The CFPB recently announced that it has entered into a consent order with Fay Servicing, LLC (“Fay”) to settle alleged mortgage servicing violations.  A copy of the consent order can be found here.  As is typical for CFPB enforcement activity in the mortgage servicing space, the focus of this consent order is alleged misconduct in connection with loss mitigation procedures and foreclosure protections.

According to the consent order, Fay did not send timely loss mitigation acknowledgement notices and loss mitigation evaluation notices.  The loss mitigation acknowledgement notice must generally be sent within five days after receipt of a loss mitigation application, and either confirm that the application is complete or detail the additional information or documents required.  The loss mitigation evaluation notice must generally be sent within 30 days of receiving a complete loss mitigation application and detail the determination of which options, if any, will be offered.

In some instances, the CFPB claims that Fay proceeded with certain foreclosure steps while the borrower was subject to foreclosure protections under Regulation X.  Those protections generally apply to a borrower who has submitted a complete loss mitigation application by certain points in the foreclosure process, and continue while the application is evaluated and resolved pursuant to Regulation X.

The consent order further states that there was a mistaken understanding that the loss mitigation requirements under Regulation X only applied to retention options (e.g., loan modification or repayment plan), and not to non-retention options (e.g., short sale or deed in lieu).  Finally, the CFPB asserted that Fay’s loss mitigation policies and procedures were lacking, and did not enable its personnel to engage in compliant practices.

Fay is required to pay restitution to consumers of up to $1.15 million, and to facilitate loss mitigation for those accounts that were the subject of the alleged misconduct.  Further, the consent order requires an extensive set of measures intended to ensure compliance going forward.

This enforcement action highlights again the importance of technical compliance with the loss mitigation procedures under Regulation X.  Since the servicing rules became effective in 2014, the CFPB has consistently signaled its prioritization of these requirements.

On May 4 H.R. 10, the Financial CHOICE Act (the Act) introduced by House Financial Services Committee Chairman Jeb Hensarling, R-Texas, obtained enough votes to move the bill on to the House of Representatives floor.  The Act seeks to rollback or modify many of the regulatory and supervisory requirements imposed by the Dodd-Frank Act.

On May 8, my colleague, Barbara Mishkin blogged about provisions of the bill that would overhaul the CFPB’s structure and authority, and a variety of other provisions.  I will blog about the provisions in the bill that relate to mortgage origination and servicing.  The passage of the bill in its current form would result in significant changes for that industry.  The most significant changes are addressed below.

S.A.F.E. Act Transitional Authority.  If certain conditions are met, the Act would create, under the S.A.F.E. Mortgage Licensing Act, temporary authority for a loan originator to continue to originate loans in cases in which (1) a registered loan originator moves from a depository institution to a non-depository institution mortgage lender and (2) a licensed loan originator moves from a non-depository institution in one state to another non-depository institution in a different state.  The temporary period would run from the date the loan originator submits an application for a license until the earlier of the date (1) the application is withdrawn, denied or granted, or (2) that is 120 days after submission of the application, if the application is listed in the Nationwide Mortgage Licensing System and Registry (NMLSR) as being incomplete.

Points and Fees.  The definition of points and fees for purposes of the Regulation Z ability to repay/qualified mortgage requirements and high-cost mortgage loan requirements would be revised to exclude charges for title examinations, title insurance or similar purposes, regardless of whether the title company is affiliated with the creditor.  Currently, for such charges to be excluded from points and fees, the title company must not be an affiliate of the creditor.  The Act also would make a conforming change to exclude escrowed amounts for insurance from points and fees.  Currently, escrowed amounts for taxes are excluded from points and fees.  Both changes were included in bills introduced in prior years that never were enacted.

Ability to Repay/Qualified Mortgage.  The Act would create a safe harbor against lawsuits for failure to comply with the Regulation Z ability to repay requirements for mortgage loans made by depository institutions that are held in portfolio from the time of origination and comply with a limitation on prepayment penalties.  Mortgage originators working for depository institutions would have a safe harbor from a related anti-steering provision if they informed the consumer that the institution intended to hold the loan in portfolio for the life of the loan.

