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CFPB Cautions Servicers about MSR Transfer Risks

by devteam August 26th, 2014 | Share

The Consumer FinancialrnProtection Bureau (CFPB) recently revised its policy guidance to residentialrnmortgage servicers and subservicers regarding transfers of residentialrnservicing rights.  Compliance Bulletinrn2014-01 was issued due to concerns about potential risks to consumers thatrnmight arise out of a continuing high volume of servicing transfers.</p

A mortgage servicer collects andrnprocesses loan payments on behalf of the owner of the mortgage note.  There are frequent transfers of loans fromrnservicer to servicer, sometimes because the mortgage owner may sell thernmortgage servicing rights (MSR) away from the note ownership or hire a vendorrn(a subservicer) to perform the servicing duties.  MSR owners may also sell the MSR as an asset orrntransfer entire portfolios of loans needing special handling to specialist servicers.  Since the financial crisis the latter type ofrntransfer has become more common. </p

Thernrevised Regulation X of the Real Estate Settlement Procedures Act (RESPA) whichrntook effect on January 20 requires servicers to maintain policies andrnprocedures designed to facilitate the transfer of information when loanrnservicing is transferred and of properly evaluating loss mitigation activity.   In addition to RESPA other regulations applyrnto loan servicing including those put forth by the Truth in Lending Act (TILA),rnthe Fair Credit Reporting Act (FCRA) the Fair Debt Collection Practices Actrn(FDCPA) and Dodd-Frank’s prohibitions on unfair, deceptive, or abusive acts orrnpractices (UDAAPs).</p

CFPB mortgage servicing examinations now include reviews for compliancernwith the new servicing rule. rnThe compliance Bulletin lays out a number of examples of policies andrnprocedures the examiners may consider as facilitating compliance such asrnensuring that contracts include the requirement to transfer all appropriaterndocuments along with the loans, developing transfer instructions specific torneach deal, using tailored testing protocols to evaluate compatibility of data,rnand engaging in quality control work post-transfer to validate accuracy of therntransferred data.   The Bureau said it isrnalso considering including other examinations of post transfer policies andrnprocedures such as ensuring that therntransferee servicer uses transferredrninformation before seekingrninformation from borrowers.</p

The January servicing rule requiresrnservicers to maintainrnpolicies and procedures to reasonablyrnassure that loss mitigation applications are properly evaluated because of thernheightened risk in transferring these loans.  Examiners will pay particular attention to theserntransfers and where loans are transferred with pending loss mitigationrnapplications or approved trialrnmodification plans.  Policies and procedures that will contributernto meeting consumer protection objectives could include arrangements betweenrnthe transferor and transferee to specifically flag such loans, ensure the newrnsystem can appropriately process the loss mitigation information, ensurerndelivery of loss mitigation documents, and evidence on the part of therntransferee that transferred documents are identified, reviewed and usedrnappropriately, and that partial payments received are in compliance withrnmodification agreements.  </p

Where an evaluation of arncomplete loss mitigation option is in process at the time of transfer therntransferee should continue the evaluation to the extent practicable and CFPBrnwill carefully scrutinize any evaluations that take longer than 30 days afterrncomplete loss mitigation application data is received.   Examiners will consider whether the transfereernservicer obtained information about loss mitigation discussions from therntransferor before attempting to obtain it from the borrower. </p

CFPB said that its examinersrnhave found that the absence of such policies and procedures are often indicatedrnby the failure of servicers to recognize a loan with a modification or thatrnservicers had failed to honor modification offers without an independentrnconfirmation that the offer was proper and met investor criteria.  Servicers sometimes required borrowers to submit additional paperwork, to provide copies of financialrndocuments they had already submittedrnto the transferor servicer or subjected borrowers to substantial delaysrnwhile re-underwriting their loans. In somerncases, the borrowers subsequently receivedrna new modification with inferiorrnterms, and in others,rnthe servicer actually conducted a foreclosure sale.</p

