Recently, the US Consumer Financial Protection Bureau ("CFPB") published comprehensive proposed rules (the "Proposed Rules") in the nature of national servicing standards applicable to servicers of residential mortgage loans.1 The Proposed Rules would amend Regulation X, which implements the Real Estate Settlement Procedures Act ("RESPA"), and Regulation Z, which implements the Truth in Lending Act ("TILA"). The Proposed Rules expand upon a preliminary proposal released in summary form in April 2012.
The Proposed Rules would implement the mortgage servicing standards set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"), and other proposed servicing requirements placed on five of the nation’s largest banks as part of the national mortgage servicing settlement between forty-nine states and these five banks (the "National Mortgage Settlement"), as well as other corrective guidance from the federal banking regulators. If promulgated in their current form, the Proposed Rules would impose new notice requirements, servicing procedures, loss mitigation obligations and foreclosure practices.
The proposed amendments to TILA include (i) changes to periodic billing statement requirements, (ii) notices about adjustable rate mortgage interest rate adjustments, and (iii) rules on payment crediting and payoffs. The proposed amendments to RESPA relate to (i) force-placed insurance requirements, (ii) error resolution and information request procedures, (iii) information management policies and procedures, (iv) standards for early intervention with delinquent borrowers, (v) rules for contact with delinquent borrowers, and (vi) enhanced loss mitigation procedures. In addition, the Proposed Rules set forth some origination, servicing transfer and escrow requirements.
The comment period for the Proposed Rules ended on October 9, 2012. The CFPB has stated that it intends to finalize the Proposed Rules by January 2013. Once enacted, the final rule is expected to specify later effective dates for various provisions included in the rule to allow for their effective implementation.
Overview of National Mortgage Servicing Standards
Periodic Billing Statements
These statements must meet timing, form, and content requirements. Specifically, a periodic billing statement would be required for each billing cycle and must be sent within a reasonably prompt time (i.e., four days, but unclear whether this means calendar days or business days) after the close of the grace period of the previous billing cycle. As far as content and layout, the Proposed Rules set forth required groupings of information, including the following: Amount Due and Explanation of Amount Due, Past Payment Breakdown, Transaction Activity, Messages, Servicer’s Contact Information, Account Information, Delinquency Information (if a consumer is more than 45 days delinquent), and Housing Counselors (which refers to a list of HUD’s or CFPB’s housing counseling websites and telephone numbers). The Proposed Rules also direct where each such grouping of information should be placed on the periodic billing statement.
As part of the provisions under the Account Information grouping, the Proposed Rules define a prepayment penalty as a charge imposed for paying all or part of a transaction’s principal before the date on which the principal is due. The commentary clarifies this definition by providing a series of examples.
The periodic billing statement must be "transmitted" to the borrower either in writing or electronically. A mailed paper statement meets the "transmit" requirement, as would electronic distributions, such as an email indicating that the statement is available. The statement must be provided in a form the consumer may keep. If an electronic statement is provided, it must be in a form that can be downloaded or printed.
Finally, the Proposed Rules provide exemptions to the periodic billing statement requirement for reverse mortgages and timeshares. Additionally, the periodic statement requirement would not apply for fixed-rate loans if the servicer provides a coupon book, so long as each coupon contains the payment due date, the amount due, and the amount and date that any late fee would incur. Other information specified in the Proposed Rules must be made available to the consumer anywhere in the coupon book (including, among others, the beginning principal loan balance and the interest rate in effect for the loan). The Proposed Rules also include an exception for small servicers that service 1,000 or fewer mortgages and service only mortgages they originated or own. When a servicer crosses the 1,000 loan threshold, it would need to begin sending periodic statements at the greater of either six months or the beginning of the next calendar year.
