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The Dodd-Frank Wall Street Reform and Consumer Protection Act contains numerous provisions that will affect how a mortgage loan servicer will service a residential mortgage loan. Some of those provisions are specifically called out in the Act including the aptly titled “Mortgage Servicing” provision in Section E of Title XIV. However, not all of the Act’s provisions affecting mortgage servicers are so readily apparent. In this article, we will provide a brief overview of those provisions that are obvious in their applicability to mortgage servicers and those that are not so obvious.

Subtitle B Minimum Standards for Mortgages

Servicing Disclosures: Section 1418 adds Section 128A to the Truth In Lending Act (“TILA”) and 1420 amends Section 128 of TILA. Under these Sections servicers are required to provide borrowers additional servicing statements. Section 1418 requires a servicer to provide an adjustment notice for “hybrid adjustable mortgage loans,” which means a loan secured by the consumer’s principal dwelling with a fixed interest rate for an introductory period that adjusts or resets to a variable interest rate thereafter, either in the seventh month before the reset date or at consummation, whichever is later. The notice cannot be combined with any other correspondence and must include:

• The index or formula used in making the adjustment;
• An explanation of how the new interest rate and payment are determined, including an explanation of how the index was adjusted, such as by the addition of a margin;
• A good faith estimate of the amount of the monthly payment that will be due after the adjustment and the assumptions on which the estimate is based;
• A list of alternatives the consumer may pursue before the adjustment and descriptions of what the customer must do to pursue these alternatives, including: refinancing; renegotiation of loan terms; payment forbearance, and Pre-foreclosure sale;
• The names, addresses, telephone numbers and Internet addresses of counseling agencies or programs available to the consumer; and
• The address, telephone number and Internet address for the appropriate state housing finance authority.

Section 1420 requires a servicer to provide to the obligor of a residential mortgage loan a statement for each billing cycle, which provides, as applicable, the following items in a conspicuous and prominent manner:

• The principal amount;
• The current interest rate;
• The date of the next rate adjustment;
• The amount of any prepayment fee to be charged;
• A description of any late payment fee;
• A telephone number and Internet address to obtain information regarding the mortgage;
• The names, addresses, telephone numbers, Internet address of counseling agencies and programs; and
• Such other information as the Board of Governors of the Federal Reserve (“Board”) may require.

This requirement does not apply to any fixed rate loan provided that the consumer receives a coupon book with substantially the same information.

Subtitle C High-Cost Mortgages

Servicing of High Cost Loans: Section 1432 of the Act amends Section 129 of TILA. This Section limits certain practices in connection with a high-cost mortgage loan, including the collection of late fees, the circumstances under which a high-cost mortgage maybe accelerated, a prohibition of assessing modification or deferral fees, restrictions on the assessment of payoff statement fees, and the timing for the delivery of a payoff statement to a borrower.

Subtitle D Office of Housing Counseling

Default And Foreclosure Database: Section 1447 of the Act requires the Secretary of Housing and Urban Development (“HUD”) and the Director of the new Bureau of Consumer Financial Protection (the “Bureau”) to work with other federal financial regulatory agencies to establish and maintain a database of default and foreclosure information for residential 1 to 4 family mortgage loans and make such information available to the public. The information collected and made available through the database will include the number and percentage of subject mortgage loans that: are delinquent by more than 30 days; are delinquent by more than 90 days; are REOs; are in the foreclosure process; and have an outstanding principal obligation amount that is greater than the value of the property for which the loan was made. The database may also include such other information as HUD and the Bureau consider appropriate.

Foreclosure Rescue Scam Notice: Section 1452 of the Act requires the Neighborhood Reinvestment Corporation, in consultation with residential mortgage loan services, to inform delinquent borrowers of the dangers of fraudulent activities associated with foreclosure. Delinquent borrowers will be provided a notice, presumably by the servicer, to inform them that: the foreclosure process is complex and can be confusing; the borrower may be approached during the foreclosure process by persons regarding saving their home and they should use caution in any such dealings; and there are federal government and nonprofit agencies that may provide information about the foreclosure process, including HUD; they should contact their lender immediately, contact HUD to find a HUD certified housing counseling agency to assist in avoiding foreclosure, or visit HUD’s website regarding tips for avoiding foreclosure. The notice will also provide the telephone number of the loan servicer or successor, the telephone number of HUD’s housing counseling line, and HUD website addresses for housing counseling and for tips for avoiding foreclosure.

