Insights

On April 9, 2012, the Consumer Financial Protection Bureau released an advance outline of its servicing rules for the mortgage industry. Once finalized, the rules will implement a series of mortgage servicing enhancements in the Dodd-Frank Act that are scheduled to take effect in January 2013, unless final regulations are issued first.

To kick-off the rulemaking process, the CFPB issued the outline of its proposed rules for review by a Small Business Review Panel under the Small Business Regulatory Fairness Act (or “SBREFA”). As a result, the outline includes a significant amount of discussion of the potential costs and benefits that the rules may have on small entities acting as mortgage servicers. However, the outline also provides a broad outline of what will likely be found in the proposed rules – including those areas where the CFPB may exercise regulatory discretion and issue requirements in addition to those found in the Dodd-Frank Act. The number and types of changes that may be required by the revisions discussed in the outline are many and potentially significant. As a result, creditors and servicers may wish to review the outline from two vantage points. The first is as a means of assessing whether to provide comment during the official public comment period on ways in which the requirements discussed in the proposal could be improved. However, in light of both the statutory underpinnings of these requirements and the attention to which mortgage servicing issues have been highlighted as contributing to the recent economic crisis, creditors and servicers may also wish to consider using the outline as a blue print of things to come and get a head-start on compliance efforts.

Proposed Servicing Standards Under Consideration

The CFPB outline covers six key areas related to servicing. Each is discussed briefly below.

Mortgage Servicing Disclosures

The outline of the proposed rules addresses three substantive disclosure requirements, each required by separate sections of the Dodd-Frank Act:

• Periodic Statements: Dodd-Frank § 1420 amends the Truth in Lending Act (“TILA”) by requiring creditors, assignees or services of residential mortgage loans to provide a periodic statement to borrowers for each billing cycle. Although the statute includes a number of data elements that must be included in the statement (including principal obligation amount, current rate, rate reset dates, prepayment and late fee amounts and contact information to obtain further information regarding the mortgage and for HUD or state housing finance agency approved housing counseling agencies), the statute also permits the CFPB to add additional data elements to the periodic statement requirements. The outline notes that the list provided in the statute does not include many items that are currently provided by servicers, and that the CFPB proposed rule will include a number of additional data points for inclusion on periodic statements. Among them:
  • Loan account number;
  • Property address;
  • Servicer name and address;
  • Next payment due date and amount information;
  • Late payment grace periods;
  • Loan maturity date;
  • Recent transaction activity (including an itemization of fees and charges);
  • Itemization of the current, most recent and year-to-date payments of principal, interest, escrow, fees and partial payments;
  • A description of the servicer’s policy with regard to the application of additional payments received from the borrower;
  • A description of the servicer’s policy with regard to partial payments received from the borrower;
  • Amortization information for payment option loans; and
  • Delinquent borrower alerts (such as a foreclosure warning, summary of the borrower’s delinquency history and information about loss mitigation alternatives).

Under the Dodd-Frank Act, borrowers with a fixed-rate mortgage who receive a coupon book with “substantially the same information” as is found on the periodic statement are exempt from the monthly statement requirement. Due to the fact that some of the information proposed above is variable on a monthly basis, the CFPB is considering different means of making that information available (for example through a web site or VRU) so that the exception may be retained. Proposed forms of the periodic statement developed by the CFPB and reviewed through several rounds of regional testing are attached as Appendix B of the outline.

• Adjustable Rate Mortgage Reset Notices: Dodd-Frank § 1418 amends TILA by adding a new section (TILA § 128A) to require a creditor or servicer to provide initial reset notices for “hybrid adjustable rate mortgages.” The statute defines this term to mean a consumer credit transaction secured by the consumer’s principal dwelling that has a fixed interest rate for an introductory period that thereafter resets to a variable interest rate. The CFPB noted in the outline that it understands this term to include any ARM product that has an introductory period longer in duration than subsequent adjustment periods (such as 2/1, 3/1, 5/1, 7/1 and 10/1 ARMs). However, the outline also notes the CFPB is considering extending the notice requirements to non-hybrid ARMs (such as 1/1, 3/3, 5/5 products) as well.

Under the Dodd-Frank Act, the initial reset notices must be sent during the one (1) month period that ends six (6) months before the end of the introductory period (or at consummation if the initial rate reset will occur within six months of consummation). The notice – which must be separate and distinct from other correspondence – must (per the statute) include:

• Any index or formula used to adjust or reset the interest rate (and its source);
• An explanation of how the new rate and payment will be determined (including a description of how the index may be adjusted, such as by the addition of a margin);
• A good faith estimate (and the assumptions on which it is based) of the amount of payments after the rate adjustment;
• A list of alternatives that the customer may pursue prior to the rate reset (including refinance, loan modification, forbearance, pre-foreclosure sales and how the consumer may pursue these options);
• Contact information for HUD or state housing agency-approved housing counselors or programs; and
• Contact information for the state housing finance authority in the state where the consumer lives.

