New Servicer Rules Address Disconnect in a "Broken System"

by devteam January 17th, 2013 | Share

In remarks to a Mortgage Servicing Field Hearing this morning, Richard Cordray, Director of the Consumer FinancialrnProtection Bureau  (CFPB), announced thernrelease today of CFPB’s final Mortgage Servicing Rules spokernand personally about the need for the new regulations.  The rules set for the responsibilitiesrnof servicers to their borrowers, outlining requirements for servicers to meet inrncollecting payments and maintaining performing loans in their portfolios and inrnmanaging delinquent and defaulted loans from initial collection contactsrnthrough foreclosure.</p

Cordray told of the first time in encountered a “foreclosurerncrisis.”  It was in 2004, several yearsrnbefore the nationwide and ongoing one. rnAs treasurer in his Ohio county he noticed there was suddenly an unusualrnnumber of people losing their homes. rnThis was puzzling to because there appeared to be no underlying economicrncause.  Local officials organized a “Savernour Homes” task force and mounted a public information campaign advising peoplernto “call your lender.” </p

The Director said this was the first time he realized that arnproblem had been building for years and that foreclosure filings in Ohio hadrnset a new record each year from 1996 to 2009. rn”Predatory lending, equity stripping, and outright fraud created many ofrnthe problems,” he said, but a notable feature of the situation was how often peoplernwith a problem were entirely unable to find a solution.  ‘Call your lender,’ we had advised,” but thenrnwe discovered a disconnect – “the direct link between borrower and servicer hadrnsnapped.” “‘Call your lender’ was not thernanswer if people did not know whom to call and could not get help even if theyrndid know.  People were trapped in a broken system, with deeply tragicrnconsequences.”</p

Cordray said the CFPB has beenrnwriting rules to address the main flaws of that broken system.  Americans have about $10 trillion in mortgagesrnon their homes most of these mortgages are managed by servicers.   “Becausernof what servicers do and the size of the market, their effects on borrowers canrnbe profound.”</p

The new mortgage servicing rulesrnachieve two main objectives.  First, they will help prevent all borrowersrnfrom being caught off guard by surprises and getting the runaround from theirrnservicers.  Second, there are special protections for borrowers who arernhaving trouble making their mortgage payments.</p

The final rules will take effect on January 10, 2014 andrnwill be setrnforth in two notices, one to amendrnRegulation Z, which implementsrnthernTruth in LendingrnAct, and one to amendrnRegulation X, whichrnimplements the Real Estate SettlementrnProcedures Actrnand cover nine majorrntopics. rnThe rules implementrncertain provisions of the Dodd-Frank Wall Street Reform andrnConsumer Protection Actrn(Dodd-Frank Act) that relate tornmortgage servicing.</p

The final rules include a number of exemptions and otherrnadjustmentsrnforrnsmall servicers, definedrnas servicers that service 5,000 or fewer mortgage loans andrnservice only mortgage loans thatrnthey or an affiliate originated orrnown.  CFPB says this definition coversrnsubstantially all of the community banks and creditrnunions thatrnarerninvolved in servicingrnmortgagesrnand should help reduce burdensrnfor these institutionsrnthat have strong consumer service safeguardsrnalready builtrnintorntheir businessrnmodels.</p

Here is a summary of the nine topic areas and rules.  The termrn”servicers” where used is shorthand for “servicers, creditors, andrnassignees” and each topic area notes that there are unspecified exceptions forrnsmall servicers.</p

 1.  Servicers must provide arnperiodic statement forrneach billingrncycle containing,rnamong otherrnthings,rninformation on current and past payments, fees imposed,rntransaction activity, application of pastrnpayments, contact information for the servicerrnandrnhousing counselors,rnand, where applicable,rninformation regardingrndelinquencies.  Periodicrnstatements are not required for fixed-rate loans where the servicer provides a coupon book, sornlongrnas the coupon book contains information specifiedrnin the rule.   </p

