In a special edition of its Supervisory Highlights publication, the Consumer Financial Protection Bureau (CFPB) detailed its Supervision findings regarding the mortgage servicing industry's compliance with CFPB regulations. While the CFPB found shortcomings in some servicers' compliance positions, particularly with regard to purported technological failures to ensure communication with defaulted borrowers compliant with Regulation X, the CFPB also praised servicer compliance improvements over the last few years and encouraged the industry to continue on that path.

What happened

In January 2014, new regulations promulgated by the CFPB took effect outlining certain information consumers must receive from mortgage servicers and providing additional protections for consumers during loss mitigation interactions with servicers. Over the last two years, the CFPB's supervisory examinations of mortgage servicers have focused on reviewing servicers' compliance with these regulations, commonly referred to as the CFPB Mortgage Servicing Rule, or MSR (part of Regulation X, 12 C.F.R. Part 1024, promulgated by the CFPB pursuant to 12 U.S.C. §§ 2603-2605, 2607, 2609, 2617, 5512, 5532, and 5581).

The latest edition of Supervisory Highlights details exams between January 2014 and April 2016, which exams the Bureau claims revealed that mortgage servicers' use of obsolete technology platforms leads to consumer harm. While the report acknowledged that some members of the industry sufficiently have invested in new compliance technology platforms, it also challenged servicers with continued compliance issues to consider ways to use technology as a tool to address those issues.

"Mortgage servicers can't hide behind their bad computer systems or outdated technology. There are no excuses for not following federal rules," said CFPB Director Richard Cordray. "Mortgage servicers and their service providers must step up and make the investments necessary to do their jobs properly and legally."

The MSR requires that, under certain circumstances, if a servicer receives a loss mitigation application 45 days or more before a foreclosure sale, it must notify the borrower in writing within 5 days to acknowledge receipt of the application and provide the borrower with an opportunity to engage in the loss mitigation process.

CFPB examiners claim to have found multiple violations related to these process requirements, with one or more servicers failing to send any loss mitigation acknowledgement notices due to a repeated loss mitigation processing platform malfunction over a significant period of time. In addition, the examinations revealed some instances in which notices represented that homes would not be foreclosed on before the deadline passed for submitting missing documents, but the foreclosure proceeded before the deadline.

Deficiencies with regard to timeliness and content of the acknowledgement notices were also found, according to the report, including letters requesting documents that borrowers already submitted or insufficient specificity in listing the additional documentation borrowers needed to provide to complete an application.

The CFPB also purports to have found what it characterizes as deceptive and abusive practices concerning fees. Some servicer examinations found inadequate disclosure of fee amount and timing of assessment in proprietary loan modification agreements. The report did not say whether such information was provided to the borrower in other correspondence. The report also cited instances of loss mitigation offer letters sent with response deadlines that had already passed or were about to pass by the time the borrower received the letter. The CFPB ordered the affected servicers to correct these problems through remedial action.

As for loan modification denial notices, servicers are required by the MSR to provide the specific reason(s) for denying the borrower a trial or permanent loan modification. However, examinations found that denial notices at one or more servicers failed to state the correct reason(s) for the denial and one or more servicers sent notices stating "Not Available" as the reason for denying loss mitigation applications. Denial notices that failed to communicate a borrower's specific right to appeal a denial were also cited by examiners.

The policies, procedures, and requirements of some mortgage servicers also failed the scrutiny of the CFPB, with one or more servicers failing to provide accurate and timely information and documents in response to the borrower's requests for information about a mortgage loan, neglecting to properly evaluate a loss mitigation application for all options that a borrower might be eligible for, and not promptly identifying and facilitating communication with the successor in interest upon the death of a borrower.

Finally, as in past supervisory reports, the CFPB expressed a heightened concern about servicing transfers occurring in the middle of the default and loss mitigation stage. "While Supervision has observed more attention to pre-transfer planning by transferor and transferee servicers since 2014, Supervision found that at one or more servicers incompatibilities between servicer platforms led, in part, to transferees failing to identify and honor in-place loss mitigation after receiving the loans," the CFPB said.

Some borrowers who completed trial payments with a new servicer encountered substantial delays before receiving a permanent loan modification, examiners found, while one or more servicers failed to honor the terms of in-place trial modifications after transfer.

On a more positive note, the CFPB concluded by recognizing that some servicers have made "significant improvements" over the last several years, "by enhancing and monitoring their servicing platforms, staff training, coding accuracy, auditing, and allowing for greater flexibility in operations." The CFPB also praised servicers who are actively reviewing consumer complaints and creating complaint governance committees with a mandate to ensure appropriate attention to consumer concerns.

Such actions demonstrate that "improvements and investments in servicing technology, staff training, and monitoring can be essential to achieving an adequate compliance position," the CFPB wrote. To help mortgage servicers achieve compliance, the CFPB published an update to its Supervision and Examination Manual to provide additional guidance on what the CFPB will be looking for in future exams.

To read the CFPB's Supervisory Highlights report on mortgage servicers, click here.

To read the updated Supervision and Examination Manual, click here.

Why it matters

The CFPB's invocation of unfair, deceptive or abusive practices is still a relatively new phenomenon. Examining instances, like this one, where the CFPB does so (in a fee context), is always of interest to assist in guiding industry expectations for CFPB supervisory and enforcement action. The lesson from this report appears to be that technical compliance with the MSR is a necessary but not sufficient condition to avoid adverse examination findings.

The CFPB's continued emphasis on technology platform improvements, especially with regard to servicing transfers, should come as no surprise. But in this latest report, the CFPB was more specific about its expectations going forward: "A growing point of emphasis for Supervision in achieving needed improvements in servicer compliance will be to require servicers to submit specific and credible plans describing how changes in their information technology systems will offer assurance that they can systematically and effectively implement the changes made to resolve the issues identified by Supervision," according to the report.