Yesterday the Consumer Financial Protection Bureau (CFPB) released a special edition of their semi-annual Supervisory Highlights report focusing solely on issues uncovered during reviews of mortgage servicers. The report acknowledges that the servicing market has invested in compliance since the mortgage servicing rules went into effect in January 2014, but notes that the collective investment across the industry has not been sufficient. After nearly two and a half years of examining servicers’ compliance with the new servicing rules, the CFPB has concluded that “[o]utdated and deficient servicing technology continues to pose considerable risk to consumers in the wider servicing market.”
To show how technology issues have compromised servicers’ compliance, the report describes more than thirty violations and general “issues” that the CFPB’s exam teams have encountered during their examinations of mortgage servicers. The violations and issues in the report are categorized into five areas:
- Loss mitigation acknowledgment notices;
- Loss mitigation offers and related communications;
- Loan modification denial notices;
- Policies and procedures;
- Servicing transfers.
Many of the issues cited by the CFPB do appear to be related to faulty technology. For example, the CFPB notes that it has observed at least one servicer that failed to send any acknowledgment letters after receiving loss mitigation applications. This was due to a repeated processing platform malfunction over a significant period of time.
On the other hand, a number of the violations described by the CFPB do not appear to be related in any way to breakdowns in technology. For instance, the CFPB notes that it found deceptive language in acknowledgment and loss mitigation offer letters. It also determined that required content was often missing in written correspondence, and concluded that at least some servicers failed to maintain adequate policies and procedures. While it certainly is possible that technology played some role in each of these issues, it seems more likely that these were simply the result of compliance failures.
That is not to say that there haven’t been significant issues across the industry that were caused or exacerbated by outdated and faulty technology. When confronted with broad-sweeping regulatory changes—regardless of the industry—those impacted have to determine whether their existing technology can handle the new demands that have been imposed on them. In many instances, entities aren’t able to see the inadequacies or limitations until it is too late. Nevertheless, it is clear that the CFPB places the burden first and foremost on servicers themselves. In its press release, CFPB Director Richard Cordray specifically stated that “[m]ortgage servicers can’t hide behind their bad computer systems or outdated technology.”
However, the reality is that many, if not most, servicing platforms and other systems are not proprietary to the servicers that use them and are both designed and maintained by third party providers. In our experience, servicers are often severely limited by the willingness and ability of their technology providers to adapt and make changes. On-the-spot technology adjustments are exceedingly rare, and even the most basic, minimal changes can take months to implement.
The CFPB, to its credit, has consistently warned that entities they supervise can, and will, be held liable for violations caused by their service providers. In the examination context, entities should expect to be held accountable for issues and violations, regardless of who or what caused the problem. However, the reverse is also true; the CFPB can hold service providers liable for violations of the law.
While servicers bear some responsibility for ensuring vendors comply and provide the tools necessary to allow the servicers themselves to comply, the CFPB in the past has recognized that pressure from the industry may, in some cases, not be enough. Director Cordray, during a speech in late 2015, spoke about service providers’ role in TILA-RESPA Integrated Disclosure problems and indicated that “[i]t may well be that all of the financial regulators, including the Consumer Bureau, need to devote greater attention to the unsatisfactory performance of these vendors and how they are affecting the financial marketplace.” Notably absent from yesterday’s report was any mention of steps taken by the CFPB to exert its authority over technology providers that may be causing the types of violations cited.
Regardless of who or what is to blame, the report makes clear that, in the CFPB’s view, many servicers have still failed to ensure that they comply with the 2014 mortgage servicing rules. Servicers across the industry would be well advised to do whatever is within their power to ensure they comply with the obligations and expectations of the CFPB. This means reviewing, monitoring and testing aspects within the servicer’s control such as the content of written correspondence, and policies and procedures. It also means managing and working with technology service providers to ensure they are not causing unnecessary problems.
NOTE: Yesterday’s report, which was accompanied by the release of updated mortgage servicing examination procedures, also contained valuable insight from the CFPB on their overall examination process and areas where others in the industry have previously stumbled. As the saying goes, those who do not learn from history are doomed to repeat it. Additional analysis of these issues will be forthcoming in future posts.