The New York Superintendent of Banks issued a new emergency regulation, 3 N.Y.C.R.R. Part 419, governing mortgage servicing that is effective October 1, 2010. While the regulation will expire on October 27, 2010, the Superintendent is expected to reissue the regulation at that time. A substantial effort is also being made to delay the effective date of the regulation, which effort may have succeeded by the time this article is published.
Scope. Part 419 applies to any person engaging in servicing mortgage loans in New York whether or not the person is registered or required to be registered under New York Banking Law Article 12-D. This means that “exempt organizations” (e.g., state or national banks or thrifts, among others) that service mortgage loans must comply with the new regulation even if they are exempt from licensing or registration under the law.
The definition of “mortgage loan” is very broad, covering consumer purpose loans, secured by either a mortgage or deed of trust on residential real property, or a security interest in a “cooperative interest.” “Servicing mortgage loans” means receiving any scheduled periodic payments from a borrower, and making the payments to the owner of the loan or other third parties. In the case of a home equity conversion mortgage or reverse mortgage, servicing includes making payments to the borrower. Since “servicing” requires both receiving payments and passing those payments on to the “owner” of the loan, a lender servicing its own loans technically should not be subject to Part 419. A word of caution: A lender who has sold a mortgage, servicing retained (e.g., to Fannie Mae), would be subject to the new regulation since the lender/servicer does not “own” the loan. Also, the Banking Department has informally stated that the Department has not arrived at a “consensus position” as to whether a lender servicing its own portfolio is covered. This may change by the Basis Points publication date.
Servicer duty of fair dealing. The regulation establishes a servicer’s duty of good faith and fair dealing in its communications, transactions, and course of dealings with each borrower. The regulation lists activities that are subject to good faith and fair dealing standards (§ 419.2), then provides details of actions servicers must take to comply with those standards. The regulation also requires compliance with federal laws and regulations (§ 419.3), making the failure to do so a violation of the new regulation.
Consumer complaints and inquiries. A servicer must establish procedures and systems to respond to and resolve borrower inquiries and complaints promptly and appropriately, including designating a customer service department with a toll-free telephone number or collect calling service. (§ 419.4)
Clear and conspicuous disclosure: A servicer also must clearly and conspicuously disclose (1) with its welcome packet to borrowers, (2) with each periodic billing statement, including as applicable either the monthly mortgage statement or annual coupon book, and (3) with each annual statement:
Respond to written request: Within 10 days of receiving a request in writing from a borrower or the borrower’s authorized representative, a servicer must provide the borrower with the name, address, phone number or email address, if available, and other relevant contact information for the owner or assignee of the mortgage loan.
Escrow accounts. A servicer must pay taxes and insurance premiums on time and must disclose any payments from escrow clearly and conspicuously in the next periodic statement provided to the borrower. The regulation includes additional substantive and disclosure requirements with respect to escrow accounts (see § 419.5).
With limited exception, servicers must credit payments on the business day they are received, or must treat them as credited on that day. For loans originated after January 1, 2010, the payments must be credited to the interest and principal due before crediting the payments to taxes, insurance, or fees. The servicer may establish reasonable requirements for conforming payments. The regulation states that a cut-off time of 5 p.m. for receipt of a mailed check at the servicer-specified location would be considered reasonable. The new regulation also addresses non-conforming payments, application of late payments, special requirements for servicers who follow a “scheduled due date” accounting method, and requires a “notice of noncredit” (servicer must give reason when payment is not credited or treated as credited by the due date or within 30 days from the date of receipt, whichever is earlier). A servicer must also establish written policies and procedures for determining the handling of payment overages and shortages. (See § 419.6).
Statement of account and payment histories. At least once annually, within 30 days of the end of the computation year, a servicer must deliver to the borrower a plain language statement of the borrower’s account showing:
The annual escrow statement may be provided separately from the annual statement showing the unpaid principal and interest paid.