Subtitle E Mortgage Servicing

Mandatory Escrow Accounts: Section 1461 of the Act adds Section 129D to TILA. Under this Section, creditors are required to establish and maintain escrow accounts for the payment of taxes, hazard insurance, and, as applicable, flood insurance, mortgage insurance, ground rents, and any other required periodic payments or premiums relating to the property or the loans terms on any consumer credit transaction secured by a first lien on a consumer’s principal dwelling where:

• State law or federal law requires such accounts;
• The loan is made, guaranteed or insured by a state or federal government agency;
• The original principal amount does not exceed the conventional loan limit, as of the date the interest rate is set, and the APR exceeds the average prime offer rate by 1.5 or more percentage points;
• The original principal amount exceeds the conventional loan limit, as of the date the interest rate is set, and the APR exceeds the average prime offer rate by 2.5 or more percentage points; or
• Escrow is required by a yet undefined “regulation.”

Mandatory escrow accounts must be maintained for a minimum of five years except where: the borrower has sufficient equity so that PMI is no longer required; the borrower is delinquent; the borrower is otherwise noncompliant with the loan agreement, as established by a yet undefined “rule;” or the underlying mortgage is terminated.

Mandatory escrow accounts are not required for open-end loans, reverse mortgages, loan secured by shares in a cooperative, condominiums where the condominium is covered by a master insurance policy, and other specific circumstances that the Board may establish by regulation.

Section 1461 provides certain requirements for mandatory escrow accounts, including, among other things, that they must be established in a federally insured depository institution or credit union and must be administered in accordance with the Real Estate Settlement Procedures Act (“RESPA”), the Flood Disaster Protection Act, and applicable state law. Further, creditors must pay interest on deposits held in escrow accounts if required by federal or state law. Section 1462, which adds a subsection to Section 129D to TILA, requires certain disclosures where an escrow account is not established in connection with a consumer credit transaction secured by real property, or if the consumer elects to close an escrow account after one has been established. The creditor or servicer must provide an escrow waiver disclosure that states: the applicable fees or costs associated with not having an escrow account; a clear and prominent statement that the consumer is responsible personally and directly for paying the non-escrowed items, in addition to paying the mortgage payment and the fact that costs for taxes, insurance and related fees can be substantial; a clear explanation of the consequences of failing to pay non-escrowed items, including the possible requirement for the forced placement of insurance and the potentially higher cost (including any potential commission payments to the servicer) or reduced coverage; and such other information that the Board may require.

Servicer Prohibitions: Section 1463 of the Act amends Section 6 of the RESPA. Under this Section servicers of federally related mortgages are prohibited from:

• Force-placing insurance unless there is a reasonable basis to believe the borrower has failed to maintain required property insurance;
• Charging fees for responding to valid qualified written requests;
• Failing to respond timely to borrower’s requests to correct errors related to allocation of payments, final payoff balances, or other standard servicer’s duties;
• Failing to respond within 10 business days to a borrower request for the identity or contact information of the owner or assignee of the loan; and
• Failing to comply with any other obligation prescribed by the Bureau

Section 1463 also provides certain requirements for force-placing insurance on federally related mortgage loans, including that a servicer must send to the borrower, before imposing a charge for force-placed insurance, two written notices at least 30-days apart that: explain the borrower’s obligation to maintain hazard insurance; state that the servicer does not have evidence of the required insurance; explain to the borrower in a clear and conspicuous statement how to provide such evidence to the servicer; and state that the servicer may obtain such coverage at the borrower’s expense if the borrower does not provide evidence of coverage in a timely manner. Section 1463 prohibits a servicer from imposing a charge for force-placed insurance until 15 days after the second notice was sent and imposing a charge for force-placed insurance that is not bona fide and reasonable. Further, a servicer must accept any reasonable form of written confirmation of insurance coverage from a borrower that either includes the insurance policy number and the contact information for the insurance company or agent or otherwise meets the requirements of the Bureau and must, within 15 days of receiving evidence of insurance coverage from the borrower, terminate the force-placed insurance and refund any force-placed insurance premiums the borrower paid during the time the borrower’s insurance coverage was in effect, and any related fees.

