The Consumer Financial Protection Bureau (CFPB) issued new Mortgage Servicing Rules that will take effect on January 10, 2014. These rules apply to any “closed-end consumer credit transaction secured by a dwelling.”1 The new Mortgage Servicing Rules impose new or modified rules in nine major areas affecting mortgage servicing. Thankfully, there is a “small servicer” exception which will likely shield a majority of community banks that service their own loans from some of these rules. The “small servicer” exception applies to an entity that services 5,000 or fewer mortgage loans and is the creditor or assignee for all of them. However, even if a community bank qualifies as a “small servicer,” it cannot ignore the Mortgage Servicing Rules altogether as some of the new rules apply to all entities servicing mortgage loans, regardless of size. This article will focus on summarizing a handful of the Mortgage Servicing Rules which apply to “small servicers” such as community banks that service their own loans.2
Under the new rules, consumers must be given interest rate adjustment notices on adjustable rate loans. Specifically, an initial interest rate adjustment notice must be sent between 210 and 240 days before a payment at a new rate is due when an adjustable rate initially resets. Thereafter, ongoing rate adjustment notices must be given to consumers between 60 and 120 days before a payment at a changed rate is due. The new rules provide model forms for the rate adjustable notices.
Prompt Payment Crediting/Payoff Statements
Mortgage servicers are required to promptly credit periodic payments to consumers’ accounts as of the day the payments are received. If the payment received is less than is required to cover the payment, the rules provide it may be put into a suspense account, provided that once the account contains sufficient funds, it must be credited to the consumer’s account. There is also a requirement that an accurate payoff balance be provided to the consumer within seven days of a request.
One of the more significant changes relates to force-placed insurance. Before a servicer can purchase force-placed insurance on behalf of a consumer, the servicer must reasonably believe the consumer has not maintained hazard insurance. Once this determination is made, the servicer must send an initial notice at least 45 days before charging for force-placed coverage, and send a second notice at least 30 days after the first notice was sent but at least 15 days before a force-placed charge is assessed. If a servicer receives evidence that the consumer has hazard insurance, it must cancel the force-placed insurance within 15 days and reimburse the consumer for any overlap in coverage.
Additionally, if the loan is set up so that insurance payments are escrowed, a small servicer is required to maintain the existing homeowners policy and cannot buy force-placed insurance unless the obligation is overdue more than 30 days and if the cost of force-placed insurance is less than the cost to keep the existing insurance policy in force.
Error Resolution/Informational Requests
The new rules impose requirements for resolving errors and responding to informational requests. A request to fix an error must be acknowledged within five days, and the consumer must be informed in writing within 30 days that the error has been corrected or after an investigation informed that no error has occurred. However, if the notice of error asserts that the servicer has violated the previously mentioned rule that requires servicers to give consumers accurate payoff balance amounts, the servicer has only seven days to inform the consumer either that the problem was corrected or that there was no error. Similarly, requests for information must be acknowledged within five days. The information must be provided within 30 days, or an explanation must be given as to why the information is not available after a reasonable search. The 30 day time-frames for responding/providing information may be extended by an additional 15 days in certain circumstances.
Prohibition Against Foreclosure Prior to 120 Days Delinquent
There are some complex new rules which set forth specific requirements for dealing with delinquent borrowers and loss mitigation which, for the most part, do not apply to “small servicers” and are beyond the scope of this article. However, one important rule that applies to all servicers, large and small, prohibits the commencement of foreclosure proceedings until a consumer is more than 120 days delinquent or if a consumer is acting under terms of a loss mitigation agreement.
This article merely scratches the surface in highlighting some of the significant mortgage servicing rules which will likely affect small servicers such as community banks. Community banks should begin the process of becoming familiar with the new servicing rules to ensure compliance by January 10, 2014. A good starting place is to review the resources on the CFPB’s website (www.consumerfinance.gov) including the Small Entity Compliance Guide which provides a useful summary of the new mortgage servicing rules.