; for interest only or negatively amortizing payments, an explanation of how the current and new payment is allocated to principal, interest and escrows; an explanation of how the rate is determined (the index used, a public source of information for the index, and any margin added to the index); any limits on rate or payment increases at each adjustment period and over the life of the loan; an explanation of how the new payment amount is determined (index, margin, loan balance on the date of the adjustment and length of remaining loan term); if the new rate and payment amounts are estimated, the estimates must be based on a current index and include a statement that an additional notice will be provided between 2 and 4 months before a new payment at the adjusted amount comes due; for interest only payments, a warning that the new payment will not reduce the loan balance; for negatively amortizing payments, a warning that the new payment will add to the loan balance, and the payment amount required to amortize the loan balance at the new interest rate over the remaining loan term; any prepayment penalty and a statement that the consumer may contact the servicer for more information; a telephone number the consumer may call if they anticipate a problem making their new payment; a brief explanation of alternatives the consumer may pursue to avoid paying at the new rate including refinancing, selling the property, or requesting a modification or payment forbearance; CFPB or HUD website addresses and HUD toll-free telephone number that may be used to obtain a list of approved counselors; and the CFPB website to find contact information for state housing finance authorities.For subsequent rate adjustments, a similar notice must be provided between 60 and 120 days before a payment at a new level becomes due. The current Reg. Z requirement for a notice to the consumer at least once each year in which an interest rate adjustment is made but that does not result in a corresponding change in payment amount has been eliminated.
- Force-placed insurance. Under Reg. X, before a servicer can charge the borrower for force-placed insurance, the servicer must have a reasonable basis to believe the borrower has failed to maintain hazard insurance. In order for a reasonable basis to be established, the servicer must send two written notices to the borrower and not have received any verification that the borrower has insurance coverage in place. The first notice must be sent at least 45 days before a charge is imposed, and a second reminder notice must be sent 30 days or more after the first notice and at least 15 days before a charge is imposed. Before force-placed coverage can be renewed, a notice must be sent before the anniversary date of the force-placed policy and at least 45 days before a charge is imposed for the renewal coverage.The rule prescribes the content and format of the notices and contains model forms. Some information must appear in bold text. The notices must be in a separate document, but a separate mailing is not required. If mailed, the notices must be sent by first class mail or better.If a borrower provides proof of hazard insurance coverage, the servicer must cancel any force- placed insurance and refund any premiums for overlapping coverage within 15 days. All charges must be bona fide and reasonable. Any costs other than premiums or charges regulated by state insurance authorities or authorized by Federal law for flood insurance, must be for services actually performed and bear a reasonable relationship to the servicer’s cost of providing the service.When the loan includes escrows for payment of insurance, the servicer will be required to advance funds to pay the hazard insurance premiums even where the borrower is delinquent on the loan. Currently, RESPA requires a servicer to advance escrow funds only if the borrower is not more than 30 days past due. There is an exception for situations where the servicer has a reasonable basis to believe the borrower’s policy was cancelled or not renewed for reasons other than non-payment of the premium or where the borrower’s property is vacant.Small servicers are exempt from the requirement to advance funds where the insurance premiums are paid through an escrow account, but only if the force-placed insurance is less expensive to the borrower than the amount the servicer would have to disburse to maintain the borrower’s existing coverage. Small servicers are not exempt from the notice and other requirements for force-placed insurance.
