With the release of the Mortgage Examination Procedures (the “Procedures”) by the Consumer Financial Protection Bureau (the “CFPB”), mortgage servicers now face even more uncertainty as to what does and does not constitute legally compliant servicing operations.
Mortgage servicers already know that the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) created the CFPB, which will function as the primary federal regulator for mortgage servicing. Mortgage servicers also recognize that the Dodd-Frank Act contains a litany of new mortgage servicing requirements, which will likely be augmented and expanded by the CFPB in regulations to be released later this year.
But not all mortgage servicers may realize that the CFPB provided critical information into what servicers can expect during future mortgage servicing examinations with the release of Version 1.0 of its examination procedures in October of 2011. And even fewer mortgage servicers may realize that the Procedures include requirements that extend beyond the prescriptive strictures of established federal laws to include less precise, judgment-based assessments that could present a sizable compliance challenge. The CFPB refers to this latter group of assessments as “Other Risks to Consumers.”
The Procedures – Examination Objectives
The CFPB makes clear that the Procedures are intended to accomplish four objectives during a mortgage servicing examination. These objectives are informative as the first three relate to potential or future violations of federal consumer financial law. Only the fourth objective mentions actual violations of federal law. The objectives are as follows:
1. To assess the quality of the regulated entity’s compliance risk management systems, including internal controls and policies and procedures, for preventing violations of federal consumer financial law in its mortgage servicing business.
2. To identify acts or practices that materially increase the risk of violations of federal consumer financial law in connection with mortgage servicing.
3. To gather facts that help determine whether a regulated entity engages in acts or practices that are likely to violate federal consumer financial law in connection with mortgage servicing.
4. To determine, in consultation with CFPB Headquarters, whether a violation of a federal consumer financial law has occurred and whether further supervisory or enforcement actions are appropriate.
If the CFPB is true to these objectives as stated, mortgage servicers can anticipate that examiners will want to gather more information than in past exams and will expand their testing beyond questions of compliance with relevant federal laws.
The Procedures – Modules and Alphabet Soup
The Procedures categorize the mortgage servicing examination protocol into three broad groupings: (1) Routine Servicing; (2) Default Servicing; and (3) Foreclosure. Each of these three groupings includes varying numbers of modules to be tested.
Routine Servicing
Module 1 Servicing Transfers, Loan Ownership Transfers, and Escrow Disclosures
Module 2 Payment Processing and Account Maintenance
Module 3 Customer Inquiries and Complaints
Module 4 Maintenance of Escrow Accounts and Insurance Products
Module 5 Credit Reporting
Module 6 Information Sharing and Privacy
Default Servicing
Module 7 Collections and Accounts in Bankruptcy
Module 8 Loss Mitigation
Foreclosure
Module 9 Foreclosures
Within each module, the CFPB lists those federal laws that will be tested. These federal laws include the familiar panoply of federal laws relevant to mortgage servicing:
The Procedures – “Other Risks to Consumers”
But the CFPB notes that “the examination process also will include assessing other risks to consumers that are not governed by specific statutory or regulatory provisions. These risks may include potentially unfair, deceptive, or abusive acts or practices (UDAAPs) with respect to servicers’ interactions with consumers.”
In other words, the CFPB is using its ability to regulate actions that are unfair, deceptive or abusive to further regulate mortgage servicer operations. Within each module, the CFPB specifies these “Other Risks to Consumers” (using this nomenclature), which presumably the CFPB views as potential UDAAP violations. The following lists these “Other Risks to Consumers” as contained in each module.
Module 1 - Servicing Transfers, Loan Ownership Transfers, and Escrow Disclosures
Servicing Transfers
1. Determine whether the servicer conducts adequate due diligence in connection with acquiring servicing rights to ensure that it does not misrepresent amounts owed after transfer of account servicing.
2. For loans subject to modification agreements and forbearance agreements:
a. Determine that the servicer has received executed copies of prior servicers’ modification agreements and forbearance agreements.
b. Determine whether the servicer is properly applying, after transfer, payments due under a loan modification agreement or other payment modification to which the prior servicer agreed.
c. Determine whether the servicer is charging amounts not due under a loan modification agreement or forbearance agreement.
3. For loans subject to negotiations related to modification agreements and forbearance agreements, determine whether the servicer receives adequate information about loan modifications or other foreclosure alternatives that were under discussion with the prior servicer. If the servicer does not receive system notes or other information documenting such discussions, assess and document the information that the servicer does receive.
