21 Aug Federal Regulatory Update
On August 19, the Bureau of Consumer Financial Protection (“CFPB”) issued a compliance bulletin and policy guidance addressing mortgage servicing transfers to residential mortgage servicers and subservicers in light of potential risks to consumers that may arise in connection with transfers of mortgage servicing rights. The CFPB’s concern related to this area remains heightened due to the continuing high volume of servicing transfers.
Bulletin 2014-01 stresses that servicers engaged in significant servicing transfers should expect that the CFPB will, in appropriate cases, require them to prepare and submit informational plans describing how they will be managing the related risks to consumers.
Description of Compliance Bulletin and Policy Guidance
Bulletin 2014-01 replaces Bulletin 2013-01 released in February, 2013 which also addressed servicing transfers. Revised Regulation X, implementing the Real Estate Settlement Procedures Act (“RESPA”) (new servicing rules) took effect on January 10, 2014. It requires servicers to, among other things maintain policies and procedures that are reasonably designed to achieve the objectives of facilitating the transfer of information during mortgage servicing transfers and of properly evaluating loss mitigation applications. When the new servicing rules became effective, Bulletin 2013-01 became outdated.
Bulletin 2014-01 was to address:
· General transfer-related policy and procedures;
· Applicability of the new servicing rules to transfers;
· Protections under federal consumer financial law; and
· Plans for handling servicing transfers.
General Transfer-Related Policies and Procedures
The following are examples of policies and procedures that CFPB examiners may consider in future examinations as contributing to meeting the requirements of the new servicing rules:
· Ensuring that contracts require the transferor to provide all necessary documents and information at loan boarding.
· Developing tailored transfer instructions for each deal and conducting meetings to discuss and clarify key issues with counterparties in a timely manner; for large transfers, this could be months in advance of the transfer. Key issues may include descriptions of proprietary modifications, detailed descriptions of data fields, known issues with document indexing, and specific regulatory or settlement requirements applicable to some or all of the transferred loans.
· Using specifically tailored testing protocols to evaluate the compatibility of the transferred data with the transferee servicer’s systems and data mapping protocols.
· Engaging in quality control work after the transfer of preliminary data to validate that the data on the transferee’s system matches the data submitted by the transferor.
· Recognizing when a transfer cannot be implemented successfully in a single batch and implementing alternative protocols, such as splitting the transfer into several smaller transactions, to ensure that the transferee can comply with its servicing obligations for every loan transferred.
CFPB examiners may also consider the following post-transfer policies and procedures, among others, for transferee servicers as to contributing to meeting this requirement:
· Implementing a post-transfer process for validating data to ensure it transferred correctly and is functional, as well as developing procedures for identifying and addressing data errors for inbound loans.
· Effectively organizing and labeling incoming information, as well as ensuring that the transferee servicer uses any transferred information before seeking information from borrowers.
· Conducting regularly scheduled calls with transferor servicers to identify any loan level issues and to research and resolve those issues within a few days of their being raised.
The new servicing rule requires servicers, among other things, to maintain policies and procedures that are reasonably designed to achieve the objective of properly evaluating loss mitigation applications. There is heightened risk in transferring loans in loss mitigation, including the risk that documents and information are not accurately transferred. In cases where servicers choose to engage in transfers of loans with pending loss mitigation applications or approved trial modification plans, CFPB examiners may consider the following policies and procedures, among others, as contributing to meeting this requirement:
· As a transferor, specifically flagging all loans with pending loss mitigation applications (complete and incomplete), as well as approved loss mitigation plans (including trial modification plans) through a previously agreed upon means and assisting in ensuring that the transferee’s systems can process the loss mitigation data upon transfer.
· As a transferee, requiring that the transferor servicer supply a detailed list of loans with pending loss mitigation applications, as well as approved loss mitigation plans.
· As a transferee, requiring that appropriate documentation for loans with pending loss mitigation applications, as well as approved loss mitigation plans, be transferred pre-boarding. For example, one transferor servicer that has engaged in large volumes of transfers has provided advance access to a web portal containing loan documentation for such loans 45-60 days before transfer.