Within 30 days of receipt of a request, a servicer must deliver to the borrower a payment history for the last 36 months (unless a different period is requested) showing the date and amount of all payments made or credited to the account and the total unpaid balance. The servicer has 60 days where the request is for a payment history period longer than the last 36 months. A servicer may not charge a fee to the borrower for the annual escrow statement, or for one payment history furnished to a borrower in a 12-month period. (See § 419.7).
Late payment notices. Except when under an automatic stay under bankruptcy law, a servicer must send a payment reminder notice to a borrower at the borrower’s last known address no later than 17 days after the payment becomes due and remains unpaid. (See § 419.8).
Payoff statements. A servicer must send a payoff statement within 5 days of receipt of a request from the borrower (§ 419.9). The statement must be clear, understandable and accurate and must show total amount that is required to pay off the mortgage loan as of a specified date. No fee may be charged for a payoff statement (applies to first 5 requests in any calendar year) or for providing a release upon full prepayment.
Servicer fees. A servicer must maintain and keep current (“current” is not defined in the regulation) a schedule of standard or common fees, such as nonsufficient fund fees. The schedule must be available on servicer’s website and to the borrower or borrower’s authorized representative upon request. The schedule must identify each fee, provide a plain English explanation of the fee, and state the amount of the fee or range of amounts or, if there is no standard fee, how the fee is calculated or determined.
A servicer may collect a fee only if the fee is for services actually rendered and one of the following conditions is met:
Under the new regulation, late charges may not be assessed when the only delinquency is attributable to late fees or delinquency charges assessed on an earlier payment, and the payment is otherwise a full payment for the applicable period and is paid when due or within any applicable grace period. In addition, late charges must not be (1) based on an amount greater than the past due amount; (2) collected from the escrow account or from escrow surplus without the approval of the borrower; or (3) deducted from any regular payment. Finally, late charges must not be imposed more than once with respect to a single delinquent installment and must not exceed 2% of the amount of the delinquent installment. (See § 419.10).
Residential mortgage loan delinquencies and loss mitigation efforts. Generally, servicers must make reasonable and good faith efforts to engage in appropriate loss mitigation options, including loan modifications, to avoid foreclosure. Servicers must have adequate staffing, written procedures, resources and facilities to provide timely and appropriate responses to borrowers and to ensure that borrowers are not required to submit multiple copies of required documents. Following are summaries of some (but not all) of the loss mitigation requirements.
Notice requirement. Whenever a borrower is at least 60 days delinquent (or earlier at the servicer’s option) or whenever a borrower who is in default or at imminent risk of default contacts the servicer with respect to a loan modification or other loss mitigation assistance, the servicer must inform the borrower of the facts concerning the loan, the nature and extent of the delinquency or default, the servicer’s loss mitigation protocols, and the loss mitigation options and services offered by the servicer.
Loan Modifications: The regulations provide a formula based on net present values of alternate cash flows for determining when a loan modification should be considered. Loan modifications should be structured to result in payments that are affordable and sustainable for the borrower. Servicers that are participating in HAMP must follow HAMP guidelines or directives.
Servicer written acknowledgement. Within 10 business days of receiving a request for a loss mitigation option (unless a longer time is permitted under the HAMP) the servicer must send an acknowledgment specifying information needed from the borrower to review the borrower’s loss mitigation request. The acknowledgement must also include the key elements of the loss mitigation process, including, as appropriate, information the borrower may be asked to provide and third party approvals required to evaluate and complete the request for the loss mitigation option, average time decide about the loss mitigation option, and notification of the actions the servicer, lender or owner of the mortgage may take during the loss mitigation process.