- Error Resolution and Information Requests. The Reg. X amendments define a servicer’s obligations to correct errors and respond to consumer requests for information and set time limits for responding. In order to trigger the time limits, the notice of error or information request must be in writing, and servicers can designate a specific address to be used for that purpose by written notice to the consumer.Servicers must acknowledge receipt of the request or error notice within five days (excluding Saturdays, Sundays and legal holidays), investigate and correct the error and any additional errors discovered in the course of investigation, and provide the borrower with written notice of the corrective action taken along with contact information including a phone number the consumer can use for further assistance. If the investigation finds that no error occurred, then the notice must include a statement of reasons and the borrower’s right to obtain copies of any documentation relied upon by the servicer, along with contact information including a phone number that may be used for that purpose. The servicer may request additional information from the borrower in connection with the investigation, but may not postpone starting its investigation or use the failure to receive additional information as a reason for determining no error occurred without conducting an investigation to the extent possible.Time limits for responding to a notice of an error include: failure to provide a payoff statement – 7 days after receipt; errors relating to initiating foreclosure, seeking a judgment or order of foreclosure, or conducting a foreclosure sale in violation of the rule – earlier of prior to foreclosure or within 30 days after receipt of notice; and for other errors – 30 days after receipt. For errors other than payoff statements and foreclosure, the servicer can extend the 30 day period to 45 days by written notice to the borrower of the reasons for the extension. If the borrower requests copies of any documentation relied upon by the servicer, it must be provided at no charge to the borrower within 15 days after request. The servicer can withhold privileged, confidential or proprietary information but must give written notice to the borrower within 15 days after receipt of the borrower’s request.The servicer can short-cut the investigation process simply by correcting the error asserted by the borrower and notifying the borrower within 5 days after receiving the borrower’s notice. There are also exceptions to the investigation requirements for repetitive notices of the same error, vague or overbroad notices where the servicer cannot reasonably determine the specific error asserted, and notices of error received more than one year after the loan has been paid off or servicing has been transferred elsewhere. However, when an exception applies, the servicer must respond to the borrower’s notice within 5 days telling the borrower the reason no investigation will be made.No fee can be charged for responding to an error notice. Servicers cannot require any payment due or past due to be made before responding to an error notice. Any adverse information about the account that relates to a payment that is the subject of an error notice may not be furnished to a consumer reporting agency for at least 60 days after receipt of the error notice. The servicer is generally free to pursue collection or foreclosure for delinquent accounts while responding to an error notice, unless the error notice relates to a violation of the rules concerning foreclosure.
Requests for information are required to be treated in the same way. Within similar time deadlines, a servicer must acknowledge receipt of the borrower’s request and either provide the information or explain why it is not available. The requirements in current Reg. X for responding to a “qualified written request” go away. That term still exists under the new rules, but a qualified written request is just one type of error notice or request for information and is subject to the same rules and deadlines.
- Foreclosure. A small servicer may not initiate foreclosure (publish the first notice or make the first filing required for a foreclosure) unless the borrower is at least 120 days delinquent. In addition, a small servicer may not seek to a judgment of foreclosure, move for an order of sale, or actually conduct a foreclosure sale, if the borrower is performing pursuant to the terms of a loss mitigation agreement.
Additional Requirements for Servicers Other Than Small Servicers. In addition to the above requirements, a servicer who does not meet the definition of a small servicer must also comply with the following additional rules:
- General servicing and information management policies and procedures. Servicers must establish and maintain written policies and procedures for servicing loans and maintaining and managing information. The policies and procedures must be tailored to the size, scope, and nature of the servicer’s operations and be reasonably designed to achieve five main objectives:
- accessing and providing accurate and timely information to borrowers, investors, and courts (which might include policies and procedures for providing accurate and timely disclosures, responding to error notices and information requests, providing mortgage investors and assignees with loan information, handling of foreclosures and foreclosure documentation, and handling loans where the borrower has died);
- properly evaluating loss mitigation applications (policies and procedures for making borrowers aware of loss mitigation options, identifying the options a borrower may be eligible for, identifying the information a borrower must submit for consideration, ensuring all personnel assisting the borrower have access to the information, and evaluating the borrower’s application under investor guidelines and required RESPA loss mitigation procedures);
- oversight of third party service providers (policies and procedures for appropriate access to information concerning servicer provider actions, periodic reviews/compliance audits of the service provider, and facilitating sharing of information between the servicer and the third party service provider in connection with any loss mitigation or foreclosure proceedings);
- transfer of information in servicing transfers (policies and procedures for assuring complete and accurate information is transferred or received, as the case may be); and
- making borrowers aware of error resolution and information request procedures.
In addition, servicers must meet two basic standards for information management: (i) servicing records must be maintained for at least one year after the payoff or transfer of servicing of the loan; and (ii) records and data for each mortgage loan must be maintained in a way that would allow the servicer to compile it into a loan servicing file within five days that includes a schedule of all transactions on the account including any escrow or suspense accounts, a copy of the mortgage or deed of trust, any notations by servicing personnel reflecting communications with the borrower about the account, the data fields relating to the account in the servicer’s electronic systems, and copies of any documents or information provided by the borrower in connection with any error notices or loss mitigation procedures.