Higher-Priced Mortgage Loan Escrow Requirements.  The Act would exempt certain small creditors from the escrow account requirements under Regulation Z for higher-priced mortgage loans if the small creditor held the loan in portfolio for at least three years after origination.  A creditor would qualify for the exemption if it has consolidated assets of $10 billion or less.

Small Servicer Exemption.  For purposes of the exemption for small servicers from various servicing requirements, the Act would require an increase in the limit on loans serviced to be considered a small servicer.  Currently the limit is 5,000 loans serviced by the servicer and its affiliates, and the servicer and its affiliates must be the creditor or assignee of all of the serviced loans.  The Act would require the adoption of a limit of 20,000 loans serviced annually.  The Act does not expressly refer to loans serviced by affiliates or whether the servicer and its affiliates must be the creditor or assignee of the loans.

HMDA Reporting Threshold.  The revised Home Mortgage Disclosure Act (HMDA) rule adopted by the CFPB establishes uniform volume thresholds to be a reporting institution at 25 closed-end mortgage loans in each of the prior two years or 100 open-end lines of credit in each of the prior two years.  The uniform thresholds will become effective January 1, 2018, although the 25 loan threshold for closed-end mortgage loans became effective January 1, 2017 for depository institutions.  The bill would increase the thresholds to 100 closed-end mortgage loans in each of the prior two years and 200 open-end lines of credit for each of the prior two years.

HMDA Information Privacy.  The revised HMDA rule adopted by the CFPB significantly expands the data on the consumer and loan that must be collected and reported, including the credit score and age of the consumer.  The mortgage industry has raised concerns about how much information the CFPB will make public under HMDA, as parties can use the publicly released data as well as other publicly available data to determine the identity of the consumer.  The CFPB is still assessing what elements of the reported data it will release to the public.  The Act would require the Comptroller General of the United States to study the issue and submit a report to Congress.  The Act also would provide that reporting institutions are not required to make available to the public any information that was not required to be made available under HMDA immediately prior to the adoption of the Dodd-Frank Act.  This aspect of the Act does not address that, under the revised HMDA rule, the CFPB, and not each reporting institution, would make reported information available to the public.

It is likely that the H.R. 10 as currently structured will not be adopted, but various provisions may find their way into law.  We will continue to monitor developments.

The CFPB issued its final rule amending the mortgage servicing rules under Regulations X and Z.  The proposal for these amendments was issued in November 2014.  The amended provisions cover a wide range of topics, including the following:

  • Tailored periodic statements and early intervention notices for borrowers in bankruptcy;
  • Additional procedures for communicating with, and confirming, a wide variety of potential successors in interest;
  • Application of loss mitigation procedures and foreclosure protections more than once over the life of the loan;
  • An additional notice required upon completion of a loss mitigation application;
  • Clarification of how certain requirements apply in the context of a servicing transfer; and
  • Relief from the periodic statement requirement for certain charged-off loans.

Most of the provisions will go into effect 12 months after publication in the Federal Register.  However, the amended provisions relating to successors in interest and periodic statements for borrowers in bankruptcy will take effect 18 months after publication.

Also of note, the CFPB issued an accompanying interpretive rule concerning the interaction of the Fair Debt Collection Practices Act (FDCPA) and the servicing rules.  Characterized as an advisory opinion for purposes of the FDCPA, the interpretive rule aims to provide a safe harbor from FDCPA liability for compliance with the following requirements under Regulation X:

  • The requirement to communicate with a potential successor in interest regarding an existing loan (i.e., communicating with a third party regarding a debt);
  • The requirement to send early intervention notices despite a borrower’s cease communication request pursuant to the FDCPA; and
  • The requirement to respond to borrower-initiated communications regarding loss mitigation, despite a borrower’s cease communication request pursuant to the FDCPA.