Adjustable-rate Mortgage Interest-rate Adjustment Notices
Under the Proposed Rules, servicers would have to provide consumers with an adjustable rate mortgage (ARM) notice 60 to 120 days before an adjustment that results in a payment change. Mortgages originated before July 21, 2013 with look-back periods of 45 days or less could continue to provide these ARM disclosures 25-120 days before an adjustment that results in a payment change. This provision applies to closed-end ARMs secured by principal dwellings. Accordingly, open-end ARMs, such as home equity mortgages, are exempt from this provision (but are subject to other existing TILA disclosure requirements). However, plans that convert to a fixed rate will be subject to the rule when a payment adjustment occurs. Also exempt from these notices are construction loans with terms of one year or less; "fixed rate" loans that have certain payment or rate adjustment features, such as shared equity mortgages; price-level adjusted mortgages and similar products; graduated payment mortgages; renewable balloon payment instruments and preferred rate loans. In a departure from current practice, servicers would no longer be required to provide an annual notice if a rate adjustment does not result in an increase in payment. Furthermore, the proposal identifies the exact information that must be disclosed in ARM payment change, and requires the information to be presented in a specific table format.
Additionally, servicers would have to provide an initial, one-time ARM adjustment notice 210 to 240 days prior to the first rate adjustment. This provision applies to closed-end ARMs secured by principal dwellings. Open-end ARMs and home equity plans are exempt from the initial notice (but are subject to other existing TILA disclosure requirements). Also exempt are construction loans with terms of one year or less; fixed rate loans that have certain payment and rate adjustment features such as shared-equity mortgages; price-level adjusted mortgages and similar products; graduated payment mortgages; renewable balloon payment instruments; and preferred rate loans. Servicers would not send this initial notice if the rate adjustment creates a payment change for the first time within 120 days after consummation and the actual rate (not the estimated rate) was disclosed at closing. Content requirements are further set forth in the Proposed Rules.
Prompt Payment Crediting and Payoff Statements
The Proposed Rules would amend Regulation Z to require the servicer (or creditor or assignee, as applicable) to conform its existing servicing practices to specific standards:
- credit full contractual payments of principal, interest and escrow amounts as of the day of receipt, unless a delay would not result in a charge to the consumer or in the reporting of negative information to a consumer reporting agency;
- if retaining a partial payment in a suspense or unapplied funds account, disclose to the consumer the total amount of funds held and apply the funds to the oldest outstanding payment when those funds equal a full contractual payment;
- credit certain non-conforming payments within five days after receipt;
- eliminate any pyramiding of late fees when the servicer receives an otherwise full contractual payment by the due date or within any grace period; and
- send an accurate payoff balance to the borrower within seven business days after receipt of a written request therefor.
Error Resolution and Information Requests
Servicers would be required to meet certain procedural requirements for responding to information requests or complaints of errors. The Proposed Rules provide examples of the types of claims that constitute error, and clarify that a borrower may assert an error either orally or in writing.
Servicers must acknowledge a complaint within five days, but no acknowledgment is required if the error alleged is corrected within five days of receiving the notice and the borrower is notified of the correction in writing. Within 30 days (with the possibility for extensions in some cases), servicers would be required to correct an error or respond to the borrower with the results of an investigation. The Proposed Rules contain additional information regarding the content of a resolution notice, timelines for sending supportive documents, exemptions and other requirements respecting error resolution.
A borrower may make a request for information either orally or in writing. Servicers can designate, by notice, a specific phone number and address that borrowers must use when requesting information. A servicer must acknowledge a borrower’s request within five days, but need not provide an acknowledgment if the information requested by the borrower is provided within five days of receiving the notice. The Proposed Rules set forth timelines for acknowledging receipt of, and for resolution to, a borrower’s request for information according to the information being sought. Additionally, the Proposed Rules provide exemptions based on whether the request for information is duplicative, confidential/proprietary or general corporate, irrelevant, overbroad or unduly burdensome, or untimely. Definitions for each of the foregoing terms are set forth in the Proposed Rules.
