The CFPB released its summer 2013 “Supervisory Highlights” Report highlighting numerous mortgage servicing and compliance issues affecting both banks and non-banks. The 25-page Report, which is based on the CFPB’s supervisory activity from November 2012 to June 2013, not only reviews the Bureau’s enforcement and supervisory actions, but it also provides some important insight for financial institutions into the CFPB’s examination processes. The Report’s key findings identify three important areas of concern for the CFPB: compliance management systems, mortgage servicing and fair lending.
COMPLIANCE MANAGEMENT SYSTEMS
In its Report, the CFPB states that, while it does not insist upon a specific compliance management system (CMS), it tests four (4) components it believes are necessary “for an effective CMS:”
- Board of directors and management oversight;
- A compliance program;
- A consumer complaint management program; and
- An independent compliance audit.
The Report found that, while non-bank entities are more likely to lack a robust CMS, many banks and non-banks lack one or more of the components, which, “in a number of instances, resulted in violations of Federal consumer financial laws.” The report specifically identifies the lack of periodic monitoring and/or independent compliance audits as a significant area of concern that permits issues to go undetected, which could potentially lead to multiple, systemic regulatory violations.
The CFPB’s Report also flagged several issues in mortgage servicing that relate to loss mitigation, servicing transfers and payment processing.
Loss Mitigation: In connection with loss mitigation, the Report claims that the CFPB’s examiners found numerous issues including:
- Inconsistent borrower solicitation and communication;
- Inconsistent loss mitigation underwriting;
- Inconsistent waivers of certain fees or interest charges;
- Long application review periods;
- Missing denial notices;
- Incomplete and disorganized servicing files;
- Incomplete written policies and procedures; and
- Lack of quality assurance on underwriting decisions.
Service Transfers: The CFPB’s examiners also found issues pertaining to servicing transfers. These include:
- Noncompliance with the requirements of the Real Estate Settlement Procedures Act (RESPA) to provide disclosures to consumers about transfers of the servicing of their loans;
- Lack of controls relating to the review and handling of key documents – such as loan modification applications, trial modification agreements, and other loss mitigation agreements;
- Failure to review any individual documents that the prior servicer had transferred, such as trial loan modification agreements; and
- Failure to properly process loan files due to poor organization and/or labeling of the loan files.
Payment Processing: The CFPB’s Report also noted issues related to the payment processing, including:
- Inadequate notice to borrowers of a change in the address to which they should send payments;
- Improper escrow payments for taxes and insurance;
- Violations of the Homeowners Protection Act (HPA) due to excessive delays in processing borrower requests for private mortgage insurance (PMI) cancellation;
- Incomplete documentation for default-related fees charged to the borrower; and
- Improperly charging borrowers for default-related fees that investors were supposed to pay under investor agreements.
The CFPB’s examiners reported several issues related to the compliance by banks and non-banks with certain fair lending laws and regulations: the Home Mortgage Disclosure Act (HMDA) and the Equal Credit Opportunity Act (ECOA).
Specifically, examiners found issues concerning:
- Failure to comply with various aspects of the adverse action notification requirements under ECOA and Regulation B;
- Lack of adequate monitoring and internal controls to detect and prevent violations of fair lending laws; and
- Insufficient CMS processes and training to ensure notifications are sent to consumers with the appropriate content and within the timeframes required under Regulation B.