The CFPB is proposing to add a number of additional elements to this list, including: the loan account number, property address, servicer name and address, the length of the introductory period and when future rate adjustments will occur, the date of upcoming interest rate adjustments and the due date of the first payment after the rate adjustment. The proposed rule may also require additional information (such as prepayment penalty information, any limits on interest rate or payments and amortization information for negative amortization and interest-only products) to the extent it may be required for a particular product. Proposed notices developed by the CFPB and reviewed through several rounds of regional testing are attached as Appendix C of the outline. The outline also notes that the CFPB is considering proposing changes to the content and timing of current TILA disclosure requirements for all ARM rate resets.

• Force-Placed Insurance: Dodd-Frank § 1463 amends the Real Estate Settlement Procedures Act (“RESPA”) to prohibit servicers from force-placing insurance unless there is a “reasonable basis” to believe that the borrower has failed to comply with contractual requirements to maintain property insurance. The outline notes that the CFPB is considering proposing examples of what would constitute a “reasonable basis.” Additionally, the Dodd-Frank Act establishes a process that servicers will be required to follow before charging borrowers for force-placed insurance, including sending up to two (2) notices to the borrower (depending on whether the borrower responds with proof of coverage) and accepting reasonable forms of written confirmation from the borrower. Under the Dodd-Frank Act, no charges for force-placed coverage may be imposed until 15 days after the second notice has been sent. If the borrower provides confirmation of existing coverage the servicer must terminate force-placed coverage within 15 days.

The Dodd-Frank Act mandates certain content for the notices to the borrower, including: a reminder to the borrower of his/her duty to maintain insurance on the collateral property, a statement that the servicer currently does not have evidence of the borrower’s existing coverage, an explanation of how the borrower may demonstrate the existence of current coverage and a statement that the borrower may purchase coverage at the borrower’s expense if s/he does not provide proof of coverage. In addition to this content, the CFPB is proposing to also require a good faith estimate of the force-place premium, a warning that such insurance may not provide as much coverage and may cost much more than what may be purchased by the borrower, and a statement that the servicer has (or will) force-place insurance. Like the other notices discussed above, the outline contains (in Appendix D) several versions of the notice which the CFPB is considering for use.

In addition to the disclosures, the proposed rule would require that the price of force-placed insurance be bona-fide, reasonable and for services actually rendered. Coupled with this pricing limitation, the CFPB is considering additional amendments to Regulation X (the implementing regulation to RESPA) that would require servicers to make timely payments from escrow for insurance, regardless of whether borrower is delinquent.

Prompt Crediting of Payments and Payoff Requests

Coupled with these additional disclosures, Dodd-Frank § 1464 establishes requirements for the prompt crediting of payments. These requirements have been codified in Regulation Z § 1026.36(c). The rule to be proposed by the CFPB will amend this provision to provide examples of the types of payment requirements that servicers may impose that would be reasonable for servicers to establish for conforming payments, presumably in addition to those already found in the Official Staff Commentary to Regulation Z § 1026.36(c)(2).

For partial payments, the CFPB will propose retention of the current general rule that requires crediting of such payments in accordance with the legal obligation between the customer and the creditor as determined by state or other applicable law. The outline notes that this would permit servicers to either hold partial payment amounts in a non-interest bearing suspense account until an amount sufficient to constitute a full payment is received, or to return nonconforming payments to the borrower. In addition to these explanations, the CFPB notes in the outline that it is also considering several additional processing alternatives for partial payments, such as require servicers to credit all or some of them (for example: if they are above a certain threshold).

Finally, the outline notes that the proposed rule will generally track the language of the statute and amend the current “reasonable time” standard in Regulation Z to require servicers to provide accurate payoff balances within 7 days of receiving a written request from the borrower.

Error Resolution and Response to Inquiries

Under the current codification of RESPA and its implementing regulation, Regulation X, servicers are required to respond to “qualified written requests” from borrowers related to “mortgage servicing loans,” which is defined to mean only first-lien closed end loans. Section 1463 of Dodd-Frank amends RESPA to revise the time frames to respond to a qualified written request and to establish a number of practices that would be considered in connection with a servicer’s response to the same, including:

• Prohibiting servicers from charging fees for responding to valid qualified written requests;
• Failing to respond within 10 business days (excluding weekends and holidays) to a borrower’s request for the identity and contact information (potentially including address and telephone number) for the owner or assignee of his/her loan; and
• Failing to timely respond to borrower requests for corrections to errors related to payment allocation, final payoff balances, avoiding foreclosure or “other standard servicer’s duties.”

