On December 18, 2019, the New York Department of Financial Services (DFS) issued its Final Regulations detailing the business conduct rules for mortgage loan servicers. Originally proposed on April 12, 2019, these Final Regulations revise the existing mortgage servicing regulations in Part 419 of the Superintendent’s Regulations, which were adopted on an emergency basis, (the “Emergency Regulations”).
The Final Regulations largely mirror the content as proposed (the “Proposed Regulations”), and include significant new requirements and variances from both the Emergency Regulations in Part 419, and from federal servicing requirements. These regulations will require implementation of additional New York-specific communications and servicing procedures.
We also note the broad definition of “servicing mortgage loans” stated below, which includes originators or note holders that also hold mortgage servicing rights. Such parties should pay particular attention to the service provider oversight and affiliated business arrangement requirements included in the Final Regulations.
We outline certain provisions from the Final Regulations below, with greater detail provided for the more notable aspects.
The Final Regulations are effective immediately upon the adoption date of December 18, 2019. However, the Final Regulations allow for a 90-day “transition period” (until March 17, 2020) during which a servicer does not violate the Final Regulations if it otherwise acts in compliance with the existing Emergency Regulations in Part 419.
As with the Emergency Regulations, the Final Regulations define a “servicer”, that is subject to these requirements, to include those that are exempt from the state licensing requirement. The Final Regulations further define the activity of “servicing mortgage loans” as follows:
“[R]eceiving any scheduled periodic payments from a borrower pursuant to the terms of any mortgage loan, including amounts for escrow accounts under Section 6-k of the Banking Law, Title 3-A of Article IX of the Real Property Tax Law or of RESPA of 1974 as amended (12 USC 2609), and making payments to the owner of the loan or other third parties of principal and interest and such other payments with respect to the amounts received from the borrower as may be required pursuant to the terms of the mortgage loan documents or servicing contract. In the case of a home equity conversion mortgage or reverse mortgage as referenced in Section 6-h of the Banking Law, Sections 280 and 280-a of the Real Property Law or 24 CFR 3500.2, servicing includes making payments to the borrower. The term includes a Person who makes or holds a mortgage loan if such Person also directly or indirectly is the holder of the mortgage servicing rights or has been delegated servicing functions for the Mortgage Loan.” § 419.1(m) (emphasis added)
Escrow Accounts (§ 419.2)
As required under Regulation X, the Final Regulations specify that if a servicer advances funds to pay an escrow disbursement, and it is not the result of a borrower’s payment default, then the servicer shall conduct an escrow account analysis to determine the extent of the deficiency. However, the Final Regulations further provide that the servicer must then provide a written explanation to the borrower and must wait 30 days after providing the explanation before seeking repayment of the funds necessary to correct the deficiency.
Payment Crediting (§ 419.3)
The Final Regulations include various payment crediting provisions, covering topics such as reasonable payment requirements, non-conforming payments, and late payments. These provisions largely mirror those already imposed by the Emergency Regulations in New York.
Periodic Statements (§ 419.4)
The Final Regulations include requirements for mortgage periodic statements. These provisions generally conform to those in Regulation Z, however, there are some differences. For example, the following requirements are notable for loans that are 45 days or more delinquent:
- The Final Regulations provide that the statement must include the date on which the borrower became delinquent, whereas 12 CFR § 1026.41(d)(8)(i) (and the associated sample forms published by the CFPB) requires that the statement include the length of the consumer’s delinquency.
- Instead of requiring a notice of whether the first notice or filing for foreclosure has been made, the New York Final Regulations require a notice of whether the servicer “has fulfilled the pre-foreclosure notice requirements of Real Property Actions and Proceedings Law section 1304 or Uniform Commercial Code section 9-611(f), if applicable”.
- Instead of simply providing the total payment amount needed to bring the account current, as required by Regulation Z, the New York Final Regulations require a “breakdown of the total payment amount needed to bring the account current, including a detailed breakdown of the actual fees and charges claimed, as well as, a date upon which the payment amount specific will expire and no longer be sufficient to bring the account current.”