The Ballard Spahr Mortgage Banking Group continues to review this voluminous offering from the CFPB (just over 900 pages), and will have further comments in the near future.  In addition, a webinar covering this final rule and other recent servicing developments is scheduled for Tuesday, September 13th.

In an unmistakable warning shot to mortgage servicers, the CFPB recently issued a “Mortgage Servicing Special Edition” of its Supervisory Highlights. The CFPB also updated portions of its Mortgage Servicing Examination Procedures.

In the Bureau’s accompanying press release, and throughout the Supervisory Highlights, there is a particular focus on perceived technological failures. In the words of Director Cordray: “Mortgage servicers can’t hide behind their bad computer systems or outdated technology. There are no excuses for not following federal rules.” The clear takeaway is that the CFPB will not be persuaded by arguments that system limitations impair a servicer’s ability to comply with CFPB regulatory interpretations.

The Supervisory Highlights focus primarily on issues involving loss mitigation procedures and servicing transfers. Scrutiny in these areas should not be a surprise to the industry, due to the CFPB’s continued emphasis in the areas, the logistical difficulties involved, and the inherent potential impact on consumers.

On the topic of loss mitigation, the CFPB first addresses issues with loss mitigation acknowledgment notices under Regulation X. Findings include obvious issues, such as failing to send an acknowledgment notice due to system glitches, and failing to send the notice within the 5-day time frame. The report also highlights issues with requests for additional information in connection with incomplete loss mitigation applications. Notably, the findings cite failures to request necessary documents, requesting documentation that is not applicable to a particular borrower, and requesting documents that a borrower already submitted. As we have noted in response to past Supervisory Highlights, the CFPB expects that 5-day acknowledgement notices be tailored to the particular borrower and reflective of information already on file.

The CFPB also cites issues regarding loss mitigation offer letters. Noted issues include deceptive statements of the time at which fees, charges, and advances would be assessed. The document notes examples of servicers taking “unreasonable advantage of borrowers’ lack of understanding of the material risks of the loan modification” in terms of when certain charges would be assessed. These findings reinforce the importance of considering potential payment shock for borrowers through the life of a modified loan, and the clarity with which payment schedules are disclosed in modification agreements and accompanying materials.

The Supervisory Highlights provide several other examples of issues for loss mitigation offers. Such issues include the failure to disclose conditions of a permanent loan modification with the trial modification plan, and failure to timely convert completed trial modifications into permanent modifications. In the category of easily preventable issues, the report notes repeated findings of broad waivers of consumer rights in loss mitigation agreements. In our experience, such waiver-of-rights provisions are common in legacy loss mitigation agreement templates. If not done already, servicers should review all loss mitigation agreement templates to remove these types of broad waiver clauses.

Finally on the topic of loss mitigation, the Supervisory Highlights note issues pertaining to denial notices. Cited issues include incorrect statements of the reason for denial, and failing to correctly state the borrower’s right to appeal the denial.

Regarding servicing transfers, the CFPB notes that incompatibilities between servicer platforms have, in part, caused issues related to in-process loss mitigation. Examples of issues include a transferee servicer failing to honor the terms of loss mitigation agreements already in place at the time of transfer, and delays converting trial loan modifications to permanent loan modifications.

Notably, this section of the Supervisory Highlights includes some limited positive feedback. The CFPB states that one or more transferee servicers began to use certain tools available to the industry, such as Fannie’s HomeSaver Solutions Network and the HAMP Reporting Tool, to reconcile loan data during transfer and better identify in-flight modifications.

As noted above, the CFPB also revised its Mortgage Servicing Examination Procedures. On the topic of complaint handling, the revised module focuses on a servicer’s procedures for expedited evaluation of complaints and information requests for borrowers in foreclosure. The CFPB also notes that it will be conducting targeted reviews of fair lending issues for mortgage servicers.