The Proposed Rules would amend Regulation X to prohibit the servicer from obtaining force-placed insurance unless the servicer has a "reasonable basis" to believe that the borrower has failed to maintain contractually required hazard insurance and has provided certain required written notices. The servicer would be required to provide a first notice at least 45 days before charging for force-placed insurance and a second reminder notice no earlier than 30 days after the first. The Proposed Rules delineate the content of the notices and specify in an appendix the format of the disclosure.
Moreover, in connection with escrowed loans, the Proposed Rules would require the servicer to make payments from a borrower’s escrow account to pay the premium charge on an existing hazard insurance policy if the servicer pays for such policy from the borrower’s escrow account, unless the servicer has a reasonable basis to believe that the borrower’s hazard insurance has been canceled or has not been renewed for reasons other than nonpayment of premium charges. If the borrower’s escrow account does not contain sufficient funds to pay the premium charge, the servicer would be required to advance funds to make the payment. The Proposed Rules do not set forth any new mechanism for servicer reimbursement for such advances.
In addition, the servicer would be required to cancel any force-placed insurance and refund (and remove from the borrower’s account) all premium charges and related fees within 15 days of receiving verification that the borrower has hazard insurance in place. The Proposed Rules also place limitations on force-placed insurance charges. All charges by or through the servicer related to force-placed insurance must be "bona fide and reasonable," meaning that the charge is for a service actually performed that bears a "reasonable relationship" to the servicer’s cost of providing the service and is not otherwise prohibited by applicable law.
Information Management Policies and Procedures
Servicers would be required to establish "reasonable" information management policies and procedures. The reasonableness of a servicer’s policies and procedures would take into account the servicer’s size, scope, and the nature of its operations. The Proposed Rules mitigate this amorphous requirement by establishing a safe harbor: a servicer satisfies the requirement if it does not engage in a pattern or practice of failing (i) to achieve certain enumerated objectives or (ii) to comply with certain enumerated standards. The enumerated objectives are:
- assessing and providing accurate information;
- evaluating loss mitigation objections available to borrowers;
- facilitating oversight of, and compliance by, service providers; and
- facilitating service transfers.
The enumerated standards are:
- retention of records that document servicer actions for a period of one year after discharge of the mortgage loan or a servicing transfer; and
- provide the borrower with a servicing file that includes a schedule of all payments credited or debited to the mortgage loan account, the mortgage note and the mortgage, the servicing notes, certain electronically created records, and information or documents provided in connection with a notice of error or an information request.
Early Intervention with Delinquent Borrowers
Servicers would be required to make good faith efforts to notify delinquent borrowers of loss mitigation options through oral notice or written notice in a manner set forth in greater detail in the Proposed Rules.
Continuity of Contact with Delinquent Borrowers
The Proposed Rules would amend Regulation X to require the servicer to provide delinquent borrowers with access to personnel with applicable loss mitigation options. Not later than five days after the early intervention notice described above, the servicer would be required to assign dedicated personnel to respond to borrower inquiries and assist with loss mitigation options, who must be accessible by telephone to the borrower. Personnel must be assigned and available to the borrower until refinancing, loan payoff, a reasonable time has passed since the loan became current or a permanent loss mitigation agreement in which the borrower keeps the property, title is transferred to a new owner (e.g., deed-in-lieu, short sale, foreforeclosure sale), or a reasonable time has passed since a servicing transfer.
The Proposed Rules would require the servicer to establish policies and procedures "reasonably designed" to ensure that such servicing personnel can perform certain functions:
- provide the borrower with accurate information about loss mitigation options, required borrower actions, the status of any loss mitigation application, the circumstances under which the servicer may make a foreclosure referral, and any loss mitigation deadlines;
- access to borrower records, including the complete payment history, all loss mitigation documents that the borrower has submitted, and any similar documents submitted to prior servicers that the current servicer possesses;
- provide such documents to personnel authorized to evaluate a borrower for loss mitigation options; and
- provide the borrower with the telephone number and address for information requests and notices of error within a reasonable time after a borrower request.