Fees (§ 419.5)
As with the existing Emergency Regulations, the Final Regulations include a requirement that servicers publish, and make available upon request, a schedule of servicing fees. Notably, unlike the Proposed Regulations, the Final Regulations will continue permit a servicer to include a range of amounts for a particular fee.
The provision regarding Attorneys’ Fees found in the existing Emergency Regulations, has been amended in a couple of notable ways. First, the provision removes the restriction that expressly references attorneys’ fees in connection with foreclosure actions, but incorporates the restrictions in Civil Practice Law and Rules § 3408(h). Second, the provision adds the following restrictions with respect to attorneys’ fees charged in connection with a loss mitigation option, reinstatement, or loan satisfaction: (1) that the fee must be reasonable and customary for work that is actually performed by an attorney; and (2) that the fee and a breakdown of the tasks performed must be disclosed to the borrower prior to entering into the agreement governing the loss mitigation option, reinstatement or loan satisfaction. We note that the part requiring a “breakdown of the tasks performed” was not included in the Proposed Regulations.
Regarding late fees, the Final Regulations add to the Emergency Regulations with a new restriction that late fees not be charged if a borrower is making timely trial payments. The Final Regulations also add an exemption from the 2% late fee cap for “loans or forbearances insured by the federal housing commissioner or for which a commitment to insure has been made by the federal housing commissioner or to any loan or forbearance insured or guaranteed pursuant to the provisions of an act of congress entitled ‘Servicemen’s Readjustment Act of 1944’”.
A new provision covering Property Valuation Fees is added, which prohibits a servicer from charging a property valuation fee more than once during a 12 month period. However, a servicer may charge a reasonable fee for a property valuation, in order to facilitate a borrower’s loss mitigation application, if the servicer has already provided, without charge, one property valuation within preceding 12-month period.
Borrower Complaints and Inquiries (§ 419.6)
The provisions regarding borrower complaints and inquiries largely follow the existing provisions found in Section 419.4. However, the Final Regulations add procedures for handling borrower complaints, that are generally analogous to those found in Regulation X (i.e., a written acknowledgment of a complaint within 5 days, and a response within a certain number of days, depending on the nature of the complaint), but which include some notable differences.
The Final Regulations expressly provide that the 5-day acknowledgement letter for a complaint must: (1) inform the borrower of any additional information or documentation required by the servicer to review and address the complaint; and (2) if applicable, inform the borrower that the complaint has been reassigned to the borrower’s single point of contact or escalated to a supervisor.
For complaints involving either the commencement of a foreclosure in violation of Section 419.10, or moving for a foreclosure judgement/order of sale, or conducing a foreclosure sale in violation of Section 419.10, the response must be provided by the earlier of: (1) prior to the foreclosure sale; or (2) 15 business days after receipt of the complaint. We note that the analogous provisions in Regulation X require a response either before the sale, or within 30 business days after receipt of the Notice of Error.
The provision for extending the general 30-day response time frame also deviates from the analogous provisions in Regulation X. Under the Final Regulations, a servicer can extend the general 30-day response time frame by only 7 business days, as opposed to 15 business days under 12 CFR § 1024.35(e)(3)(ii).
Finally, the Final Regulations include a general requirement that servicers have a process that enables borrowers to escalate complaints or pending loss mitigation matters for a supervisory level review.
We also note that the Final Regulations, unlike the Notice of Error provisions in Regulation X, do not include express exemptions from the procedures for complaints that are duplicative, overbroad, or untimely.
Residential Mortgage Loan Delinquencies and Loss Mitigation Efforts (§ 419.7)
The Final Regulations include in this section a variety of delinquent loan servicing and loss mitigation requirements. The existing requirement that servicers make reasonable and good faith efforts to pursue loss mitigation options, in order to avoid foreclosure, has been amended to reference the need for conformity with Civil Practice Laws & Rules § 3408.
Single Point of Contact
The section includes requirements for assigning a single point of contact (SPOC) to delinquent borrowers, which are similar to the federal rules. However, there are some notable differences. For example, the Final Regulations provide that the SPOC must be assigned to any borrower who is at least 30 days delinquent (or who has requested a loss mitigation application), as opposed to 45 days delinquent under Regulation X.
