On August 19, 2014, the Consumer Financial Protection Bureau (CFPB) issued a new compliance bulletin and policy guidance, Bulletin 2014-01, (the “bulletin”), putting mortgage servicers on notice of the CFPB’s heightened scrutiny of mortgage service transfers. The bulletin supersedes the CFPB’s prior guidance found in CFPB Bulletin 2013-01, released in February 2013, and warns that additional guidance may be forthcoming. The new bulletin outlines areas of particular interest to the CFPB in servicing transactions, which the CFPB defines to cover transfers of servicing rights and transfers of servicing responsibilities through subservicing or whole loan servicing arrangements.
In light of the bulletin, servicers need to be aware of the following:
The recent rise in servicing transfers and concomitant risks from those transfers has gained the attention of both federal and state regulators. Earlier this year, the New York Department of Financial Services halted a large servicing transfer. The Federal Housing Finance Agency (FHFA), the regulator of Fannie Mae and Freddie Mac, and the FHFA’s Office of Inspector General have issued several recent reports on the operational and financial risks to the government- sponsored enterprises related to servicing transfers, including a June 11, 2014, advisory bulletin1 setting forth supervisory expectations for risk management in connection with servicing transfers. The FHFA has also announced that additional guidance will follow later this year.
1 Federal Housing Finance Agency, Advisory Bulletin AB 2014-06 Mortgage Servicing Transfers, June 11, 2014, http://www.fhfa.gov/ SupervisionRegulation/AdvisoryBulletins/AdvisoryBulletinDocuments/2014%20AB-06%20Mortgage%20Servicing%20Transfers%20 Advisory%20Bulletin.pdf
This alert is published by Alston & Bird LLP to provide a summary of significant developments to our clients and friends. It is intended to be informational and does not constitute legal advice regarding any specific situation. This material may also be considered attorney advertising under court rules of certain jurisdictions.
While FHFA’s focus is on liquidity and operational risks, the CFPB’s guidance focuses on legal and compliance risk. In addition to providing specific guidance on servicing transfers, the CFPB reminds servicers that the bureau expects all servicers under its jurisdiction to maintain a robust CMS to ensure compliance with all servicing rules and applicable federal consumer finance laws, such as the Truth in Lending Act, the Fair Credit Reporting Act (FCRA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act’s prohibitions on unfair, deceptive or abusive acts or practices (UDAAP).
As the CFPB, FHFA and other regulators are looking to establish a more complete regulatory regime for transfers of servicing, the CFPB’s bulletin provides the groundwork.
The CFPB’s Recommended Pre- and Post-Servicing Transfer Policies and Procedures
In future reviews of servicers for compliance with the new servicing rules, CFPB examiners will consider several pre- and post-servicing transfer policies and procedures that contribute to a servicer’s compliance with the information transfer and loss mitigation objectives of the new servicing rules.
Prior to completing a servicing transaction, servicers should consider implementing the following policies and procedures:
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After a servicing transfer is completed, servicers should implement the following policies and procedures:
In loss mitigation matters, servicers should implement the following policies and procedures:
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Policies and Practices That Will Draw CFPB Scrutiny
In the bulletin, the CFPB notes that examiners may consider the following practices, among others, as indications that a servicer’s policies and procedures are not reasonably designed to achieve the objective of the Real Estate Settlement Procedures Act (RESPA) and its implementing regulation, Regulation X, to facilitate the transfer of information during mortgage servicing transfers or properly evaluating loss mitigation applications:
The CFPB May Require Written Mitigation Plans for High Value Servicing Transfers
The CFPB will be placing particular focus on significant servicing transactions and, in appropriate cases, will require servicers to prepare and submit written plans to the CFPB that detail how they will manage the risks related to the transfer of borrower information. While servicers do not need approval from the CFPB to move forward with servicing transfers, unless required to do so by a consent order or other provision, servicers should be aware of this potential request for a written plan from the CFPB; the CFPB will use such plans to assess consumer risk from the transaction and inform further examination planning. If the CFPB requests a written plan, it will likely request information regarding the following:
• The total servicing volume being transferred (measured by unpaid principal balance);
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Servicers Must Implement a Strong Compliance Management System
There are a number of new servicing rules and federal consumer laws applicable to servicing transfers. As noted earlier, the CFPB expects all servicers under its jurisdiction to maintain a strong CMS. According to the CFPB, a“robust CMS must, among other things, both ensure that violations of Federal consumer financial law do not occur during a transfer and must contain mechanisms for promptly identifying and remediating any violations of Federal consumer financial law that do occur.”To establish a strong CMS, an entity must have strong policies and procedures, effective board oversight, regular and properly directed training, internal monitoring, external audits and compliance reviews.
In addition, servicers should also be mindful of the following rules and laws in the context of servicing transfers:
• Error Resolution Procedures (12 C.F.R. § 1024.35) and Requests for Information (12 C.F.R. § 1024.36)
• Force-placed Insurance (12 C.F.R. § 1024.17(k) and 12 C.F.R. § 1024.37)
• Early Intervention (12 C.F.R. § 1024.39)
• Continuity of Contact (12 C.F.R. § 1024.40)
• Loss Mitigation (12 C.F.R. § 1024.41)
• Fair Credit Reporting Act (15 U.S.C. §§ 1681i, 1681s-2)
• Fair Debt Collection Practices Act (15 U.S.C. §§ 1692a, 1692d, 1692e, 1692f, 1692g)
Alston & Bird Observations
Given the continuing high volume of servicing transfers and the attendant risks to borrowers, the CFPB has been closely monitoring servicing transactions. While the bulletin covers a number of regulations relevant to servicing transfers, its focuses on revised Regulation X, which implements the Real Estate Settlement Procedures Act that took effect January 10, 2014. The provisions of Regulation X at issue are found in 12 C.F.R. § 1024.38 and require servicers to, among other things, maintain policies and procedures that are reasonably designed to achieve two objectives:
(1) the accurate transfer of mortgage servicing information; and (2) the proper evaluation of loss mitigation applications from borrowers.
The accurate transfer of mortgage servicing information is governed by Regulation X as well as many other consumer financial laws and regulations. Servicers must be careful to comply with all of the foregoing regulations and statutes (and, of course, those not stated but nonetheless could be deemed a UDAAP). Failure to do so will invite CFPB scrutiny, and the CFPB will take appropriate supervisory or enforcement actions to address violations and seek all appropriate corrective measures, which could prove quite costly to servicers.
To ensure compliance with Regulation X, the bulletin provides practical policies and procedures that transferors and transferees should implement to mitigate the potential for noncompliance with the regulation. We encourage you to review these policies and procedures carefully and to implement them to the fullest extent.