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CFPB Advises Mortgage Servicers to Tighten up Servicing Practices
By Shawnielle D. Predeoux

The CFPB issues Supervisory Highlights to help businesses limit risks to consumers by advising businesses of practices that may harm consumers and providing guidance to prevent or correct them. In its most recent issue of Supervisory Highlights, released on August 21, 2013, the CFPB identified harmful mortgage servicing practices related to servicing transfers, payment processing, and loss mitigation.

With respect to servicing transfers, the CFPB identified noncompliance with the servicing transfer disclosure requirements of the Real Estate Settlement Procedures Act (RESPA) and a lack of controls over transferred documents that may lead to unfair practices. In particular, the CFPB noted that servicers are not properly handling loss mitigation documents when servicing is transferred. A failure to either review individual loss mitigation documents or use loss mitigation application documents submitted by delinquent borrowers to the prior servicer because of shoddy record keeping may result in an unfair practice. The CFPB recommends that servicers receiving transferred documents link imaged documents received in the servicer’s systems, organize the received documents, and review them to determine whether the documents can be used in loss mitigation efforts to prevent the risk of engaging in unfair practices.

The CFPB also identified the following inappropriate practices in processing loan payments and handling escrow accounts:

  • Providing inadequate notice of changes to the payment processing address was highlighted as an unfair practice. If this happens, a servicer should waive late and other delinquency fees.
  • Failing to provide notice of changes in the date for paying property tax escrow payments from December to January of the next year was also flagged as an unfair practice. If this happens, impacted borrowers must be compensated for their harm, including the inability to claim a tax deduction in the prior year.
  • Servicers who pay property taxes late (in violation of RESPA) must pay any associated late fees, solicit information from borrowers to determine whether they experienced any additional harm due to the late payment, and compensate borrowers for the additional harm.
  • Excessive delays in processing borrower requests to cancel private mortgage insurance and improperly handling the unearned premiums in violation of the Homeowners Protection Act.
  • Charging default-related fees without adequately documenting the reason for the charge and the amounts of the fees.
  • Charging borrowers for default-related fees that investors are required to pay under investor agreements. Servicers must refund these fees.

Finally, the CFPB identified the following loss mitigation practices that present risks to consumers and could create fair lending risk:

  • Providing inconsistent borrower solicitation and communication;
  • Providing deceptive communications about the status of applications and documents;
  • Having cumbersome procedures for requesting missing or incomplete information that make it difficult for consumers to comply;
  • Performing inconsistent loss mitigation underwriting;
  • Providing inconsistent waivers of certain fees or interest charges;
  • Having long application review periods;
  • Having incomplete and disorganized servicing files, which may not include denial notices;
  • Having incomplete written policies and procedures; and
  • Failing to perform quality assurance on underwriting decisions.

These practices can be corrected by reviewing loss mitigation decisions to ensure they are consistent and to minimize fair lending risk. This review should include an analysis of fees and charges assessed to determine whether borrowers should be reimbursed, improving loss mitigation policies and procedures (including the implementation of fair lending policies and procedures over the loss mitigation process), documenting actions taken during the loss mitigation activities, training personnel on any new policies and procedures implemented, and performing compliance monitoring and testing to identify any potential shortcomings.

By publishing the Supervisory Highlights the CFPB is identifying for the industry a series of acts and practices it considers problematic. Mortgage servicers should review their policies, procedures, and practices to ensure that they are not engaging in these practices or, if they are currently engaging in any of the acts identified above, to immediately take corrective action to prevent customer harm.

Shawnielle D. Predeoux is an associate of Hudson Cook, LLP, in the firm’s Hanover, Maryland office. Shawnielle can be reached at 410-865-5425 or by email at spredeoux@hudco.com.

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