On August 4, 2016, the Consumer Financial Protection Bureau (CFPB) issued its long-awaited final mortgage servicing rule under the Real Estate Settlement Procedures Act (RESPA) and implementing Regulation X, and the Truth in Lending Act (TILA) and implementing Regulation Z. The rule finalizes many of the proposed amendments that the CFPB issued in November 2014, revising portions of Regulation X, Regulation Z, and the CFPB’s official interpretations related to mortgage servicing. The CFPB presented its changes to the servicing rules in a 900-page document, and grouped them into several broad categories. Some of the most significant changes are discussed below:
- Successors in Interest. The final rule makes various changes relating to borrowers who are successors in interest to an original borrower, such as individuals who receive property upon the death of a relative or joint tenant, as a result of a divorce or legal separation, or from a spouse or parent. The final rule adopts a definition of “successor in interest” that is modeled on categories of transfers protected in the Garn-St. Germain Depository Institutions Act of 1982. Significantly, the rule applies the mortgage servicing rules contained in Regulations X and Z to successors in interest once the servicer confirms the status of that successor in interest. The CFPB noted that it received more comments on the successor in interest provisions than on any other aspect of the proposal. The CFPB hopes its new rule affords confirmed successors in interest the same protections under the mortgage servicing rules as original borrowers.
- Definition of Delinquency. Recognizing that a number of consumer protections under its servicing rules depend on how long a consumer has been delinquent under a mortgage, the CFPB’s new rule defines “delinquency” as a period of time that begins on the date that a periodic payment sufficient to cover principal and interest (and if applicable, escrow) becomes due and unpaid, and runs until such time as no periodic payment is due and unpaid. The rule also provides servicers discretion to consider a borrower as having made a timely payment even if that payment falls short of a full periodic payment (called a “payment tolerance”), but provides that if such a tolerance is given, the borrower cannot be treated as “delinquent” under the CFPB’s new definition.
- Force-Placed Insurance. The new rule finalizes amendments to force-placed insurance disclosures and model forms to account for situations when a servicer wishes to force-place insurance, but the borrower has insufficient—rather than expiring or expired—hazard insurance coverage on the property.
- Early Intervention. The final rule clarifies that servicers’ early intervention live contact obligations recur in each billing cycle while the borrower is delinquent. It also attempts to clarify requirements regarding the frequency of written early intervention notices, including when there is a servicing transfer. The rule also finalizes exemptions from servicers’ live contact obligations where the borrower is in bankruptcy or invokes cease communication rights under the FDCPA; however, it now requires that servicers provide written early intervention notices to those borrowers under certain circumstances.
- Loss Mitigation. The final rule implements several significant changes to loss mitigation requirements applicable to servicers under the mortgage servicing rules, including:
- Requiring servicers to meet loss mitigation requirements each time a borrower becomes delinquent, specifically addressing delinquent borrowers who bring their loans current and later default again;
- Modifying an existing exception to the 120-day prohibition on foreclosure filing to allow a servicer to join the foreclosure action of a superior or subordinate lienholder;
- Providing that if a borrower timely submits a complete loss mitigation application after the servicer has already made a first notice or filing, the servicer may not move for a foreclosure judgment or order of sale, or conduct a foreclosure sale, unless the loss mitigation application is properly denied, withdrawn, or the borrower fails to perform on a loss mitigation agreement;
- Requiring that servicers provide a written notice to a borrower within five days of receiving a complete loss mitigation application;
- Requiring servicers to make efforts to obtain required information from third parties that the borrower does not possess, and prohibiting servicers from denying borrowers for loss mitigation due to a lack of such information;
- Providing that servicers may stop collecting documents and information from a borrower for a particular loss mitigation option after confirming that the borrower is ineligible for that option; and,
- Addressing how loss mitigation procedures apply when a transferee servicer receives a mortgage loan for which there is a pending loss mitigation application, and generally requiring that the new servicer comply with the loss mitigation requirements within the same timeframes that applied to the transferor servicer, with limited extensions under certain circumstances.
- Prompt Payment Crediting. The final rule provides that periodic payments made pursuant to temporary loss mitigation programs must continue to be credited according to the loan contract, while payments made pursuant to a permanent loan modification must be credited under the terms of the permanent loan agreement.
- Periodic Statements. The final rule attempts to clarify disclosure requirements for periodic statements relating to mortgage loans that have been accelerated, are in loss mitigation programs, or have been permanently modified, “to conform generally the disclosure of the amount due with the Bureau’s understanding of the legal obligation in each of those circumstances.” It also requires servicers to send modified statements to consumers who have filed for bankruptcy, with content varying based on whether the debtor is in Chapter 7 or 11, or Chapter 12 or 13, bankruptcy. The rule also exempts servicers from the periodic statement requirement for charged-off loans, “if the servicer will not charge any additional fees or interest on the account and provides a periodic statement including additional disclosures related to the effects of charge-off.”
- Small Servicers. The final rule excludes from the 5,000-loan limit for small servicers certain seller-financed transactions and mortgage loans voluntarily serviced for a non-affiliate, even if the non-affiliate is not a creditor or assignee.
In issuing its final rule, the CFPB noted that it “recognizes that [the] industry has incurred costs in the implementation” of its mortgage servicing rules, but “believes that the majority of the provisions in this final rule would impose, at most, minimal new compliance burdens,” and perhaps even reduce compliance costs. The Bureau went on to note that any new requirements were added only “after careful weighing of incremental costs and benefits.”
The CFPB also lent significant discussion to the topic of language access and the struggles faced by consumers with limited English proficiency (LEP), but ultimately concluded that—because it had not had adequate opportunity to test RESPA and TILA disclosures in languages other than English—it would “not impos[e] mandatory language translation requirements or other language access requirements at this time with respect to the mortgage servicing disclosures and other mortgage servicing requirements.” However, the CFPB left the door open to such requirements , noting that it would “consider further requirements on servicer communications with LEP consumers in the mortgage servicing context, if appropriate.”
In conjunction with its final rule, the CFPB issued an interpretive rule under the Fair Debt Collection Practices Act to clarify the interaction between the FDCPA and the mortgage servicing rules in Regulations X and Z. Most of the provisions of the final rule will take effect 12 months after the rule is published in the Federal Register, except for the provisions relating to successors in interest and periodic statements to borrowers in bankruptcy, which will take effect 18 months after publication.