As with the new information management policies and procedures requirement, the Proposed Rules do mitigate these requirements by establishing a safe harbor: a servicer’s policies and procedures would satisfy these requirements if servicer personnel do not engage in a pattern or practice of failing to perform the enumerated functions. The Proposed Rules would also state that a servicer has not violated the section if the servicers’ failure to comply is caused by conditions beyond its control.
Loss Mitigation Procedures
Servicers that offer loss mitigation options to borrowers would be required to implement procedures to ensure that complete loss mitigation applications are reasonably evaluated before proceeding with a scheduled foreclosure sale. Specifically, the Proposed Rule sets forth requirements for, and provides guidance with respect to, incomplete loss mitigation applications, application review, denials, borrower response and performance, deadlines for loss mitigation applications, prohibitions on foreclosure sales, appeals process, duplicative requests and the treatment of other liens. The Appendices set forth a variety of new model forms and model clauses that servicers may use to comply with the mortgage servicing requirements in Regulation X and Z. The Regulation X proposal modifies the model form applicable to servicing transfer disclosure requirements, adds a new model for force-placed insurance disclosure requirements, and adds new model clauses for early intervention notices. The Regulation Z proposal adds new model forms for periodic statements and variable-rate model forms.
The Proposed Rules would update record maintenance requirements and require that servicers maintain mortgage records, including escrow information, until one year after the date a mortgage loan is discharged or servicing is transferred.
Through commentary, the Proposed Rules make the following changes:
- Provide that the origination servicing transfer notice need only be provided to the primary applicant even if the co-applicant resides at a different location;
- Ensure that reverse mortgages would get the origination transfer of servicing disclosures upon reorganization of various sections;
- Remove the requirement that transferee and transferor servicers provide collect call options, but retains the requirement to provide toll-free telephone numbers;
- Remove the requirement to state the borrower’s rights in connection with complaint resolution—it is believed that the expanded error resolution and information request requirements provide tools for borrowers to assert errors and request information in connection with a servicing transfer;
- Require the transferor servicer to transfer misdirected payments to the transferee or return the payment to the borrower;
- Clarify how a notice of servicing transfer should be delivered; and
- Clarify that when there are co-borrowers, the notice of transfer need only be given to one borrower, but it must be given to the primary borrower when one is readily apparent.
The Proposed Rules would require a servicer to refund any amounts remaining in an escrow account when a mortgage loan is paid in full, and also would clarify how and when to credit funds to an escrow account for a new mortgage.
- If adopted in their current form, the Proposed Rules would increase compliance burdens for mortgage servicers, thereby increasing the cost of servicing residential mortgage loans and potentially exposing mortgage servicers to enhanced litigation risk. This may also lead to consolidation in the servicing industry in order to spread the cost across a larger platform and thus reduce competition in the industry.
- Beyond the technical aspects of the Proposed Rules and the overarching goal of requiring servicers to exhaust all alternatives to foreclosure, there are two additional focus areas for servicers. The first is fair servicing and the requirements for testing servicing activities to ensure that there is no disparate treatment of, or disparate impact on, protected classes. The second major area of focus is on force-placed insurance and, in particular, insurance and re-insurance arrangements with affiliates and the imposition of fees for servicer-placed insurance.
- In the long run, the Proposed Rules may diminish the incentives for individual states to adopt unique and nuanced servicer requirements, such as those contained in the recently adopted California Homeowner Bill of Rights, or in New York’s Superintendent Regulations Part 419, which would have a long term benefit to servicers if the Proposed Rules reduce the patchwork of state laws with which servicers must comply in addition to the federal requirements. At the same time, however, states may adopt servicer requirements that are even more stringent and afford greater protection to consumers than those set forth in the Proposed Rules.
- Smaller servicers and their trade associations have already expressed concern with regard to the exemption set forth in the Proposed Rules for servicers with less than 1,000 loans in their portfolio. Not only is this an exceptionally low threshold, but once exceeded each and every aspect of the Proposed Rules will become applicable, creating extraordinary challenges for specialty and small-scale servicers who happen to have just slightly more than 1,000 loans in their portfolios.