Late Payment Notice
The Final Regulations retain the 17-day late payment notice requirement found in the existing Emergency Regulations, as well as the exemption for debtors in bankruptcy.
Early Intervention Notice
The Final Regulations include an Early Intervention Notice requirement, which largely conforms to the federal requirements in Regulation X. However, the 45-day Early Intervention Notice requirement in the Final Regulations include additional content that must be provided in the notice, such as information regarding “the servicer’s loss mitigation protocols”, the nature and extent of the delinquency, and contact information for the DFS Consumer Assistance Unit. The Final Regulations also include an exemption from the requirement while any borrower on a particular mortgage loan is a debtor in bankruptcy.
Loss Mitigation Procedures
The Final Regulations include loss mitigation procedural requirements, similar to those in Regulation X. However, the New York regulations include some notable requirements that differ or go beyond those required under federal law, certain of which we outline below.
- Loss Mitigation Acknowledgment Letters – The 5-day acknowledgement letter, sent after receipt of a loss mitigation application, must include information beyond that required in Regulation X. While certain of this additional content is already required by the New York Emergency Regulations, there are some new inclusions in these Final Regulations. Notably, the Final Regulations provide that, if the application is incomplete, the acknowledgment letter must “[s]tate the action that the servicer will take if the borrower does not submit the documents or information necessary to make the loss mitigation application complete within the [reasonable date] time period specified in the letter.” This provision is notable because the CFPB has clarified, through webinars and other guidance, that the “reasonable date” disclosed in the 5-day loss mitigation acknowledgement letter is merely a suggested timeframe, as opposed to a hard deadline after which the application is denied. Servicers should take care in drafting this language, in light of the CFPB’s guidance regarding the effect of the “reasonable date” by which borrowers are told to return any missing information.
- Loss Mitigation Denial Review – Regarding the evaluation process for loss mitigation, the Final Regulations provide that, within the 30-day time frame for evaluating a complete application received more than 37 days before a foreclosure sale, the servicer must review “any initial determination to deny a loss mitigation option” (note this is not expressly limited to loan modifications). This review must be performed by supervisory personnel that were not involved in making the initial determination.
- Incomplete Application Evaluation – As with the Regulation X loss mitigation procedures, the Final Regulations permit a servicer to evaluate a borrower for loss mitigation, based on an incomplete application, in certain circumstances. However, the Final Regulations differ from Regulation X by providing a hard threshold of 30 days, during which the application remained incomplete without borrower progress, despite the servicer’s reasonable diligence. We note that Regulation X contemplates varying timeframes, depending on the circumstances, which may be shorter than 30 days.
- Loss Mitigation Offers – As with the existing New York Emergency Regulations, the Final Regulations require additional content in a loss mitigation offer letter, beyond that required under Regulation X (e.g., a statement of the “material terms, costs and risks” of the option offered). However, the Final Regulations go even further, requiring that the offer letter include: (1) changes to the terms of the mortgage loan, to the extent the changes are known to the servicer after due diligence by the servicer at the time of the notice; (2) a breakdown of the loan balance and an itemization of any fees or charges assessed; and (3) any amounts capitalized and applied to the balance of the mortgage loan.
- Loss Mitigation Denial – As with the existing New York Emergency Regulations, the Final Regulations provide that a loss mitigation denial letter must specify the reasons for denial for all loss mitigation options (as opposed to Regulation X only requiring only requiring a statement of denial reasons for a denied loan modification), and to include certain disclosure language in bold.
- Borrower Response to Loss Mitigation Offer – The Final Regulations further differ from Regulation X, by providing that if a complete loss mitigation application was received 90 days or more before a foreclosure sale, the servicer must allow the borrower at least 30 days to accept or reject the offer. Regulation X provides a 14-day acceptance/rejection time frame in the same scenario.
