Yesterday, the Consumer Financial Protection Bureau (CFPB) proposed additional amendments to Regulation X, which implements the Real Estate Settlement Procedures Act (RESPA), and Regulation Z, which implements the Truth in Lending Act (TILA). After implementing extensive amendments to both Regulations in January 2014, the CFPB identified further issues after engaging in “ongoing outreach and monitoring with consumer advocacy groups, industry representatives, housing counselors and other stakeholders.” According to CFPB Director Richard Cordray, the CFPB’s proposed amendments are designed to “give greater protections to mortgage borrowers” and ensure that “homeowners and struggling borrowers are treated fairly by mortgage servicers and that no one is wrongly foreclosed upon.” The proposed amendments, which cover nine major topics, will be open for public comment for a period of 90 days starting on the date they are published in the Federal Register. Although the proposal touches upon many different aspects of a servicer’s business, if the CFPB finalizes the rules as they are currently proposed the largest impact is likely to be felt in the areas of loss mitigation and periodic billing statements. Servicers of all sizes should work with legal counsel to review and analyze how these proposals could impact their business and consider submitting an official comment to the CFPB detailing any concerns.
Summary of the Major Topics of the CFPB’s Proposal
The CFPB believes successors in interest may have difficulty receiving information about the status of a mortgage loan as servicers strive to balance the privacy issues of borrowers with the rights of successors in interest. The proposed amendments will define “borrower” or “consumer” to include successors in interest and would permit a successor in interest to retain “the same rights as the original owner, with no change in substance,” including rights related to early intervention, continuity of contact, and loss mitigation assistance.
While the January 2014 amendments defined “delinquency” with respect to some rules, such as the 36-day live contact requirement and the 45-day written notice requirement, delinquency was not defined in other sections of the amendments, such as the 120-day prohibition on foreclosure referrals. The proposed amendments aim to provide a definition of delinquency that will be applicable to the Mortgage Servicing Rules as a whole. The CFPB’s newly proposed delinquency definition is “a period of time during which a borrower and the borrower’s mortgage loan obligation are delinquent. A borrower and borrower’s mortgage loan are delinquent beginning on the date a periodic payment sufficient to cover principal, interest, and, if applicable, escrow became due and unpaid, until such time as the outstanding payment is made.” The CFPB is also proposing an official interpretation that would allow servicers to use payment tolerances. This would provide servicers with the ability to treat a borrower as current, notwithstanding the definition of delinquency, if a missing amount is advanced to the borrower’s account.
The current Official Interpretations to the requests for information rules require a servicer to identify the owner or assignee of a mortgage loan when a borrower requests such information. If a mortgage-backed security exists, the name, address, and contact information of the trust and trustee must be disclosed to appropriately respond to a request to identify the owner or assignee of a mortgage loan. The proposed amendment would permit a servicer to only disclose Fannie Mae or Freddie Mac as the owner or assignee of a mortgage loan when Fannie Mae or Freddie Mac is the trustee, investor, or guarantor of the mortgage loan (unless the specific name and number of the trust is requested by the borrower).
Current force-placed insurance rules only address situations where borrowers do not possess hazard insurance and may not address situations where insurance exists but the existing insurance is insufficient pursuant to the mortgage terms. Accordingly, the proposed rules provide flexibility to servicers to force-place insurance not only when hazard insurance expires or is about to expire, but also when coverage is insufficient under the mortgage terms. The proposed rule would also permit servicers to include the borrower’s loan number on force-placed insurance notices, which may help foster communication between servicers and borrowers.
After the CFPB amendments became effective in January 2014, questions surrounding periodic billing statementscontinued to persist. Through the proposed amendments, the CFPB attempts to resolve many of the issues raised by the industry. For loans that have been accelerated, servicers currently include the entire accelerated amount on periodic billing statements, as the accelerated amount is the legal obligation owed by the borrower at the time the statement is sent. In October 2013, the CFPB confirmed this interpretation through informal guidance during a webinar with the MBA. The proposed rule appears to reconsider this interpretation, requiring servicers to include the reinstatement amount as the “amount due” as opposed to the entire accelerated amount. When a borrower agrees to a loss mitigation option, (1) under a permanent loss mitigation option, the “amount due” on the periodic billing statement shall be the permanent modified amount; and (2) under a temporary loss mitigation option, the “amount due” on the periodic billing statement can be either the amount due under the loan documents or the amount due under the temporary loss mitigation program. In October 2013, the CFPB exempted bankruptcy accounts from the periodic billing statement requirements, but in an anticipated move has proposed that bankrupt accounts begin receiving periodic billing statements except under specific exceptions, such as surrender of the property. Sample template forms for bankrupt statements have been provided by the CFPB. Finally, with regard to charged off-loans, the proposed amendments permit servicers to forego sending charged-off statements if the borrower will not be charged any additional fees or interest on the account after charge-off. The CFPB has previously taken the position that charged-off loans must continue to receive statements unless the lien is released on the property.
