News & Knowledge
CFPB Unveils New Mortgage Servicing Rules
John C. Lynch
David N. Anthony
Alan D. Wingfield
Ethan G. Ostroff
Maryia Y. Jones
On January 17, 2013, the Consumer Financial Protection Bureau (CFPB) unveiled new mortgage servicing rules (the “Rules”) intended to help borrowers, in particular those facing the potential of foreclosure. These wide-ranging Rules covering nine major topics are the first national standards for servicing mortgages.
The Rules implement certain provisions of the 2010 Dodd-Frank Act relating to mortgage loan servicing and take effect on January 10, 2014. They amend Regulation X, which implements the Real Estate Settlement Procedures Act, and Regulation Z, which implements the Truth in Lending Act. The CFPB also issued commentaries that set forth official interpretations of both Regulations.
The entire mortgage servicing industry is covered by the Rules. The only exemption from the Rules is for those small servicers that service 5,000 or fewer mortgage loans that they or an affiliate either own or originated, which is intended to protect community banks and credit unions who service mortgages for their customers or members.
The Rules issued by the CFPB impose numerous additional requirements on loan servicers, in particular when dealing with borrowers in default, and restrict a servicer’s ability to pursue foreclosures. As a general matter, these Rules place an emphasis on documenting the foreclosure process, which comes as no surprise given the CFPB’s overarching belief that compliance with consumer laws include a general duty of documentation. Loan servicers should begin the process of reviewing and updating their policies and procedures to address these regulatory changes.
Some of the highlights of the new requirements include:
Restrictions on Dual Track: Servicers may not initiate foreclosure proceedings unless the loan has been delinquent for at least six months and not when an application for a loan modification or other foreclosure alternative is pending.
Single Application for All Loss Mitigation Options: Servicers are not allowed to require multiple applications for foreclosure alternatives and must offer a single application, which is considered for all options upon submission.
Notification of Foreclosure Alternatives: Servicers must reach out to all borrowers who have missed two or more payments and provide them with a written notice of loss mitigation options, including information about housing counseling.
Direct Access to Servicer Personnel: Servicers are responsible for ensuring easy access to live personnel that possesses accurate information regarding the borrower’s records, makes sure that submitted documents get to the right person in time, and is well informed about the status of any loss mitigation application the borrower has submitted.
Fair and Prompt Review of Loss Mitigation Applications: Servicers must review the borrower’s applications for all loss mitigation options permitted under investor guidelines and may not steer the borrower to select an option that is most favorable to investors or servicers. In addition, servicers must respond within thirty days to complete loss mitigation applications.
Reasons for Rejection of a Loss Mitigation Application: Servicers must explain with specificity the reasons for rejecting the borrower’s application for a home loan application and may not merely cite “investor requirements” as the justification. If the decision was based upon a financial model, the servicer must provide the borrower with the specific inputs used in making their calculations about the borrower. Any borrower who disagrees with the outcome can appeal, and the servicer must have someone new conduct a review.
Clear Monthly Mortgage Statements: Servicers must provide regular statements that include: the amount and due date of the next payment; a breakdown of payments by principal, interest, fees, and escrow; and recent transaction activity.
Early Warning Before Interest Rate Adjusts: Servicers must provide a disclosure before the first time the interest rate adjusts for most adjustable-rate mortgages and provide disclosures before interest rate adjustments that result in a different payment amount.
Options for Avoiding Costly “Force-Placed” Insurance: Servicers must provide more transparency regarding the placement of property insurance, including advance notice and pricing information before charging consumers. Servicers must also have a reasonable basis for concluding that a borrower lacks such insurance before purchasing a new policy. If servicers buy the insurance but receive evidence that it was not needed, they must terminate it within fifteen days and refund the premiums.
Payments Promptly Credited: Servicers must credit a consumer’s account the date a payment is received. If the servicer places partial payments in a “suspense account,” once the amount in such an account equals a full payment, the servicer must credit it to the borrower’s account.
Prompt Response to Requests for Payoff Balances: Servicers must generally provide a response to consumer requests for the payoff balances of their mortgage loans within seven business days of receiving a written request.
Errors Corrected and Information Provided Quickly: Servicers must generally acknowledge receipt of written notices from consumers regarding certain errors or requesting information about their mortgage loans. Generally, within thirty days, the servicer must: correct the error and provide the information requested; conduct a reasonable investigation and inform the borrower why the error did not occur; or inform the borrower that the information requested is unavailable.
Maintain Accurate and Accessible Documents and Information: Servicers must store borrower information in a way that allows it to be easily accessible. Servicers must also have policies and procedures in place to ensure that they can provide timely and accurate information to borrowers, investors, and in any foreclosure proceeding, the courts.
Loan servicers should promptly begin reviewing these Rules and taking proactive steps to ensure compliance with them before their effective date of January 10, 2014. A copy of Rule amending Regulation X can be found here and the Rule amending Regulation Z is located here.
Troutman Sanders Financial Services Litigation and Regulatory Compliance Team
Troutman Sanders’ Financial Services Litigation and Regulatory Compliance Team is an accomplished and experienced leader in providing litigation and regulatory advice to a broad spectrum of financial services institutions. The team is comprised of a dedicated group of trial and regulatory lawyers who focus on resolving the array of issues which confront financial institutions. Its lawyers have years of hands-on successful experience in all areas of the trial process, coupled with in-depth banking industry and regulatory knowledge.
Please do not hesitate to contact David Anthony, John Lynch, Alan Wingfield, Ethan Ostroff, or Maryia Jones if you have questions or would like additional information on compliance with these Rules.
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