Module 2 - Payment Processing and Account Maintenance
Payment Processing
1. Assess how the servicer uses suspense accounts in the time period before the servicer has provided the customer notice that the contract has been declared in default and the remaining payments due under the contract have been accelerated.
a. For loans that are not Daily Simple Interest Loans:
i. Determine the circumstances under which the servicer places payments into a suspense account. Determine whether the servicer informs consumers of these actions in a timely, clear, and understandable manner.
ii. Determine the servicer’s practices in connection with crediting amounts held in a suspense account, including whether the servicer leaves money in the suspense account without assessing whether the consumer has cumulatively made a payment of principal, interest, taxes and insurance (a “PITI” payment) and applying such a payment.
iii. Determine the servicer’s practices in connection with the use of funds in a suspense account, including whether the servicer pays late fees or default-related fees from suspense accounts before crediting those funds towards the PITI payment.
iv. Determine the circumstances under which the servicer sends back payments, including, if applicable, whether the servicer in a timely, clear, and understandable manner explains the reason a payment is sent back, and the future payment amount that would be accepted.
b. For Daily Simple Interest Loans: Determine whether the servicer promptly accepts and applies all borrower payments, including cure payments, trial modification payments, and payments by or on behalf of a borrower in bankruptcy while the case is pending, as well as non-conforming payments.
2. Determine whether the servicer credits payments toward principal and interest before it applies payments to fees and other charges.
Optional Products
1. Determine whether the servicer offers additional products or services (such as payment protection or credit protection) and, if so, which products and/or services the servicer offers.
2. Review marketing materials, whether they are telemarketing scripts, direct mail, Web-based, or other media, and determine whether each optional product’s costs and terms are clearly and prominently disclosed. If consumer complaints or document review indicates potential violations in these areas and the servicer engages in telemarketing, monitor call center activity, and statements of representatives marketing the products. If the servicer engages in web-based marketing, monitor Internet communications related to the marketing.
3. Determine whether the servicer added on optional products or services without obtaining explicit authorization from the consumer. If the servicer obtains written authorization, review records of customers who received additional products or services to ensure that written authorization has been provided and retained.
Fees
1. Determine the servicer’s practices in assessing attorney’s fees, property inspection fees, sheriff’s fees, publication fees, and other charges, including whether the servicer ensures that fees are only assessed when the activity or service actually takes place.
a. Determine the servicer’s practices in assessing foreclosure attorney’s fees, including whether these fees are assessed in stages to ensure that the servicer does not charge the entire fee for a foreclosure at the initial stage of the foreclosure referral before all of the charged services have been rendered.
b. Determine the servicer’s practices in connection with obtaining invoices for services rendered, for example determining whether it assesses charges when it has a valid invoice.
c. Determine whether the servicer assesses charges for estimated fees in connection with the reinstatement or payoff of a loan in foreclosure, including, if applicable, whether it:
i. Clearly and conspicuously explains the estimated fees; and
ii. For borrowers who reinstate or pay off the loan, (1) perform a timely reconciliation of the fees paid to ensure that all fees assessed were imposed for services that were valid and actually performed and (2) reimburses the borrower in the event of any overpayment, within a reasonable time, using reasonable efforts to update the borrower’s address.
d. Determine whether the servicer or any of its affiliates impose mark-ups on any third-party fees or insurance products without performing administrative work, quality control, or providing other services consistent with the mark-up.
2. Document the timing and frequency of fees, and determine whether the servicer has established reasonable intervals for repeat services.
Periodic Statements and Other Disclosures
1. Review sample periodic statements to ensure that information provided is clear and understandable. If the servicer uses general categories such as “other fees,” determine whether the reason for the fee is otherwise made clear.
2. Determine whether the servicer adequately informs the customer of the reason for any amounts due (particularly those other than PITI) in a timely manner.
3. Determine whether the servicer has adequate controls and an adequate data integrity program to ensure that information about amounts due and the loan’s status that is communicated to consumers is accurate and contains all material information.
4. Determine whether the factual assertions made in periodic statements and other communications to the borrower are accurate and contain all material information.
5. For any adjustable rate mortgage, determine whether the monthly payment amount stated on a periodic statement after an interest rate change is consistent with the consumer’s obligations under the note.
Payoff Statements
1. Determine whether, when calculating the payoff amount, the servicer includes late charges and fees owed in the payoff amount or instead deducts such fees and charges from the escrow account.