There is a safe harbor for compliance with the policies and procedures rule that protects a servicer who does not engage in a pattern or practice of failing to achieve any of the five objectives or failing to ensure compliance with the two standard requirements.
- Early Intervention with Delinquent Borrowers. For a loan secured by the borrower’s principal dwelling, a servicer must make good faith efforts to establish live contact with the borrower by the time the account is 36 days delinquent and inform the borrower, where appropriate, that loss mitigation options may be available. In addition, the servicer must send written notice by the time the loan is 45 days delinquent. The notice must include, among other things: a statement encouraging the borrower to contact the servicer; the servicer’s telephone number; a brief description of any available loss mitigation options; and information about how to contact approved counseling organizations. The rules specify the contents of the written notice and provide model forms.
- Continuity of contact with delinquent borrowers. For a loan secured by the borrower’s principal dwelling, a servicer must have and maintain reasonable written policies and procedures for providing the delinquent borrower with access to personnel who can assist them with any available loss mitigation options. The policies and procedures must be reasonably designed to: assign the borrower to specific loss mitigation personnel by the time written notice under the early intervention requirements is given, but no later than 45 days after delinquency; make the assigned personnel accessible to the borrower by phone; provide the borrower with accurate information about available loss mitigation options and the documents and information required to evaluate the borrower for eligibility; and ensure that the assigned personnel and any others responsible for evaluating the borrower for loss mitigation options can access all information the borrower has provided to the servicer.
- Loss Mitigation Procedures. For a loan secured by the borrower’s principal dwelling, a servicer is subject to limitations on initiating or continuing foreclosure and to procedural requirements when offering loss mitigation options. A loss mitigation option is pretty much any alternative to foreclosure that is offered by the investor/owner of the mortgage loan that is available through the servicer. The rules do not require servicers to make any specific loss mitigation options available, but if they do, the servicers must follow the procedures described in the rules. Servicers are also free to follow the requirements and guidelines established by the investor to determine eligibility.
- Foreclosure and dual tracking. As noted above, servicers are prohibited from starting foreclosure until the loan is at least 120 days delinquent. Once a borrower is more than 120 days past due, the servicer can start foreclosure unless the borrower has submitted a complete loss mitigation application. In that event, the servicer must complete the review and appeal process required in the procedures described below before starting foreclosure. Additionally, if the borrower submits a complete loss mitigation application by the deadlines discussed below, the servicer may not seek a judgment for foreclosure, move for an order of sale or conduct a sale until the review and appeal process is complete. Also, as noted above, a servicer may not start foreclosure if the borrower is performing under a loss mitigation agreement, and may not seek a judgment for foreclosure, move for an order of sale or conduct a sale if the borrower is performing under a trial modification or other agreed loss mitigation option. In other words, the rules prevent a servicer from “dual tracking” – proceeding with foreclosure while at the same time dealing with the borrower on a pending loss mitigation option.
- Loss mitigation applications and timelines. For any loss mitigation application received 45 days or more prior to a foreclosure sale, the servicer must acknowledge receipt in writing within five days and inform the borrower of any additional information needed to complete the application and the deadline for providing it. If a complete loss mitigation application is received more than 37 days before a foreclosure sale, the servicer must evaluate the borrower for all available loss mitigation options within 30 days.
- Approvals. If a complete loss mitigation application is received 90 days or more before a foreclosure sale, the servicer must give the borrower at least 14 days to accept or reject any offer of loss mitigation. If the application is received less than 90 but more than 37 days before a foreclosure sale, the borrower must be given at least 7 days to accept or reject any loss mitigation offer. If the borrower does not accept within the applicable timeframe, the servicer can treat the offer as rejected, subject to the appeal rights discussed below.
- Denials and review of denials. If the application is denied, written notice of that determination must be given to the borrower. If the application is for a trial or permanent loan modification and is denied, the servicer must give specific reasons for its decision for each available modification program. If the application for modification was received 90 days or more before a foreclosure sale, the borrower may appeal the denial, and the denial letter must also describe the borrower’s right to appeal, the deadline for doing so (which must be at least 14 days after providing the denial notice) and any requirements for the appeal. The appeal must be reviewed by different personnel than those responsible for evaluating the original application. The servicer must notify the borrower of its determination on the appeal within 30 days. If the appeal results in an offer of loss mitigation or there was a pending offer at the time of the appeal, the borrower must be given 14 days after the servicer provides notice of its determination on the appeal to accept or reject. Additional appeal rights are not required.