- Appeals – The appeal process in the Final Regulations generally aligns with that under Regulation X. However, the New York Final Regulations grant appeal rights for the denial of “any loss mitigation option”, as opposed to being limited to loan modification denials under federal law.
Reporting Requirements and Books and Records (§§ 419.8 and 419.9)
Additional provisions covering the quarterly and annual servicing reports, and books and record keeping, are included in the Final Regulations. While many of these provisions already exist in the Emergency Regulations, there are some minor changes in these Final Regulations.
Servicing Prohibitions and the Duty of Fair Dealing (§ 419.10)
The Final Regulations include a variety of additional servicing requirements, certain of which already exist under the New York Emergency Regulations. However, several new requirements are added, which also deviate from applicable federal requirements in certain respects.
The Final Regulations include new “dual-tracking” type prohibitions, which restrict the foreclosure process in light of loss mitigation requirements.
- Complete Application Received Prior to Commencing Foreclosure – The Final Regulations provide that a servicer is prohibited from commencing foreclosure, if the borrower submits a complete loss mitigation application before the servicer has commenced a residential foreclosure action against the borrower, unless: (1) the servicer has sent the borrower notice that he/she is not eligible for any loss mitigation option, and the appeal process has been exhausted; (2) the borrower rejects all loss mitigation options offered; (3) the borrower is more than 30 days in default under a trial or permanent modification agreement; or (4) the foreclosure is based on a violation of a due on sale clause. We note that the exception above for a borrower failing to perform under a loss mitigation option is limited to trial and permanent loan modifications, whereas the similar provision in Regulation X provides that foreclosure may proceed if the borrower fails to perform under any agreed upon loss mitigation option.
- Incomplete Application Received Prior to Commencing Foreclosure – The Final Regulations prohibit a servicer from commencing foreclosure, if the borrower submits an incomplete loss mitigation application before the servicer has commenced foreclosure, unless the borrower fails to provide the outstanding information or documentation within 15 business days after the servicer sends the incomplete loss mitigation application acknowledgement letter. However, this this protection must only be applied once, for a single incomplete loss mitigation application on a borrower’s loan.
- Foreclosure Sale Restrictions – The Final Regulations prohibit a servicer from moving for judgment of a foreclosure and sale, or conducting a foreclosure sale, when:
- The borrower is in compliance with a trial loan modification, forbearance plan, or repayment plan;
- A short sale, or deed-in-lieu of foreclosure has been approved by all parties (including, for example, first lien investor, junior lien holder and mortgage insurer, as applicable), and proof of funds or financing has been provided to the servicer; or
- A borrower has submitted a complete loss mitigation application more than 37 days before a foreclosure sale, unless; (1) the servicer has sent the borrower notice that he/she is not eligible for any loss mitigation option, and the appeal process has been exhausted; (2) the borrower rejects all loss mitigation options offered; or (3) the borrower is more than 30 days in default under a trial or permanent modification agreement.
Good Faith and Fair Dealing
The Final Regulations incorporate existing language from New York’s Emergency Regulations, regarding good faith and fair dealing in connection with servicing loans and evaluating borrower for loss mitigation. However, the Final Regulations assert an affirmative duty for servicers to structure loan modifications that result in payments that are reasonably affordable and sustainable for the borrower at the time the modification is made.
Third Party Service Provider Oversight (§ 419.11)
The Final Regulations include detailed requirements for oversight of “third party providers”. The term “third party providers” is defined as “any person or entity retained by or on behalf of the servicer, including, but not limited to, foreclosure firms, law firms, foreclosure trustees, and other agents, independent contractors, subsidiaries and affiliates, that provides insurance, foreclosure, bankruptcy, mortgage servicing, including loss mitigation, or other products or services, in connection with the servicing of a mortgage loan.”
The Final Regulations require that servicers adopt and maintain policies and procedures covering the following requirements and measures:
- The servicer must perform due diligence of third party providers’ qualifications, expertise, capacity, reputation, complaints, information systems, document custody practices, quality assurance plans, financial viability, and compliance with licensing requirements and applicable rules and regulations.
- The servicer must require compliance with the servicer’s applicable policies and procedures and applicable New York and Federal laws and rules.
