On January 17, 2013, the Consumer Financial Protection Bureau ("CFPB") issued final rules (the "Final Rules") detailing national mortgage servicing standards.1 The Final Rules implement the mortgage servicing provisions set forth in Title XIV of 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.
The Final Rules are designed "... to improve the information consumers receive from their servicers, enhance the protections available to consumers to address servicer errors, and to establish some baseline servicing requirements that will provide additional protections for consumers who have fallen behind on their mortgage payments."
The Final Rules supersede the comprehensive proposed rules (the "Proposed Rules") in the nature of national servicing standards applicable to servicers of residential mortgage loans that the CFPB published on August 10, 2012.2 The Proposed Rules, which expanded upon a preliminary proposal released in summary form in April 2012, sought to amend Regulation X, which implements the Real Estate Settlement Procedures Act ("RESPA"), and Regulation Z, which implements the Truth in Lending Act ("TILA").
The Final Rules are set forth in two separate notices: one to amend Regulation X, and one to amend Regulation Z. The effective date for both of these rules is January 10, 2014. Consistent with the CFPB's Proposed Rules, the Final Rules cover nine major topics, as summarized below, as well as certain other technical and streamlining amendments.
Prior to the financial crisis, the servicing of mortgage loans was not required to be performed using uniform standards. In certain instances, servicers were inadequately compensated and were unable to devote adequate resources to loss mitigation matters. The result was often a varied approach among servicers with respect to servicing standards. The advent of the Final Rules will promote more uniformity in servicing standards that will not diverge from transaction-to-transaction or servicer-to-servicer. The implementation of these new servicing standards will be expensive and will be far more personnel-intensive than in the past. Understandably, that cost will be passed through to borrowers directly or indirectly.
Summary of The Final Rules
"Small Servicer" Exemption
The Final Rules include a number of exemptions and other adjustments for small servicers. In a departure from the definition set forth in the Proposed Rules, in an effort to reduce regulatory burden, the Final Rules define a "small servicer" as one that services 5,000 mortgage loans or less and only services mortgage loans that it, or an affiliate, owns or originated. Previously, the Proposed Rules defined "small servicers" as those that serviced 1,000 or fewer mortgages. The CFPB asserts that the new "small servicer" definition will cover substantially all of the community banks and credit unions that are involved in servicing mortgages, and thereby reduce burdens for "... institutions that have strong, consumer service safeguards already built into their business models."
Regulation X Final Rule
The Regulation X final rule implements Dodd-Frank Act sections addressing servicers' obligations to correct errors asserted by mortgage loan borrowers; to provide certain information requested by such borrowers; and to provide protections to such borrowers in connection with force-placed insurance. Additionally, this final rule addresses servicers' obligations to establish reasonable policies and procedures to achieve certain delineated objectives; to provide information about mortgage loss mitigation options to delinquent borrowers; to establish policies and procedures for providing delinquent borrowers with continuity of contact with servicer personnel capable of assisting such borrowers with loss mitigation efforts and other functions; and to evaluate borrowers' applications for available loss mitigation options. Further, this final rule modifies and streamlines certain existing servicing-related provisions of Regulation X.
Regulation Z Final Rule
The Regulation Z final rule implements Dodd-Frank Act sections addressing initial rate adjustment notices for adjustable-rate mortgages, periodic statements for residential mortgage loans, prompt crediting of mortgage payments, and responses to requests for payoff amounts. This final rule also amends current rules governing the scope, timing, content, and format of disclosures to consumers regarding the interest rate adjustments of their variable-rate transactions.
The Nine Major Topics Addressed by the Final Rules
- Periodic billing statements. Creditors, assignees, and servicers must provide a clearly written periodic statement for each billing cycle that is easy for a borrower to understand containing, among other things, information on payments currently due and previously made, fees imposed, transaction activity, application of past payments, contact information for the servicer and housing counselors, and, where applicable, information regarding delinquencies. These statements must meet the timing, form, and content requirements provided in the rule. The rule contains sample forms that may be used. The periodic statement requirement generally does not apply to fixed-rate loans if the servicer provides a coupon book, so long as the coupon book contains certain information specified in the rule and certain other information specified in the rule is made available to the consumer. The rule also includes an exemption for small servicers as defined above.