2.   Where the consumer has an adjustable rate mortgage</b(ARM) the servicer must provide a notice between 210 and 240 days before thernfirst payment due after the first rate adjustment.  Thisrnnoticernmayrncontain an estimate of the newrnrate and newrnpayment.  If a rate adjustment causes the payment tornchange there must also be a notice between 60 and 120 days before the firstrnadjusted payment is due.  The current annual noticernthat must be provided forrnARMs forrnwhich the interest rate, but not the payment, has changed over the course of the year is nornlonger required. </p

3.   Servicers must credit periodic payments from borrowers asrnofrnthe day of receipt. A periodic payment consists of principal,rninterest, andrnescrow (if applicable). If a servicer receives a paymentrnthatrnis less than the amountrndue for a periodicrnpayment, the payment may be heldrnin a suspense account,rnbut when the amount in the suspense account coversrna periodic payment the funds must be applied to the consumer’s account.rn Servicers must provide an accurate payoff balance torna consumer nornlaterrnthan seven businessrndays after receiptrnof a written request.</p

4.   Servicersrnarernprohibited from charging a borrowerrnfor force-placed insurance coverage unlessrnthernservicers has a reasonable basis to believe the borrower hasrnnot maintained hazard insurance andrnhasrnprovided thernconsumer with a notice at least 45 days before charging the borrower forrnforce-placedrninsurance coverage,rnand a second reminderrnnotice at least 30 days after the firstrnnotice and 15rndays before charging forrnforce-placedrncoverage. If a borrowerrnprovides proof of hazardrninsurance coverage,rnthe servicer must cancel any force-placedrninsurance policyrnand refund any premiums paidrnfor overlapping periodsrninrnwhich the borrower’s coverage was in place. Charges relatedrnto force-placed insurance (other than those subjectrnto State regulation orrnauthorizedrnbyrnFederal law forrnflood insurance) must be forrna service that wasrnactually performedrnand must bear a reasonablernrelationship tornthe servicer’s cost of providing the service.  </p

If the borrower has anrnescrowrnaccount for the payment of hazardrninsurance premiums,rnthe servicer may not obtain force-place insurance where itrncanrncontinue the borrower’s insurance, even ifrnthis requires advancing fundsrnto the escrow account to dornso.rnThe rule exemptsrnsmall servicers asrndefined above so long asrnanyrnforce-placedrninsurance is lessrnexpensive torna borrowerrnthan the disbursement the servicerrnwould have made tornmaintain hazardrninsurance coverage.</p

5.   The following applies to written customer requests for information or complaints.  Servicers may designate a specific addressrnforrnborrowersrntornuse and arerngenerally required to acknowledge the request or notice of error within five days. Servicers alsorngenerally are requiredrnto correct the errorrnasserted by the borrower andrnprovide the borrower written notification of the correction, orrnto conductrnan investigation andrnprovide the borrower written notification thatrnno error occurred,rnwithin 30 torn45 days. Further, within a similarrnamount of time,rnservicers generally are required tornacknowledge borrower written requestsrnfor information andrneither provide the information orrnexplain why the information is notrnavailable.</p

6.   Servicers arernrequired to establish policiesrnand procedures reasonably designedrnto achieve objectivesrnspecifiedrnin the rule.  “Reasonably”rnwill take into account the size,rnscope, andrnnature of the servicer’s operations. Examples of thernspecifiedrnobjectives include accessingrnandrnprovidingrnaccurate and timely information to borrowers, investors,rnandrncourts; properly evaluatingrnlossrnmitigation applications according to eligibility rules established by investors; facilitating oversight of,  andrncompliance by, service providers; facilitating transfer of information during rnservicing transfers;rnand informing borrowers of the availability of written error  resolution andrninformation requestrnprocedures. In addition,rnservicers are required tornmaintain certain documentsrnand information forrneachrnmortgage loan in a manner that enablesrnthernservices to compile itrnintorna servicingrnfile within five days. The Bureau and thernprudential regulators will be able tornsupervise servicers within theirrnjurisdiction to assure compliance with these requirements butrnthere will notrnberna private rightrnof action to enforcernthese provisions.</p