In its outline, the CFPB notes that its proposed rule will generally track the statutory requirements for the first two of these prohibited practices, but expand them to apply to all federally related mortgage loans and not just “mortgage servicing loans.”

The outline notes that the CFPB is considering taking a broader approach by establishing a comprehensive set of requirements for investigating and correcting errors and responding to borrower inquiries. The proposed rule would include an expansive definition of what constitutes an “error” for these purposes (including, among other things computation errors, errors in the allocation or timely crediting of payments, failures to make timely payments from escrows, refusing to accept conforming payments and so on). Included with the outline (as Appendix E) is an in-depth draft of error resolution requirements and time frames currently under consideration.

In their current form, these rules would permit borrowers to assert errors either orally or in writing so long as s/he provides sufficient information for the servicer to identify the account in question and the type of error alleged. Assuming that sufficient information is provided, the proposed procedures would require the servicer to send an acknowledgment (within 5 business days) and response (within 30 days, with possible extension to 45 business days) of receiving notification of the error. Inquiries that are considered “routine” (such as requests of information for tax purposes or for copies) or that involves home equity lines of credit (which are subject to other error resolution procedures under TILA) are currently contemplated to be exempt from these requirements.

Reasonable Information Management Policies and Procedures

As a catch-all addition to complement several of the provisions discussed above, Dodd-Frank § 1463 also requires servicers to comply with other consumer protection obligations that the CFPB deems “appropriate to carry out the consumer protection purposes” of the Act. The CFPB indicates in the outline that it is considering using this grant of authority to address what it terms are “wide-spread problems” with the management of borrower documents and information by writing rules that would require servicers to develop and maintain policies and procedures to adequately manage documents and information.

The CFPB sees potentially significant improvements with many of its initiatives (including error resolution, communications with borrowers) as well as loss mitigation and continuity of servicing in the event that mortgages change hands. Although the outline of the proposed guidance notes that the CFPB is considering establishing a standard for such procedures that would determine their reasonableness, depending in part, on the size of the servicer, the outline also notes that the proposed rule will have some basic requirements. Included among them:

• Servicers should have the ability to provide accurate and timely disclosures and other information to borrowers;
• The procedures should have the aim of minimizing errors and facilitating prompt correction of errors;
• The procedures should call for the maintenance of borrower contacts; and
• The procedures should facilitate loss mitigation by organizing and managing documents submitted by or about borrowers in connection with loss mitigation requests, ensuring that documents and information are easily accessible to loss mitigation personnel and identifying additional documents and information the borrower must provide to be considered for loss mitigation (and for timely notice to borrowers of any deficiencies).

The outline also notes that the requirements may also impose requirements for the timely transfer of documents relevant for loss mitigation to subsequent servicers or forums addressing foreclosure.

Early Intervention for Troubled or Delinquent Borrowers

Also under the auspices of the catch-all in Dodd-Frank § 1463, the CFPB is considering the proposal of early intervention procedures for borrowers who are troubled or delinquent in an effort to address mortgage servicing problems that they experience. Included among these steps would be a requirement to contact delinquent borrowers no later than 45 days after the onset of delinquency to provide borrowers with options to help avoid foreclosure (such as loss mitigation programs and how to access a housing counselor) and information about the foreclosure process (including loss mitigation programs that may be available and what their qualification requirements are, an explanation of the foreclosure process and timelines and contact information for housing counselors who may be able to assist the borrower).

In addition to this proactive disclosure requirement, the CFPB is also considering a reactive one that would require servicers to provide similar information within 5 days of a borrower informing a servicer that s/he may have difficulty in making payments.

Continuity of Contact

The final element discussed in the outline (which is also born out of the catch-all requirement found in Dodd-Frank § 1463) is a variation on the “single point of contact” theme found in the recent settlement with the major servicing entities. The rule currently being contemplated by the CFPB would require servicers to provide borrowers who become 45 days delinquent on their loan (or those who request assistance in avoiding delinquency) with direct and continuing access to servicing employees who are dedicated to serving troubled or delinquent borrowers. To ensure that a servicer’s staff members are able to provide adequate assistance, the proposed rule would require that they have access to a wide variety of information about borrowers (including their complete payment history, a record of prior communications between the borrower and servicer, all borrower-submitted documentation, underwriting staff that have the ability to evaluate the borrower’s eligibility for loss mitigation options and information regarding the status of any on-going or pending foreclosure proceedings involving the borrower).

What Happens Next?

The outline released by the CFPB is at this point intended for use in the SBREFA process. In their press release regarding the outline, the CFPB notes that it expects to issue a proposal for public comment at some point this summer, with final rules to follow in early 2013 (and likely mandatory compliance to follow roughly a year later).

Thomas P. Quinn, Jr. is a partner in the Massachusetts office of Hudson Cook, LLP. Tom can be reached at 774-365-4758 or by email at tquinn@hudco.com.