- Interest-rate adjustment notices for ARMs. Creditors, assignees, and servicers must provide a consumer whose mortgage has an adjustable rate with a notice between 210 and 240 days prior to the first payment due after the rate first adjusts. This notice may contain an estimate of the new rate and new payment. Creditors, assignees, and servicers also must provide a notice between 60 and 120 days before payment at a new level is due when a rate adjustment causes the borrower's payment to change. The current annual notice that must be provided for ARMs for which the interest rate, but not the payment, has changed over the course of the year is no longer required. The rule contains model and sample forms that servicers may use.
- Prompt payment crediting and payoff statements. Servicers must promptly credit periodic payments from borrowers as of the day of receipt. A periodic payment consists of principal, interest, and escrow (if applicable). If a servicer receives a payment that is less than the amount due for a periodic payment, the payment may be held in a suspense account. When the amount in the suspense account covers a periodic payment, the servicer must apply the funds to the consumer's account. In addition, creditors, assignees, and servicers must provide an accurate payoff balance to a consumer no later than seven business days after receipt of a written request from the borrower for such information.
- Force-placed insurance. Servicers are prohibited from charging a borrower for force-placed insurance coverage unless the servicer has a reasonable basis to believe the borrower has failed to maintain hazard insurance and the servicer has provided required notices to the borrower. An initial notice must be sent to the borrower at least 45 days before charging the borrower for force-placed insurance coverage, and a second reminder notice must be sent no earlier than 30 days after the first notice and at least 15 days before charging the borrower for force-placed insurance coverage. The rule contains model forms that servicers may use. If a borrower provides proof of hazard insurance coverage, the servicer must cancel any force-placed insurance policy and refund any premiums paid for overlapping periods in which the borrower's hazard insurance coverage was in place. The rule also provides that charges related to force-placed insurance (other than those subject to State regulation as the business of insurance or authorized by Federal law for flood insurance) must be for a service that was actually performed and must bear a reasonable relationship to the servicer's cost of providing the service. Where the borrower has an escrow account for the payment of hazard insurance premiums, the servicer is prohibited from obtaining force-place insurance where the servicer can continue the borrower's homeowner insurance, even if the servicer needs to advance funds to the borrower's escrow account to do so. The rule against obtaining force-placed insurance in cases in which hazard insurance may be maintained through an escrow account exempts small servicers as defined above so long as any force-placed insurance purchased by the small servicer is less expensive to a borrower than the amount of any disbursement the servicer would have made to maintain hazard insurance coverage.
- Error resolution and information requests. Servicers are required to meet certain procedural requirements for responding to borrowers' written information requests or complaints of errors. The rule requires servicers to comply with the error resolution procedures for certain listed errors as well as any error relating to the servicing of a mortgage loan. Servicers may designate a specific address for borrowers to use. Servicers generally are required to acknowledge the request or notice of asserted error within five days. Servicers also generally are required to correct the error asserted by the borrower and provide the borrower written notification of the correction, or to conduct an investigation and provide the borrower written notification that no error occurred, within 30 to 45 days. Further, within a similar amount of time, servicers generally are required to acknowledge borrower written requests for information and either provide the information or explain why the information is not available.
- General servicing policies, procedures, and requirements. Servicers are required to establish policies and procedures reasonably designed to achieve objectives specified in the rule. The reasonableness of a servicer's policies and procedures takes into account the size, scope, and nature of the servicer's operations. Examples of the specified objectives include accessing and providing accurate and timely information to borrowers, investors, and courts; properly evaluating loss mitigation applications in accordance with the eligibility rules established by investors; facilitating oversight of, and compliance by, service providers; facilitating transfer of information during servicing transfers; and informing borrowers of the availability of written error resolution and information request procedures. In addition, servicers are required to maintain certain documents and information for each mortgage loan in a manner that enables the servicers to compile it into a servicing file within five days. This section includes an exemption for small servicers as defined above. The Bureau and the prudential regulators will be able to supervise servicers within their jurisdiction to assure compliance with these requirements, but there will not be a private right of action to enforce these provisions.