7.   Servicersrnare required to make early intervention attempts with delinquency borrowers, establishing live contact by the 36thrndayrnof their delinquency or making good faith efforts to dornso.  Borrowers should be promptlyrninformed that loss mitigation options may be available and provided writtenrnnotification of loss mitigation options by the 45th day of delinquency.  </p

8.   Servicers are required to provide continuity of contact withrndelinquent borrowers, giving them access to personnel to assist them withrnlossrnmitigation optionsrnwhere applicable.  Personnel should be assigned to a delinquentrnborrower by the time of the first written early intervention notice but in anyrncase by the 45th day of delinquency.  Assigned personnel should bernaccessible tornthe borrowerrnbyrnphone to assist the borrowerrnin pursuingrnloss mitigationrnoptions, and advise the borrowerrnon the status and timelines of any loss mitigation application.  Assigned personnel should have access to all of the information provided by the borrower to the servicerrnandrnprovide that information,rnwhen appropriate, to those responsible for evaluating the borrower forrnlossrnmitigation options.rn</p

9.   Servicersrnarernrequired to followrnspecified lossrnmitigation procedures forrna mortgage loan secured by a borrower’s principal residence.  If a borrower submits an application for lossrnmitigation the servicer is generally required tornacknowledge receipt in writing within five daysrnand inform the borrower of any additional information requiredrnto complete the application. The servicerrnis required to exercise reasonablerndiligence in obtainingrndocuments andrninformation torncomplete the application.</p

For a complete loss mitigation application receivedrnmore than 37 days before a foreclosure sale, the servicerrnis required to evaluate the borrower, within 30 days,rnfor all loss mitigation,rnboth home retention and non-retention, options forrnwhich he may be eligible. Servicersrnarernfree to follow “waterfalls”rnestablished by an investor torndetermine eligibilityrnfor particular loss mitigation options. </p

The servicer must provide the borrowerrnwith a written decision,rnincluding an explanationrnof the reasons forrndenying the borrowerrna loan modification option and any inputs used to make a net present value calculation if suchrninputs were the basisrnfor the denial. A borrower may appeal a denial of a loan modification program so long as the borrower’s complete loss mitigation application is receivedrn90rndays or more before a scheduled foreclosure sale.</p

The rule restrictsrn”dual tracking,” specifically prohibiting a servicerrnfrom making the firstrnnotice or filing requiredrnfor a foreclosure process until a mortgage loan account is morernthan 120 days delinquent. Even if a borrowerrnis more than 120 daysrndelinquent and submitsrna complete application forrna loss mitigation option before the first notice or filing requiredrnfor a foreclosure processrnis made a servicer may not start the foreclosure processrnunlessrn(1) the servicer informsrnthe borrower thatrnthe borrower isrnnot eligible forrnanyrnloss mitigation option (andrnanyrnappeal has been exhausted),rn(2)rna borrower rejectsrnallrnloss mitigation offers, or (3)rna borrower fails to comply withrnthe terms of a loss mitigation option suchrnas a trial modification.</p

If a borrower submitsrna complete application forrna lossrnmitigation option after thernforeclosure processrnhas commenced but more than 37 days before a scheduledrnforeclosure sale, a servicerrnmayrnnot move for a foreclosure judgment or order of sale, orrnconduct a foreclosure sale, until one of the three conditionsrnabove has been satisfied. In all of these situations, the servicerrnis responsible for promptly instructingrnforeclosure counsel retained by the servicer whether or not to proceed withrnfiling for foreclosure judgmentrnor order of sale or tornconduct a foreclosure sale. </p

While this section includes an exemption forrnsmall servicers they are required to comply with twornrequirements: (1) a small servicer may not make the firstrnnotice or filingrnrequired for a foreclosure process unless a borrowerrnis more than 120 daysrndelinquent,rnand (2) a small servicer may not proceed tornforeclosurernjudgment or order of sale,rnor conduct a foreclosure sale, if a borrower is performing pursuantrnto the terms of a lossrnmitigation agreement.</p

