Following its adoption of the mortgage servicing rules on January 17, 2013, the Consumer Financial Protection Bureau (CFPB) indicated that it would not aggressively enforce the rule for the first six months the rule was in effect. With the issuance of an enforcement order for violation of those servicing rules, however, the industry is now on notice that the leniency period is over and servicers need to be fully compliant with the rules.
Background: The Servicing Rules
The servicing rules are composed of amendments to both Regulations X, the implementing regulation for the Real Estate Settlement Procedures Act, and Regulation Z, the Truth in Lending Act.
Regulation X The Regulation X servicing rules are:
- Force-Placed Insurance. Imposes a number of limits on force-placed insurance, including a requirement that the servicer send two notices of the required insurance before force-placing insurance.
- Error Resolution and Information Requests. Establish requirements for responding to written information requests and complaints of errors.
- Policies and Procedures. Establish policies and procedures reasonably designed to achieve certain objectives, including providing timely and accurate disclosures and properly evaluating loss mitigation applications.
- Early Intervention. Establish live contact with consumers by the 36th day of delinquency.
- Continuity of Contact. Maintain policies and procedures reasonably designed to provide delinquent consumers with access to personnel who can assist them with loss mitigation options where applicable.
- Loss Mitigation. Generally require the servicer to, among other things, work with consumers to complete applications for loss mitigation options.
The Regulation Z servicing rules are:
- Periodic Statements. Periodic statements disclosing the payment due and application of past payments are required for closed-end loans unless the creditor provides a coupon book.
- Interest Rate Adjustment Notice. Disclosures required for the initial reset of an adjustable-rate mortgage and each time an interest rate adjustment results in a payment change.
- Prompt Crediting of Payments. Periodic payments must be promptly credited as of the day of receipt. A periodic payment consists of the amount necessary to cover principal, interest, and escrow (if applicable).
- Payoff Statements. If a consumer makes a written request for a payoff statement, a creditor, assignee, or servicer must provide the statement within seven business days.
The Enforcement Order
In its press release announcing the enforcement order, the CFPB noted that the servicer allegedly "failed" its borrowers "at every step in the foreclosure relief process." The CFPB reached this conclusion based on a review of the servicer's activities from 2011 until present (including a review of compliance with the newly adopted servicing rules).
The servicer's alleged violations related to its loss mitigation activities.1 The CFPB alleged that it took the servicer nine months to process loss mitigation applications and that the servicer allegedly had a mere 25 full-time employees to review 13,000 active loss mitigation applications. More specifically, the CFPB alleges the following violations:
- Excessive Delays. The servicer took excessive time to review loss mitigation applications, causing them to expire. According to the new rules, a servicer has 30 days from receipt of a complete loss mitigation application to evaluate the application.2
- Incomplete Application. The servicer failed to alert consumers to missing documents in their loss mitigation application. The current mortgage servicing rules require that servicers identify the missing documents and inform the consumer of such documents.3
- Denied Applications. The servicer miscalculated income and denied applications for unspecified reasons. At present, servicers are required to provide specific reasons for denial of the loss mitigation application.4
- Appeal. The servicer mislead borrowers regarding their right to appeal. Under the current rules, if the servicer receives a complete loss mitigation application 90 days or more before a foreclosure sale, the servicer must permit a borrower to appeal the servicer's determination to deny the request.5
- Trial Periods. The servicer needlessly prolonged trial modifications.
In light of the above alleged violations, among other things, the servicer agreed to pay $27.5 million in restitution and $10 million as a civil penalty; and is prohibited from acquiring servicing rights for defaulted loan portfolios until it demonstrates an adequate loss mitigation policy and procedure.
This order is a reminder that servicers cannot expect leniency from the agency with respect to regulations that are in effect. Additionally, it is a reminder that mortgage servicing remains a top-of-mind issue.
Servicers are advised to take this opportunity to review their existing policies and procedures to ensure they are current and compliant. This may require some servicers to update their policies and procedures to reflect the new guidance issued by the Bureau related to servicing issues that arise in the context of the transfer of servicing.