- Early intervention with delinquent borrowers. Servicers must establish or make good faith efforts to establish live contact with borrowers by the 36th day of their delinquency and promptly inform such borrowers, where appropriate, that loss mitigation options may be available. In addition, a servicer must provide a borrower a written notice with information about loss mitigation options by the 45th day of a borrower's delinquency. The rule contains model language servicers may use for such written notice. This section includes an exemption for small servicers as defined above.
- Continuity of contact with delinquent borrowers. Servicers are required to maintain reasonable policies and procedures with respect to providing delinquent borrowers with access to personnel to assist them with loss mitigation options where applicable. The policies and procedures must be reasonably designed to ensure that a servicer assigns personnel to a delinquent borrower by the time a servicer provides such borrower with the written notice required by the early intervention requirements, but in any event, by the 45th day of a borrower's delinquency. These personnel should be accessible to the borrower by phone to assist the borrower in pursuing loss mitigation options, including advising the borrower on the status of any loss mitigation application and applicable timelines. The personnel should be able to access all of the information provided by the borrower to the servicer and provide that information, when appropriate, to those responsible for evaluating the borrower for loss mitigation options. This section includes an exemption for small servicers as defined above. The Bureau and the prudential regulators will be able to supervise servicers within their jurisdiction to assure compliance with these requirements, but there will not be a private right of action to enforce these provisions.
- Loss Mitigation Procedures. Servicers are required to follow specified loss mitigation procedures for a mortgage loan secured by a borrower's principal residence. If a borrower submits an application for a loss mitigation option, the servicer is generally required to acknowledge the receipt of the application in writing within five days and inform the borrower whether the application is complete and, if not, what information is needed to complete the application. The servicer is required to exercise reasonable diligence in obtaining documents and information necessary to complete the application.
For a complete loss mitigation application received more than 37 days before a foreclosure sale, the servicer is required to evaluate the borrower, within 30 days, for all loss mitigation options for which the borrower may be eligible in accordance with the investor's eligibility rules, including both options that enable the borrower to retain the home (such as a loan modification) and non-retention options (such as a short sale). Servicers are free to follow "waterfalls" established by an investor to determine eligibility for particular loss mitigation options. The servicer must provide the borrower with a written decision, including an explanation of the reasons for denying the borrower for any loan modification option offered by an owner or assignee of a mortgage loan with any inputs used to make a net present value calculation to the extent such inputs were the basis for the denial. A borrower may appeal a denial of a loan modification program so long as the borrower's complete loss mitigation application is received 90 days or more before a scheduled foreclosure sale.
The rule restricts "dual tracking," where a servicer is simultaneously evaluating a consumer for loan modifications or other alternatives at the same time that it prepares to foreclose on the property. Specifically, the rule prohibits a servicer from making the first notice or filing required for a foreclosure process until a mortgage loan account is more than 120 days delinquent. Even if a borrower is more than 120 days delinquent, if a borrower submits a complete application for a loss mitigation option before a servicer has made the first notice or filing required for a foreclosure process, a servicer may not start the foreclosure process unless:
- The servicer informs the borrower that the borrower is not eligible for any loss mitigation option (and any appeal has been exhausted),
- A borrower rejects all loss mitigation offers, or
- A borrower fails to comply with the terms of a loss mitigation option such as a trial modification.
If a borrower submits a complete application for a loss mitigation option after the foreclosure process has commenced but more than 37 days before a foreclosure sale, a servicer may not move for a foreclosure judgment or order of sale, or conduct a foreclosure sale, until one of the same three conditions has been satisfied. In all of these situations, the servicer is responsible for promptly instructing foreclosure counsel retained by the servicer not to proceed with filing for foreclosure judgment or order of sale, or to conduct a foreclosure sale, as applicable.
