On October 13, 2011, the Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) announced its initial approach to supervising mortgage servicers. Specifically, the Bureau released its Mortgage Servicing Examination Procedures (the “Procedures”), along with its CFPB Supervision and Examination Manual (the “Manual”). The devotion of CFPB resources to servicer regulation was foreshadowed by a speech from Raj Date, special advisor to the Secretary of the Treasury, on September 20, 2011. The CFPB, of course, was the brainchild of Professor Elizabeth Warren, who argued in a November 2008 law review article for the creation of a “single, highly motivated federal regulator” to police mortgage servicing activity. The Manual and the Procedures constitute the CFPB’s first broad attempt to implement that vision.
The Dodd-Frank Act gives the Bureau supervision authority over a large number of loan servicers. Examinations will first focus on large banks, thrifts, and credit unions with assets exceeding $10 billion and their affiliates. The Procedures describe the types of information that the CFPB’s examiners will gather to evaluate mortgage servicers’ policies and procedures, assess whether mortgage servicers are in compliance with applicable laws, and identify risks to consumers that pervade the servicing process. Under the Procedures, the CFPB will examine mortgage servicers’ compliance with various aspects of federal law, including the Truth in Lending Act (“TILA”), Equal Credit Opportunity Act (“ECOA”), Fair Debt Collection Practices Act (“FDCPA”), Gramm-Leach-Bliley Act, Real Estate Settlement Procedures Act (“RESPA”), and Electronic Funds Transfer Act. The Manual is described as a “field guide” for examiners to use in supervising both depository institutions and other consumer financial service providers.
The Bureau has indicated that it will initially focus on loans in default to ensure that (1) information provided to consumers about loan modifications and foreclosures and possible alternatives is timely, accurate, and transparent; (2) the process for referring loans to foreclosure is based on a careful review of all records and the borrower is actually in default; and (3) the fees charged to borrowers in default are not duplicative or otherwise illegal.
It is important to note a few things about the Procedures. First, there are no new rules, regulations, or standards being imposed here; rather, enforcement responsibility for federal servicing laws that previously had been housed in a variety of federal agencies now has simply been moved to a new bureaucratic home. Second, the CFPB clearly signals that a key focus of its enforcement efforts will be racially disparate impact in servicing practices, particularly in the area of loss mitigation. Third, some of the Procedures do speak to servicing standards of a business (rather than legal) nature, e.g., appropriate training and staffing, but remain very vague with respect to any actual standards for compliance.
While they are an important development, to be sure, the impact of these Procedures is somewhat muted inasmuch as they do not impose any new substantive requirements. In other words, there are no new rules here. Instead, the Procedures simply describe the process the CFPB will follow in auditing servicers’ compliance with existing laws.
While the bulk of the Procedures appear geared toward testing compliance with fairly standardized notice requirements and other basics of mortgage servicing, some areas of enforcement do stand out. Issues of disparate impact based on race have long been a focus of banking regulators appointed by President Obama. Assistant Attorney General Thomas Perez, for example, in testimony before Congress in April 2010, announced that in reviewing servicers’ compliance with HAMP, the Justice Department would carefully review servicing data for any evidence of racial disparities. Note as well that for purposes of a disparate impact analysis, a servicer’s policies and procedures may create a racially disparate impact even if those policies and procedures are entirely race-neutral. The CFPB appears to have taken up that mantle, announcing that it will examine whether racial disparity exists as to “debt cancellation, debt suspension, or other similar products,” and, with regard to loss mitigation activities, “determine whether the file documents indicated that decisions were made based upon any protected status . . .” That these disparatetreatment concerns take up as much space, in terms of word count, as the procedures for examining loss mitigation procedures more generally should clearly signal to servicers that disparate impact will be a key focus of the CFPB’s examinations. The focus on disparate impact in the loss mitigation process is somewhat odd, however, considering that servicers have little discretion under most of the federal loss mitigation programs, such as HAMP. The HAMP guidelines, written by the Treasury, presumably incorporate only race-neutral decisionmaking factors.
Finally, the CFPB appears to be concerned about mortgage servicing procedures other than legal requirements—is there sufficient staff and are the staff members adequately trained, are operations properly funded, and do borrower communications receive prompt responses? In these areas, there are no clear requirements or responsibilities and the CFPB offers virtually no guidance on what will “pass” or “fail.”
The Procedures will test, for example, whether loss mitigation disclosures are “clear, prominent, and readily understandable,” without explaining what might be sufficient or insufficient. The CFPB will test whether the servicer “provides adequate methods for consumers to contact it for information about the loss mitigation process, and timely responds to those contacts.” Here again, no guidance as to what is sufficient or insufficient is provided or referenced.
The CFPB has indicated that its supervision will be an ongoing process, including pre-examination scoping, review of information, data analysis, on-site examinations, and regular communication with supervised entities and prudential regulators, as well as follow-up monitoring. When necessary, the Bureau has warned that its examiners will coordinate with enforcement staff to take any appropriate actions necessary to address industry abuses.