Module 3 - Customer Inquiries and Complaints
Identify all channels and physical locations the servicer provides for receipt of customer complaints and inquiries.
1. Evaluate the comprehensiveness of systems, procedures, and/or flowcharts for capturing, logging, tracking, handling, and reporting complaints and their resolutions.
2. Assess the effectiveness of any telephone line available for inquiries or complaints, including (a) whether it is toll-free, (b) the ease of accessing a live person, (c) the hold times, and (d) the call abandonment rates.
3. Assess the effectiveness of other means available for inquiries or complaints, including written submissions and any online portal.
4. Evaluate the servicer’s processes and speed for responses to consumer complaints. Review reports to management and the board of directors (or principals). Review the consumer complaint log(s), performance metrics, and exception/trend reports to determine whether consumer complaints are captured, correctly categorized, and are handled appropriately.
5. Determine if staffing levels are sufficient for volume. Then determine whether assumptions used for staffing determinations are validated or supported by analysis.
6. Listen to live calls and taped calls to assess the quality and training of call center personnel.
Module 4 - Maintenance of Escrow Accounts and Insurance Products
Maintenance of Escrow
1. Determine whether the customer incurred penalties or unnecessary charges in the event the servicer failed to make disbursements of escrow funds for insurance, taxes, and other charges with respect to the property in a timely manner.
2. Evaluate whether the servicer has established adequate procedures to ensure customers are not improperly assessed force-placed insurance, including the servicer’s procedures for notifying customers that the servicer needs evidence of insurance coverage.
3. Review the extent to which borrowers are provided with relevant information about force-placed insurance in a timely, accurate, and understandable manner. Review the servicer’s practices when borrowers fail to respond to such notices.
4. Determine whether the servicer cancels force-placed insurance when the customer provides adequate evidence of existing and sufficient insurance coverage.
5. Determine whether the servicer refunds insurance premiums and any related fees that were assessed for force-placed insurance coverage that ran concurrent with the customer’s existing insurance coverage.
6. Determine whether the servicer or any of its affiliates imposes mark-ups, or received commissions or other payments, related to any force-placed insurance products.
Module 5 - Credit Reporting
No “Other Risks to Consumers” Listed.
Module 6 - Information Sharing and Privacy
No “Other Risks to Consumers” Listed.
Module 7 - Collections and Accounts in Bankruptcy
FDCPA (as applicable)
1. Determine whether the servicer contacts borrowers in an appropriate manner:
a. Employees and third-party contractors clearly indicate to consumers that they are calling about the collection of a debt.
b. Employees and third-party contractors do not disclose the existence of a consumer’s debt to the public without the consent of the consumer, except as permitted by law.
c. The entity has policies on avoiding repeated telephone calls to consumers that annoy, abuse, or harass any person at the number called.
2. Determine whether the servicer’s representatives make misrepresentations or use deceptive means to collect debts.
3. Determine whether collections staff transfer borrowers to loss mitigation staff, in accordance with the institution’s policies and procedures, to discuss loss mitigation alternatives.
Bankruptcy
1. If the servicer does not perform an annual escrow analysis because of the bankruptcy, determine whether the borrower is notified of any escrow account deficiency or shortage.
2. For customers who have filed for bankruptcy, determine whether the servicer provides notice of fees or other amounts charged to the account to the debtor, the bankruptcy trustee, or the court during the pendency of the bankruptcy case.
3. Determine whether payments received from a bankruptcy trustee are properly applied to the customer’s account.
Module 8 - Loss Mitigation
Application Process
1. Determine whether information provided to consumers about loss mitigation alternatives is clear, prominent, and readily understandable.
2. Determine whether the servicer advises customers to stop payments in order to qualify for loss mitigation relief.
3. Determine whether the servicer is providing customers with accurate information throughout the loss mitigation process. If there are consumer complaints or other indications that the servicer is not providing customers with accurate information throughout the process, evaluate the servicer’s practices in the following areas:
a. Determine whether the servicer provides adequate methods for consumers to contact it for information about the loss mitigation process, and timely responds to those contacts.
b. Determine whether the servicer adequately documents its contacts with consumers regarding loss mitigation. Appropriate documentation of oral contacts includes the dates of communications, names of contact person(s), and a summary of the conversation.
c. If the servicer represents to consumers that it is accessible for intake of loss mitigation requests, including if it represents that it has a “single point of contact” system in place, evaluate whether consumers can readily access the servicer’s representatives and obtain complete responses.