- Periodic billing statements. The Reg. Z amendments require servicers, creditors and assignees to provide a periodic statement for each billing cycle on a dwelling secured consumer loan. Billing statements must meet the timing, form, and content requirements provided in the rule, and the rule includes model forms. On fixed rate loans, the servicer may provide a coupon or payment book in lieu of sending billing statements. In that case, the rule specifies the content of the payment book. Reverse mortgages and timeshare plans are exempt as are loans serviced by a small servicer.
The information required to be contained in the periodic statement includes: the amount and due date; any late charge and the date it will be imposed if payment is not received; a breakdown of the payment as to principal, interest, escrow, fees and any past due amount; payments received since the last statement and how the payment was applied; the total of payments received since the beginning of the calendar year and how that total was applied; any debits or credits to the account during the statement period; an explanation of any partial payments held in suspense or unapplied and what must be done for the funds to be applied; account information such as principal balance, current interest rate, next interest rate change date, and any prepayment penalty; contact information for the servicer; CFPB or HUD website addresses and the HUD toll-free telephone number that may be used to obtain a list of approved counselors; on a loan more than 45 days past due, the date the delinquency occurred, possible risks including foreclosure, and a history of the account since it was last current (up to 6 months’ worth of history), an indication of any loss mitigation program the consumer has agreed to, notice of whether the servicer has started foreclosure, the amount needed to bring the loan current, and a reference to the availability of homeownership counseling.
If payment coupon books are used, each coupon must contain: the payment due date and amount and any late charge and the date it will be imposed if payment is not received. In addition, the book must include information about the account such as principal balance, current interest rate, next interest rate change date, any prepayment penalty, contact information for the servicer, and information about how the consumer can obtain additional information.
Civil Liability. In the past, banks have been subject only to administrative enforcement actions by the bank regulators for most RESPA violations. However, with two particular exceptions, borrowers will have a private cause of action for violations of the new servicing requirements under either or both Reg. X and Reg. Z. In issuing the Reg. X amendments, the CFPB is relying on its authority under Section 6 of RESPA, as amended by Dodd-Frank. Borrowers have a private cause of action for violations of Section 6 and may sue in a civil action for actual damages, statutory damages of up to $2,000 for a pattern or practice of non-compliance (up to $2,000 per classmember in a class action, not to exceed the lesser of $1,000,000 or 1% of the servicer’s net worth), plus attorneys’ fees. The exceptions are the rules requiring written servicing and information management policies and procedures and the rules requiring continuity of contact with delinquent borrowers which do not carry with them the risk of a private cause of action for violations. Violations of the Reg. Z requirements are subject to the usual civil liability provisions for violations of the Truth in Lending Act. So, there is the potential for considerable liability for violations of the new servicing requirements. In particular, the requirements for early intervention with delinquent borrowers and the foreclosure limitations and loss mitigation procedures may give borrowers a significant potential claim or defense to use in connection with mortgage foreclosures. And, of course, the CFPB and the prudential bank regulators have authority over servicers within their jurisdiction to bring enforcement actions to assure compliance with all of the new requirements.
Implementation. The CFPB has said it will issue guidance to assist the mortgage servicing industry implement the new rules by the January 10, 2014 effective date, but that guidance has not been forthcoming thus far. And, if the CFPB guidance on the ability to repay rule is any indication, any guidance on the servicing rules, while helpful, will likely not be a detailed how-to manual. Small servicers will need to review existing policies, procedures, and processes and make changes and consider new controls for assuring compliance with the timing requirements for responding to error resolution and information requests, providing force-placed insurance notices and assessing charges, and for initiating foreclosure. Prompt crediting of payments is not a new requirement and it is likely you already have procedures in place. Larger servicers will have a much bigger burden. Establishing detailed policies and procedures including loss mitigation procedures will likely require a significant investment in time and require extensive staff training. Producing billing statements or coupon books will require programming and systems changes and testing of those changes, things which usually require long lead times. Hopefully, you have already begun.