- The servicer remains responsible for all actions taken by a third party provider on the servicer’s behalf.
- The servicer must clearly and conspicuously disclose to borrowers if it utilizes a third-party provider and shall clearly and conspicuously disclose to borrowers that the servicer remains responsible for all actions taken by third-party providers.
- The servicer must conduct periodic reviews, at least annually, of each third-party provider the servicer retains. Further, the Final Regulations specify: (1) that the review must be conducted by servicer employees, who are separate and independent of the employees who prepare foreclosure or bankruptcy affidavits, sworn documents, declarations, or other foreclosure or bankruptcy documents; and (2) the type of information that must be reviewed, such as sample foreclosure and bankruptcy documents, permissible fees, and customer complaint information.
- The servicer must ensure that: (1) third party providers have appropriate and reliable contact information for servicer employees who possess information relevant to the services provided by the third-party provider; and (2) foreclosure and bankruptcy counsel have an appropriate servicer contact to assist in legal proceedings and to facilitate loss mitigation questions on behalf of a borrower.
- The servicer must take appropriate remedial action against a third party provider, in light of any problems discovered through reviews or other findings.
- The servicer must detail how it will oversee and communicate with foreclosure counsel and trustees, including certain specific requirements.
Servicing Transfers (§ 419.12)
The Final Regulations include provisions governing loss mitigation and other communications in the context of a servicing transfer. Notably, a transferee servicer is required to provide a copy of the servicer’s welcome packet, and a payment history complying with section 419.4 of the Final Regulations, along with the first periodic statement sent post-transfer.
Regarding loss mitigation, the Final Regulations address trial modifications plans in effect during the servicing transfer, and consideration of the borrower for loss mitigation in light of a denial decision made by the transferor servicer.
Affiliated Relationships (§ 419.13)
Significantly, the Final Regulations include affiliated business arrangement disclosure and compensation requirements, similar to those in RESPA, for servicing relationships. The term “affiliated relationship” is defined as “a relationship between two or more entities where one such entity, directly, or indirectly, through one or more intermediaries, controls, or is controlled by or is under common control with another such entity.” The Final Regulations include the following requirements:
- Within 10 days of entering into an affiliated relationship, servicers must provide to each borrower whose mortgage loan is subject to such arrangement, a written disclosure of the nature of the relationship (explaining the ownership and financial interest) between the parties to the arrangement and of an estimated charge or range of charges generally made by such affiliate.
- All affiliated relationships must be negotiated at market rate. Servicers may neither give nor accept any fee, kickback or other thing of value pursuant to any affiliated relationships, other than:
- Payments listed in section 419.5 of the Final Regulations (the provisions covering fees, discussed above);
- A return on ownership interest, that does not include: (1) any payment which has as a basis of calculation no apparent business motive other than distinguishing among recipients of payments on the basis of the amount of their actual, estimated or anticipated referrals; (2) any payment which varies according to the relative amount of referrals by the different recipients of similar payments; (3) a payment based on an ownership, partnership or joint venture share which has been adjusted on the basis of previous relative referrals by recipients of similar payments;
- Bona fide dividends, and capital or equity distributions, related to ownership interest or franchise relationship, between entities in an affiliate relationship; or
- Bona fide business loans, advances, and capital or equity contributions between entities in an affiliate relationship (in any direction), so long as they are for ordinary business purposes and are not fees for the referral of settlement service business or unearned fees.
These provisions covering affiliated relationships are in particular need of clarification from the DFS. The provisions were drafted in an overly broad manner, and lead to unintended consequences. For example, there is a general restriction that all affiliated relationships be negotiated at market rate, without regard to what any associated services entail. We hope that it is not the intent of the DFS to prohibit two affiliated companies from entering into any type of agreement, with terms that are more favorable than an agreement with a third party. It is also unclear as to what circumstances cause a particular loan to be “subject to” an affiliated relationship, for purposes of the disclosure requirement. As drafted, such a restriction could be interpreted to apply to general IT or payroll services provided by the parent company of a mortgage servicer.