d. Determine whether the servicer has procedures in place to ensure all paperwork is collected and tracked in an efficient and reliable manner.
e. Determine whether the servicer is providing customers with timely information on the status of loan modifications and other foreclosure alternatives.
f. Determine whether the servicer is accurately applying its procedures for evaluating customers for foreclosure alternatives, including compliance with Home Affordable Modification Program requirements, if applicable.
g. Determine whether any collection contacts occurring during the loss mitigation process acknowledge the loss mitigation process and avoid UDAAPs. In particular, determine whether collections staff transfer borrowers to loss mitigation staff, in accordance with the institution’s policies and procedures, to discuss loss mitigation alternatives.
h. If the servicer denies the customer’s application for loan modification, determine whether it provides the customer with timely notice of rejection as well as the rationale and any other options that may be available to the consumer.
i. Evaluate the servicer’s training programs for employees involved in the loan modification process.
4. Determine whether the servicer discloses all fees associated with modifications in a timely, prominent, and understandable manner.
Consequences of Loss Mitigation
1. Determine whether the servicer discloses any rescheduling of payments that may occur under an existing obligation in a clear, prominent, and understandable manner.
2. Determine whether the servicer discloses any negative consequences that may occur as a result of the borrower’s failing to make payments during the loss mitigation process.
3. Determine whether the servicer discloses any material negative consequences that may occur as a result of a completed loan modification (e.g., decreased credit score, income tax implications if principal reduction is offered, and any increase in monthly payment amount).
4. Determine whether the servicer discloses future changes in the modified loan terms (e.g., with respect to any principal forbearance or temporary interest rate reductions).
5. Determine if the servicer includes any waiver of legal rights in its loan modification or other foreclosure alternative agreements.
Short Sales
1. If the servicer is offering short sales as a loss mitigation tool, determine whether it provides clear, timely disclosures to the customer about the process.
2. If the servicer demands deficiency payments upon agreeing to a short sale to recoup any principal not recovered through the short sale, determine whether the servicer discloses in a clear, prominent, and understandable manner that it or an investor will demand a deficiency payment or related cash contribution and the approximate amount of that deficiency.
Deeds-In-Lieu of Foreclosures
1. If the servicer offers deeds-in-lieu of foreclosures, determine whether it provides clear, timely disclosures about requirements and cost to the customer.
Module 9 Foreclosures
Referrals to Foreclosure
1. Evaluate the servicer’s process for determining whether to refer a loan to foreclosure. Determine whether the servicer has reviewed adequate information to confirm the borrower’s default, including the borrower’s loan history, notes in the servicing system regarding borrower communications, whether the borrower is entitled to protection from foreclosure under applicable law, and any complaints lodged with the servicer.
2. Determine whether the servicer has referred to foreclosure, or foreclosed upon, any customer who is current or not seriously delinquent.
Dual Tracking
1. Determine whether the servicer has foreclosed on any customers paying on a trial modification agreement, permanent modification agreement, forbearance agreement, or other similar agreement.
2. Determine whether the servicer has foreclosed on any customer with whom the servicer had agreed to a modification agreement, forbearance agreement, or other similar agreement, but the first payment was not yet due.
3. Determine whether the servicer has proceeded with foreclosure without giving customers an adequate opportunity for consideration for a foreclosure alternative, or has foreclosed on any customer who has a modification or forbearance agreement request pending.
Accuracy of Filings
1. Determine whether the factual assertions made in foreclosure documents filed by or on behalf of the financial institution are accurate and adequately supported by file documentation. Examiners should focus on whether the borrower is in default and statements regarding amounts owed.
2. Determine whether affiants have reviewed adequate information to confirm the right to foreclose, including required ownership documentation.
3. Determine under what circumstances the servicer files a lost note affidavit instead of filing the note in a foreclosure action.
Walkaways
1. Evaluate the servicer’s process for informing consumers about changes in the foreclosure process, including decisions not to go forward.
With the publication of these “Other Risks to Consumers” in the mortgage servicing examination procedures, the CFPB has forewarned mortgage servicers as to what they can expect from future CFPB examinations. Those mortgage servicers who address operational inconsistencies with these “Risks” in advance of a CFPB examination will fare much better than those who do not.
Jeffrey L. King is a partner in the Ashland, Virginia office of Hudson Cook, LLP. Jeff can be reached at 804-752-7030 or by email at jking@hudco.com.
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