So far reaction to the new rule has been received fromrnthe Center for Responsible Lending (CRL), the Mortgage Bankers Associationrn(MBA) and the Center for American Progress (CAP).  MBA President and CEO David H. Stevens commendedrnCFPB for continuing to produce regulations that enhance transparency andrncertainty for borrowers and servicers alike. rn “Overall,rnthe objective of this effort is the right one – create one set of rules so thatrnborrowers know how they will be treated and servicers know what is expected ofrnthem. </p

Stevensrnsaid that MBA needs time to evaluate the full rule but that the information sornfar indicates that CFPB made productive changes and had listened to suggestionsrnfrom MBA and other stakeholders.  “As with any rule of this size, the devil is truly in therndetails, and for servicers, that means how the rules are implemented andrnoperationalized.”   He pointed to a few initial concerns; what herncalled a too narrow definition of “small servicer” and to some apparentrninconsistencies between the rule’s dual tracking regulations and existingrntimelines mandated by the GSEs, FHA, and some states.</p

CRL President Mike Calhoun said, “Newrnrules from the Consumer Financial Protection Bureau will benefit millions ofrnAmericans by fixing several key problems that have plagued mortgage servicing.rnThe rules establish basic standards such as requiring a timely application ofrnmonthly mortgage payments and a prompt correction of errors.  The rulesrnalso restrict servicers from forcing borrowers into high-cost homeowners’rninsurance policies-a common, needless and deceptive practice.<br /<br /"A specific improvement from the CFPB's original proposal requires servicers tornwait 120 days after a missed payment before beginning the foreclosure process.rn Combined with the rules' strong requirement for servicers to reach outrnearly to delinquent borrowers, this 120-day period gives time for everyone -rnservicers, investors, and borrowers alike – to see if an alternative tornforeclosure can be found.  This eliminates unnecessary costs and increasesrnthe likelihood that borrowers can stay in their homes."<br /<br /CRL also had concerns with parts of the rule:</p<ul class="unIndentedList"<liSomernprotections for borrowers who apply for foreclosure alternatives after thernforeclosure process has started should be stronger. </li<liTherndeadline requiring a borrower to complete an application for a foreclosurernalternative at least 37 days before a scheduled foreclosure sale is anrnimprovement over the 90-days initially proposed, but a 14-day deadline wouldrnhave been better.</li<liRatherrnthan preventing servicers from seeking a foreclosure judgment or holding a salernuntil an application for relief is reviewed, the foreclosure proceedings shouldrnbe put on hold during the review.</li<liThernrule limits a borrower's ability to appeal when a request for an alternative tornforeclosure is denied, which will prevent some borrowers from having anrnimproper denial corrected.</li</ul

Julia Gordon, CAP’s Director ofrnHousing Finance and Policy congratulated CFPB on several specific improvementsrnit had made from earlier drafts and said, “The new rule takes a criticallyrnimportant step toward providing comprehensive standards for all mortgagernservicers. While bad lending practices and risky products triggered the housingrncrisis, the abject failure of the mortgage-servicing industry to mitigaternlosses or to follow the law when pursuing foreclosures greatly exacerbated therndamage done to homeowners, communities, the housing market, and the largerrneconomy. The rule addresses some of the most pernicious practices causingrnunnecessary damage to families, including dual-tracking foreclosures andrnforce-placed insurance. What’s more, individual homeowners now have the abilityrnto enforce these rules, a crucial piece that has been missing from previousrnforeclosure-prevention programs.”</p<pBut due to concerns about the extent of itsrnauthority, the Consumer Financial Protection Bureau missed an opportunity tornmandate that all servicers offer affordable loan modifications to homeownersrnwho qualify. We urge the bureau to work closely with other regulators to ensurernthat affordable and sustainable loan modifications remain broadly availablernafter the Home Affordable Modification Program expires.rn

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About the Author


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

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