The Mortgage Servicing Special Edition of the CFPB’s Supervisory Highlights can be found here, and the updated Mortgage Servicing Examination Procedures can be found here.

The CFPB issued a proposed rulemaking last week to amend various provisions of the mortgage servicing rules under Regulation X and Regulation Z. Comments are due 90 days from the date of publication in the Federal Register. Ballard Spahr’s Mortgage Banking Group will continue to analyze the proposal and work with our clients and industry groups on its impact.

The proposal runs nearly 500 pages and includes several notable proposals, including an exemption from the periodic statement requirement for charged-off loans, expanded requirements for borrowers in bankruptcy, and additional loss mitigation protections. Continue Reading CFPB Proposes Additional Servicing Rule Amendments

The CFPB and the Mortgage Bankers Association (MBA) will be hosting two webinars on October 16 and 17 from 2-3:30 PM ET to address outstanding questions under the new mortgage rules.  The October 16 session will address the servicing rules and the October 17 session will address the origination rules.

Although the webinars were initially limited to MBA members, we have been informed by the CFPB that the sessions will be open to the public.  Once the link becomes available, the CFPB will post it on their website.

As expected in light of Director Cordray’s comments last week, on Friday, the CFPB finalized several amendments and clarifications to the mortgage rules, proposed on June 24, 2013 (see our previous Legal Alert outlining the amendments as proposed).  The amendments include revisions to the CFPB’s mortgage servicing rules, loan originator compensation rules, and ability-to-repay rules.  Certain of the changes are detailed below.

Mortgage Servicing

  • The amendments include a process for servicers to offer short-term forbearance plans to delinquent borrowers, without completing the full loss-mitigation evaluation process.  The rule permits a servicer to provide a six-month forbearance to a borrower who is suffering a short-term, temporary hardship, upon reviewing an incomplete loss mitigation application.
  • The amended rule clarifies which servicer activities are prohibited during the first 120 days of delinquency.  Under the final rule, servicers will be allowed to send certain early delinquency notices required under state law that may provide information regarding borrower counseling or other resources. 
  • The amendments include specific procedures for obtaining follow-up information in the event a servicer fails to identify and inform a borrower that information is missing, upon initial review of a loss mitigation application. 
  • The amended rule provides additional details on how to inform borrowers about the servicer’s contact address for the purpose of complaints and information requests.

Loan Originator Compensation

  • The amended rule clarifies activities that administrative employees of a creditor or loan originator may engage in without being considered loan originators.
  • The amended rule changes the effective date for most of the loan originator compensation provisions from January 10, 2014 to January 1, 2014.

Financing Credit Insurance Premiums

  • The amended rule includes clarifications regarding the prohibition on financing credit insurance premiums.  The rule now provides that credit insurance premiums are financed by a creditor when the creditor allows the consumer to defer payment of the premium past the month in which it is due.  Further, the amended rule clarifies how the rule applies to levelized premiums. 

Ability to Repay

  • The amended rule clarifies the types of fees and charges that must be counted toward points and fees thresholds under the ability-to-repay and high-cost mortgage rules.  As proposed, (1) points and fees items paid by third parties are included in the points and fees calculation as if paid by the consumer, (2) points and fees items paid by the seller are included in the points and fees calculation as if paid by the consumer, except for seller’s points which are excluded from points and fees, and (3) points and fees items paid by the creditor are excluded from the points and fees calculation, except for compensation paid to a non-employee loan originator which must be included in points and fees.

The text of amended final rule can be found here and additional resources can be found on the CFPB’s Regulator Implementation page.

In keeping with its promise to provide further guidance to the industry on the recent mortgage loan rules, the CFPB recently issued proposed clarifications and changes to the ability to repay/qualified mortgage rule and the servicing rules. Comments on the proposal will be due 30 days after it is published in the Federal Register.

