The CFPB has released final rules amending Regulation Z and Regulation X to implement provisions of the Dodd-Frank Act governing mortgage servicing disclosures and protecting consumers from detrimental actions by mortgage servicers. The final rules published on January 17 include exemptions and adjustments for so-called small servicers, defined to mean an institution that services 5,000 or fewer mortgage loans and services only mortgage loans that the institution or an affiliate originated or owns. The small servicer definition is meant to apply to substantially all community banks involved in servicing mortgages. The final rules cover a number of mortgage servicing issues, including periodic billing statements, interest-rate adjustment notices for adjustable-rate mortgage loans (“ARMs”), prompt payment crediting and payoff statements, and force-placed insurance. The final rules require lenders, assignees and servicers, other than small servicers, to provide a periodic statement for each billing cycle containing, among other things, information on payments currently due and previously made, fees, transaction activity, application of past payments, contact information for the servicer and housing counselors, and, where applicable, information regarding delinquencies. The final rules also require, for ARMs, that lenders, assignees and servicers notify consumers between 210 and 240 days prior to the first payment due after the rate first adjusts, and between 60 and 120 days before payment at a new level is due when a rate adjustment causes the payment to change. The final rules will become effective on January 10, 2014.

Nutter Notes: The final rules require servicers to promptly credit periodic payments from borrowers as of the day of receipt. If a servicer receives a payment that is less than the amount due for a periodic payment, the payment may be held in a suspense account until the amount in the suspense account covers a periodic payment. The final rules prohibit servicers from charging a borrower for force-placed insurance coverage unless the servicer has a reasonable basis to believe the borrower has failed to maintain hazard insurance, as required by the loan agreement, and the servicer has provided required notices. An initial notice must be sent to the borrower at least 45 days before charging the borrower for force-placed insurance, and a second reminder notice must be sent no earlier than 30 days after the first notice. The final rules prohibit force-placed insurance where the borrower has an escrow account for the payment of hazard insurance premiums if the servicer can continue the borrower’s homeowner insurance, even if the servicer needs to advance funds to the borrower’s escrow account to do so. There is an exemption from this requirement for small servicers, provided that any force-placed insurance purchased by a small servicer is less expensive to the borrower than the amount of any disbursement the servicer would have had to make to maintain hazard insurance coverage. The final rules also include mandatory loss mitigation procedures for a mortgage loan secured by a borrower’s principal residence, which restrict a servicer from initiating the foreclosure process while pursuing loss mitigation options. Small servicers are generally exempt from the loss mitigation requirements, provided that a small servicer may not make the first notice or filing required for foreclosure unless a borrower is more than 120 days delinquent, and a small servicer may not proceed to foreclosure judgment or order of sale, or conduct a foreclosure sale, if a borrower is performing pursuant to the terms of a loss mitigation agreement.