Decision notification and content: A servicer must send its loss mitigation decision within 30 days of receiving required documentation (unless a shorter time is required under HAMP). If the request is approved, a written notice must provide the borrower with clear and understandable written information explaining the material terms, costs and risks of the option offered. Where the servicer denies the request, a written notice must state with specificity the reasons for the determination, the contact information for a person at the mortgage servicer to reconsider such a denial, and any other foreclosure prevention alternatives for which the borrower may be considered. A denial must also include the following statement, in boldface type and in print no smaller than the largest print used elsewhere in the main body of the denial: “If you believe the loss mitigation request has been wrongly denied, you may file a complaint with the New York State Banking Department at xxx-xxx-xxxx or www.banking.state.ny.us.”
Borrower programs and counseling: Staff must be aware of programs designed to assist borrowers to avoid foreclosure or resolve delinquency. The servicer must make available a list of government approved not-for-profit housing counselors in the homeowner’s geographic area as listed on the Banking Department’s website (www.banking.state.ny.us) or the Division of Housing and Community Renewal’s website (www.nysdhcr.gov).
Loss mitigation contacts: A servicer must make available authorized representatives’ toll free telephone number(s) for direct communication with a loss mitigation staff person, fax number(s) for receipt of documents and e-mail addresses. The staff person must be authorized to discuss and negotiate loss mitigation options.
Escalation process: The servicer must have a process through which borrowers may escalate disagreements to a supervisory level for a separate review of the borrower’s eligibility for a loss mitigation option. The servicer must also designate special escalation contacts for not-for-profit housing counselors, government representatives, legal services organizations and attorneys to utilize when necessary to review or intervene in the handling of a pending loss mitigation matter.
Foreclosure: The servicer must implement policies and procedures to notify its foreclosure attorneys regarding a borrower’s status for consideration of a loss mitigation option and whether the borrower is being evaluated for, or is currently in, a trial or permanent modification. A servicer should avoid initiating a foreclosure action if the borrower has requested and is being considered for a loss mitigation option or if the borrower is in a trial or permanent modification and is not more than 30 days in default under the modification agreement.
Servicer Protocols: A servicer must maintain a system, compliant with minimum standards established in the regulation, for servicing delinquent loans that will facilitate the policies and procedures required by the regulation. (See § 419.11).
Quarterly reporting. The Superintendent may require entities regulated by the Superintendent to compile and submit to the Superintendent, within 30 days of the end of each calendar quarter, a report that contains extensive information about loans the loans being serviced, loss mitigation efforts and results. (See § 419.12).
Books and records and annual reports and analyses. A servicer regulated by the Superintendent must (1) keep such books and records in a manner that will allow the Superintendent to determine whether the servicer is complying with applicable laws and regulations and (2) preserve its books and records for at least 3 years after making the final entry with respect to any New York mortgage loan, unless a longer period is provided by statute. The regulation provides additional detail of the required records.
The servicer must also maintain a telephone log and file of all written correspondence, including fax transmissions and e-mail correspondence, relating to the servicing of each mortgage loan, as provided in the regulation. The servicer must conduct an annual (at least) internal assessment of all its servicing activity and must conduct periodic audits of payment processing functions.
The servicer must collect, maintain and analyze appropriate data on delinquency and foreclosure rates to enable it to (1) evaluate the effectiveness of its efforts and performance of its servicing portfolio and (2) identify discriminatory trends, and (3) take appropriate corrective action.
The servicer must submit a quarterly financial report and certification of net worth to the Banking Department within 45 days of the end of each fiscal quarter. The servicer must submit an annual audited financial statement, which must be filed with the Banking Department within 90 days of the close of its fiscal year and such other reports as the Superintendent may require. The reports must be subscribed and affirmed as true by the servicer under the penalty of perjury. (See § 419.13).
Servicing prohibitions. A servicer is also prohibited (under § 419.14) from:
Unless the Superintendent delays the effective date of the regulation, servicers will have much to do to comply with these new servicing requirements by October 1.
Geoffrey C. Rogers is a partner in the New York office of Hudson Cook, LLP. Geoff can be reached at 518-383-9591 or by email at grogers@hudco.com.
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