The CFPB notes that it received questions that it does not plan to address because it believes that the questions are already answered by the final rules. One example of such a question provided by the CFPB is whether residual income considerations have any effect on the status of a qualified mortgage that is not a higher-priced loan under the safe harbor. The CFPB advised that it believes the rule is already clear that residual income is relevant only to rebutting the presumption of compliance for qualified mortgages that are higher-priced loans, and has no effect on the safe harbor status of qualified mortgages that are not higher-priced loans. Despite the CFPB’s belief that the rule is clear in this area, the industry would prefer to see greater clarity in the rule on what may and may not be raised in court or other forums with regard to both the safe harbor and rebuttable presumption for qualified mortgages.

The proposal also includes clarifications and changes regarding the temporary qualified mortgage provisions for loans eligible for sale to Fannie Mae or Freddie Mac, including that a repurchase or indemnification demand, and even a resolution of a repurchase or indemnification demand, is not dispositive of qualified mortgage status. Whether the loan was eligible for sale to Fannie Mae or Freddie Mac would depend on the facts and circumstances.

The CFPB also proposes changes to the standards in Appendix Q, which provide guidance on the determination of a consumer’s debt and income for purposes of calculating whether the consumer satisfies the maximum 43% debt-to-income ratio applicable to the general qualified mortgage provisions. The proposed changes would address that Appendix Q is based on flexible underwriting standards that were not designed as a rigid debt-to-income rule, and simplify and clarify certain income determination obligations.

The CFPB also proposes to clarify that the mortgage servicing rules in Regulation X under the Real Estate Settlement Procedures Act do not create field preemption with regard to state servicing laws. Additionally, the CFPB clarifies the nature of the small servicer exemption and proposes technical revisions to the exemption. Please read more about the proposal in our e-alert.

Although its new mortgage servicing regulations do not take effect until next January, the CFPB sent a reminder to residential mortgage servicers last week that they need to be ready now for the CFPB to take a close look at their operations.  In Bulletin 2013-1, the CFPB issued guidance warning servicers and subservicers that CFPB examiners will be looking carefully at their compliance with federal law and focusing on specific areas related to servicing transfers.  Our legal alert contains a summary of the bulletin. 

On March 28, 2013, from 3 p.m. to 4 p.m. ET, Ballard Spahr will hold a webinar, “The CFPB’s Servicing Transfers Bulletin: What the CFPB Expects from Mortgage Servicers.” More information on the webinar and a link to register can be found here.

In their letter commenting on the CFPB’s mortgage servicing proposal, Americans for Financial Reform and numerous other consumer advocacy groups, including Consumers Union, have asked the CFPB to consider withdrawing and reissuing the portions of the proposal that deal with loss mitigation and error resolution.

With regard to error resolution, the groups criticize the CFPB for limiting the types of claims that trigger the resolution procedures and urge the CFPB to add as a trigger “a general ground that covers any borrower request to avoid foreclosure or address other ‘standard servicer dut[y].'”  In the area of loss mitigation, the groups take issue with the proposal’s allowance of “dual tracking” by servicers (meaning the ability of servicers to proceed with foreclosure while evaluating a home owner for loss mitigation).  The groups assert that dual-tracking should not be allowed and list nine issues they want the loss mitigation rules to address.

Other changes to the servicing proposal sought by the groups include protections from forced placement of insurance for borrowers without escrow accounts and requirements for servicers to provide borrowers “with verification of the servicer’s right to foreclose before initiating [a foreclosure]” and “detailed information about all of the loss mitigation strategies employed by the servicer, the eligibility requirements, and the steps required for homeowners to apply for these options.”

The approach that the consumer groups want the CFPB to take stands in stark contrast to the approach urged by the American Bankers Association in its comment letter on the servicing proposal.  In that letter, the ABA asks the CFPB not to adopt “servicing rules that significantly diverge from the express requirements of the Dodd-Frank Act” or additional requirements patterned on the national mortgage settlement.  The Mortgage Bankers Association also submitted comments on the servicing proposal in which the MBA indicated that many aspects of the proposal are in need of improvement.