This section includes an exemption for small servicers as defined above. However, a small servicer is required to comply with two requirements:
- A small servicer may not make the first notice or filing required for a foreclosure process unless a borrower is more than 120 days delinquent, and
- A small servicer may not proceed to foreclosure judgment or order of sale, or conduct a foreclosure sale, if a borrower is performing in accordance with the terms of a loss mitigation agreement.
All of the provisions in the section relating to loss mitigation can be enforced by individuals. Additionally, the Bureau and the prudential regulators can also supervise servicers within their jurisdiction to assure compliance with these requirements.
SNR Denton Observations
As highlighted in our discussion of the Proposed Rules, the Final 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. This could potentially translate into a long-term benefit to servicers insofar as the Final Rules would reduce the patchwork of state laws with which servicers must comply in addition to the federal requirements. At the same time, however, the Final Rules are a floor, not a ceiling: states may adopt servicer requirements that are even more stringent and afford greater protection to consumers than those set forth in the Final Rules.
In light of the prohibition on "dual tracking," it will be far more difficult and time-consuming to foreclose on a delinquent borrower, further complicating a trend at the state level of delaying the foreclosure process. This will likely be the case even if the borrower has vacated the property, but is nonetheless communicating with the servicer regarding loss mitigation opportunities. In our view, further extending an already cumbersome foreclosure procedure could retard the residential housing recovery, as well as unjustly reward delinquent borrowers who in many instances have not made a mortgage payment in years.
The Final Rules establish a baseline set of servicing standards that in many respects mirror the national foreclosure settlement guidelines, and also some of the recent settlement provisions respecting foreclosure processes laid out by the Federal Reserve and the Office of the Comptroller of the Currency.
While enforcement of the new servicing standards will be mostly through the CFPB and enforcement agencies, there exists a private right of action for violations of several provisions, such as dual tracking and early intervention/loss mitigation procedures.
At the direction of the Federal Housing Finance Agency, Fannie Mae and Freddie Mac adopted a new Servicing Alignment Initiative on January 8, 2013. On first read, this new GSE initiative appears to be comparable to the final mortgage servicing rules. However, the compliance burden for servicers of GSE-owned loans will be greater to the extent that there are any inconsistencies. (The same point applies for FHA-insured loans.) For example, the Servicing Alignment Initiative requires single tracking up to the date of foreclosure referral or the 120th day of delinquency, whichever is earlier, and requires servicers to conduct a formal review to confirm that the borrower has been considered for foreclosure alternatives.
Some provisions of the Final Rules may be subject to future revision as the industry carries out the requirements of the rule. Although the CFPB increased the threshold for exempting from most of the rule small servicers that service their own or an affiliate's loans (from 1000 to 5000 loans per year), groups representing small servicers had sought an exemption based on asset size that would result in a larger exemption. For example, the Credit Union National Association had sought an exemption for small servicers with $50 million or less in assets, regardless of the number of loans serviced per year.
The Final Rules do not completely address the force-placed insurance issues, likely due to the limits on the CFPB's authority to regulate inasmuch as the CFPB cannot regulate insurance. Notably, the rule prevents some activities that are already barred, such as requiring refunds of payments for overlapping coverage, while not addressing others, such as backdating of insurance policies.
1 Bureau of Consumer Financial Protection, Mortgage Servicing Rules under the Real Estate Settlement Procedures Act (Regulation X), RIN 3170-AA14 (January 17, 2013); Bureau of Consumer Financial Protection, Mortgage Servicing Rules under the Truth in Lending Act (Regulation Z), RIN 3170-AA14 (January 17, 2013).
2 Bureau of Consumer Financial Protection, 2012 Real Estate Settlement Procedures Act (Regulation X) Mortgage Servicing Proposal, RIN 3170-AA14 (August 10, 2012); Bureau of Consumer Financial Protection, 2012 Truth in Lending Act (Regulation Z) Mortgage Servicing Proposal, RIN 3170-AA14 (August 10, 2012).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.