Similarly, there have been many questions surrounding how to evaluate applications in certain circumstances under the loss mitigation rules in Regulation X. The proposed amendments would add additional rules that servicers would have to navigate when engaging in loss mitigation and would also clarify a variety of existing obligations. For example, under the current law, some servicers have expressed concern regarding how to handle applications that are missing required third-party information, but qualify as “complete” under the current definition because everything in the borrower’s control has been submitted. The CFPB’s proposal would prohibit servicers from denying borrowers for loss mitigation when necessary third-party information is missing. Instead, servicers would be required to send a written notice within 30 days after receiving the complete application specifying, among other things, what information is still missing and when it was requested from the applicable third party. The proposal would also add a requirement that servicers notify borrowers in writing when an application becomes complete if that was not communicated in the initial acknowledgment letter. Additionally, servicers would be required to evaluate subsequent loss mitigation applications submitted by a borrower if the account is brought current at any time after the submission and evaluation of a prior application. In terms of clarifying existing obligations, the proposal would, for example, provide additional guidance in the official interpretations to Regulation X regarding how to set a “reasonable date” in an incomplete acknowledgment letter. It would also clarify that a repayment plan may be offered based upon an evaluation of an incomplete loss mitigation application, and would specifically state that servicers may stop collecting documentation for a loss mitigation option once the servicer knows that the borrower would be ineligible for that option.
The proposal also adds loss mitigation requirements that impact dual tracking. Currently, servicers must generally wait until a borrower is more than 120 days delinquent before making the first notice or filing required for applicable foreclosure law. One exception that is built into the 120-day rule is for joining the foreclosure action of a subordinate lienholder. The CFPB’s proposal would extend this exception so that a servicer may also join the foreclosure action of a senior lienholder without waiting until a borrower is more than 120 days delinquent. If the first notice or filing required by applicable foreclosure law is made prior to receipt of a complete loss mitigation application, the current rules generally require servicers and their foreclosure counsel to take reasonable steps to avoid a ruling on a dispositive motion or issuance of an order of sale until the loss mitigation process has been completed. The CFPB’s proposal would provide additional instruction on what a servicer must do to avoid a foreclosure sale and specifically states that “a servicer is not relieved of its obligations because the foreclosure counsel’s actions or inaction caused a violation.” When appropriate, servicers would be required to instruct foreclosure counsel to avoid a ruling or order in accordance with the law. The official interpretations would further state that if a servicer or their counsel does not take reasonable steps, the servicer must dismiss the foreclosure proceeding if necessary in order to avoid the sale.
The loss mitigation rules in Regulation X may also be amended to include additional provisions specific to loss mitigation applications in-flight during a servicing transfer. This includes clarification that all of the loss mitigation timelines and protections generally still apply when an application is pending at the time of transfer. For example, if a complete application was submitted to the transferor servicer prior to the transfer, the proposal would require the transferee to evaluate the application for all options within 30 days of the date that the original servicer received it. For involuntary transfers, which are those compelled by an unaffiliated investor, regulator, or court with jurisdiction with less than 30 days advance notice, the proposal would provide transferor servicers with additional time to comply with certain loss mitigation responsibilities.
With respect to the early intervention live contact and written notice obligations in Regulation X, the CFPB is proposing to clarify what servicers existing obligations are under the law. Specifically, the new amendments would state that servicers are required to make good faith efforts at establishing live contact with a delinquent borrower no later than 36 days after each missed periodic payment. Similarly, the required written notice must be sent no later than 45 days after each missed periodic payment, except that it must only be provided once during any 180-day period. This revision is designed to provide additional clarity and would not change a servicer’s obligation under the current law. However, currently these contact requirements do not apply when borrowers are debtors in an active bankruptcy case or when the borrower submits a cease communication request pursuant to the Fair Debt Collection Practices Act (FDCPA) so long as the servicer is a debt collector with respect to that borrower. This proposal would loosen those exceptions and would require that the written notice be provided to certain borrowers who are in bankruptcy or who have invoked their cease communication right under the FDCPA if loss mitigation options are still available to those borrowers.
The proposed amendments would also add official interpretations to Regulation Z in order to clarify how servicers should treat payments made by borrowers in temporary loss mitigation programs or permanent loan modifications in accordance with the payment processing rules. This would explain that a periodic payment for a borrower performing under a temporary loss mitigation option would still be the principal, interest, and escrow amount that the borrower is required to pay under the loan contract, regardless of whether the borrower is required to make alternate payments under the loss mitigation agreement. On the other hand, once a borrower has permanently modified the loan contract through a loan modification, a periodic payment would equal the amount sufficient to cover principal, interest, and escrow as required by the modified agreement.
The proposed amendments also provide greater flexibility to small servicers, as the proposed amendments would exclude certain seller-financed transactions from being counted toward the 5,000 maximum loan limit to qualify as a small servicer.
The CFPB press release as well as the proposed amendments can be found at the Consumer Financial Protection Bureau website.