Thernservicing rule states that the early intervention requirements – that servicesrnmake good faith efforts to establish live contract when a borrower isrndelinquent for 36 or more days and provide written notice with certainrninformation no later than the 45th day of delinquency – must berncontinued by the new servicer even when the delinquency began under the old one.  CFPB will be looking for policies andrnprocedures such as those that allow identification of borrowers delinquent atrntransfer and ensuring that personnel are available to assist them as soon asrnthe loan is boarded or that servicer personnel can, in a timely manner,rnretrieve a record of borrower history and information provided by the borrowerrnto previous servicers.</p

CFPB will also be looking atrnpolicies and procedures established by servicers to handle error resolutionsrnand requests for information.  The rulesrnsay that transfer of MSR does not relieve the transferor of the obligation tornrespond to information or error resolution requests received from the borrowerrnfor up to one year after the loan was transferred or discharged.</p

Servicers must also comply withrncertain requirements regarding force-placed insurance coverage including thernRegulation X requirement of having a reasonable basis to conclude the borrowerrnhas failed to comply with his mortgage contract’s requirement to maintainrnhazard insurance.  If the borrower hasrnnot received required notices from the transferor regarding forced placement thenrnit is the transferee’s obligation to provide them. </p

The guidance notes that other financial laws applyrnwhen loans are transferred and parties to transfers should have establishedrnpolicies and procedures to abide by these requirements.  FCRArngenerally prohibits a sourcernfurnishing information to a consumerrnreporting agency if there is reasonable doubt about itsrnaccuracy.  The law also gives consumersrnthe ability to dispute credit information both with reporting agencies and withrnsources.  </p

The FDCPA imposes obligations on servicers to the extentrnthey act as debt collectors and among other obligations, are some requiringrnnotice of attempts to collect that debt. rnIn addition to the noticernrequirements and other consumer protections described above, servicers mustrnavoid engaging in UDAAPs. The CFPB emphasizes that conductrnthat may not violate one of the specificrnprohibitions in the laws discussedrnabove may nonetheless constitute a UDAAP.</p

CFPB said it expects all servicers under its jurisdiction, including those with significant transferrnvolume, to maintain a robust Compliance ManagementrnSystem (CMS) which must, among other things, both ensure that violations of Federal consumerrnfinancial law do not occur during a transfer and contain mechanisms for promptly identifying and remediatingrnany such violations that do occur.</p

CFPB expects if servicers identify any potential violations duringrna transfer they will undertake all necessaryrncorrective measures which should includernboth steps to preventrnthe violation from occurring for subsequently transferred loans and to remediate any actual harm caused to the consumer whose loan was transferred.rnIf the CFPB determines that a servicer has engaged in any acts orrnpractices that violate the new servicing rule, that are unfair, deceptive, or abusive, or that otherwise violate Federal consumer financial law, it will take appropriate actions to address violations and seekrnall appropriate corrective measures including remediation of any harm tornconsumers. In determining the appropriate action, thernCFPB will consider a variety ofrnfactors, including the timeliness of identification and the timelinessrnand scope of remediation of the violation by the servicer.</p

Servicers engaged in significant transfers may bernrequired to prepare and submit to CFPB written plans detailing how they willrnmanage associated consumer risks.  Whilernthe information included in the plan would vary as a general rule it wouldrncontain information on the size of the transfer, the name of the servicingrnplatforms and their compatibility, detailed descriptions on arrangements forrncomplying with new rules on transfers and the testing planned to ensurernaccurate transmission of information, the training plan and materials for staffrninvolved in the transfer and a customer service plan that provides forrnresponding to loss mitigation inquiries and for identifying loans subject tornpending loss mitigation activity.</p

In analyzing the new compliance Bulletin, Michael S.rnWaldron, of the Consumer Financial Services Group at Ballard Spahr said, “It is important to also note that the CFPB uses the NewrnGuidance as a platform to reinforce three broader and consistently providedrnmessages to the servicing industry.  The first is that the CFPB expectsrnall mortgage servicers to maintain a robust Compliance Management System</b("CMS").  The CFPB notes that a robust CMS ensures that violations ofrnconsumer protection laws do not occur and includes mechanisms to remedy anyrnsuch violations that do occur.  The second is that the CFPB is continuingrnto closely monitor the mortgage servicing market and may engage in furtherrnrulemaking in this area.  The third is that the CFPB's concern regardingrnmortgage servicing transfers remains heightened due to the continuing highrnvolume of servicing transfers."

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About the Author

devteam

Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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