Note that Section 1463 also shortens the timeframe that a servicer has to respond to a qualified written request. Specifically, the time period to acknowledge a qualified written request is shortened from 20 days to five days and the time period to make any corrections in response to a qualified written request or to provide the borrower with a written explanation are shortened from 60 days to 30 days; provided, however, that the 30 day period may be extended by 15 days if the servicer notifies the borrower before the end of the 30-day period and provides the reason for the delay in responding.

Crediting of Payments and Payoff Statements. Section 1464 of the Act adds Sections 129F and 129G to TILA. Under this Section, with respect to a consumer credit transaction secured by a consumer’s principal dwelling, a servicer must credit a loan payment on the date of receipt unless a delay in crediting does not result in a charge or the reporting of negative information to a consumer reporting agency, except where a servicer provides particular payment requirements to the consumer in writing, which the consumer does not follow and the servicer nevertheless accepts the payment, then the servicer must credit the payment as of five days after receipt. Section 1464 further provides that a servicer of a “home loan” must send an accurate payoff balance no more than 7 business days after the receipt of a written request from the borrower.

Subtitle G Mortgage Resolution and Modification

Home Affordable Modification Program. Section 1482 of the Act directs the Secretary of the Treasury to revise the Supplemental Directives and other guidelines for the Home Affordable Modification Program (“HAMP”) to require release of information related to the net present value (“NPV”) analysis. Participating mortgage servicers will be required to provide each borrower who has been denied a HAMP modification with all borrower-related and mortgage-related input data used in the NPV calculation. The NPV data must be provided to the borrower at the time of denial.

Treasury must also establish and maintain a website that has a calculator for the NPV analysis, based on Treasury’s methodology for calculating the NPV, that borrowers can use to enter their information and that provides a determination of whether the mortgage would be accepted or rejected for a HAMP modification. Treasury will also be required to provide additional information on this website, including the NPV methodology and computer models as well as non-proprietary variables.

Section 1483 requires Treasury to further revise HAMP guidelines to require that data collected by Treasury from each participating mortgage servicer or lender be made publicly available within 14 days after each monthly deadline for submission of data. The data reported will include the number of modification requests received, processed, approved and denied. Within 60 days after the monthly submission deadline, Treasury will be required to make the data tables available to the public at the individual record level. Treasury is charged with writing regulations for the disclosure procedures and protection of the borrower’s privacy interests.

Tenant Protections. Section 1484 of the Act amends the Protecting Tenants at Foreclosure Act (“Tenant Act”) by clarifying that the date of a notice of foreclosure is deemed to be the date on which complete title to a property is transferred to a successor entity or person as a result of a court order or pursuant to provisions in a mortgage or deed of trust. Further, Section 1484 extends the Tenant Act, which was originally scheduled to sunset on December 31, 2012, for an additional 2 years.

Subtitle H Miscellaneous Provisions

Emergency Mortgage Relief. Section 1496 makes funds available to HUD for emergency mortgage assistance. Borrowers will be able to request amounts required to reasonably supplement the amount the homeowner is capable of contributing toward the mortgage payment. The assistance may not exceed $50,000.

Dana Frederick Clarke is a partner in the California office of Hudson Cook, LLP. Basis Points readers can reach Dana at 714-263-0427 or by email at dclarke@hudco.com.

Lisa C. Delessio is a partner in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Lisa at 410-865-5437 or by email at ldelessio@hudco.com.