· As a transferee, ensuring receipt of information regarding any loss mitigation discussions with borrowers, including any copies of loss mitigation documents.
o The transferee servicer’s policies and procedures must address obtaining any such missing information or documents from the transferor servicer before attempting to obtain such information from borrowers.
o The CFPB expects transferee servicers to ensure that they receive transferred documents to determine if the documents may be used in loss mitigation efforts.
o A transferee that, following a transfer, fails to identify documents and information that borrowers are required to submit to complete loss mitigation applications is unlikely to have policies and procedures that comply with the servicing rules.
o A transferee that, following a transfer, fails to properly evaluate borrowers who submit loss mitigation applications is unlikely to have policies and procedures that comply with the servicing rules.
· As a transferee, monitoring newly transferred loans and determining if partial payments are received are actually payments pursuant to trial or permanent modification agreements.
CFPB examiners may consider the following practices, among others, as indicating that a servicer’s policies and procedures are not reasonably designed to achieve the rules’ objectives of facilitating the transfer of information during mortgage servicing transfers or properly evaluating loss mitigation applications. CFPB examiners have determined in a number of examinations that servicers had failed to properly identify loans that were in the trial or permanent modification with the prior servicer at the time of transfer. CFPB examiners also found that servicers had failed to honor trial or permanent modification offers unless they could independently confirm that the prior servicer properly offered a modification or that the offered modification met investor criteria. In these instances, the transferee servicers did not receive all the information they needed from the transferor servicer. As a result, the servicers required the borrowers to submit additional paperwork, or to provide copies of financial documents they had already submitted to the transferor servicer. These servicers also subjected some borrowers to substantial delays while re-underwriting their loans. In some cases the borrowers received a new modification with inferior terms, and in others, the servicer actually conducted a foreclosure sale. These practices are unfair and deceptive acts and practices.
The CFPB has received questions regarding the policy of transferring relevant data or documents to a transferee during the days following the loan boarding, even though the transferor had information in its possession prior to loan boarding. Such a transfer practice may prevent the transferor servicer from complying with its obligations to have policies and procedures reasonably designed to timely transfer all information and documents. CFPB examiners will scrutinize the policies and procedures of any institution that regularly waits until after loan boarding to transfer information that it had in its possession prior to boarding.
Applicability of Other Parts of the New Servicing Rule to Transfers
Error Resolution Procedures and Requests for Information
Servicers are required to meet certain procedural requirements for responding to notices of error and written information requests. Transferor servicers are required to respond to notices of error and information requests received from the borrower or the borrower’s agent up to one year after the loan was transferred or discharged. Servicers that transfer a mortgage loan shortly after receiving a notice of the error or information request from the borrower or the borrower’s agent are still obligated to respond within the applicable time frames, not withstanding the servicing transfer.
If a servicer transfers a mortgage loan after mailing or delivering to the borrower one or both of the notices required by 12 C.F.R. § 1024.37, the transferee servicer need not resend such notices.
Under 12 C.F.R. § 1024.39 a servicer must establish or a make good faith effort to establish live contact with a delinquent borrower not later than the 36th day of the borrower’s delinquency. Servicers are required to make a good faith effort for each billing cycle for which a borrower has been delinquent for at least 36 days. A transferee servicer must begin or continue the good faith efforts regardless of whether the delinquency began while the loan was being serviced by the transferor servicer. A servicer must provide to the borrower a written notice containing certain information not later than the 45th day of the borrower’s delinquency.
Continuity of Contact
Servicers must maintain policies and procedures that are reasonably designed to achieve certain objectives related to personnel assigned to assist delinquent borrowers. CFPB examiners may consider the following policies and procedures as contributing to meeting this requirement:
· Identifying which borrowers are 45 days or more delinquent at transfer and ensuring that personnel are available to assist such borrowers at loan boarding.
· Ensuring that these servicer personnel can provide the borrower accurate information including information relating to loss mitigation applications started at the transferor servicer.
· Ensuring that servicer personnel can retrieve, in a timely manner:
o A complete record of the borrower’s payment history, including with the transferor servicer and all prior servicers, and
o All written information the borrower has provided to the transferor servicer and all prior servicers in connection with a loss mitigation application.
· Servicers should also consider how to inform delinquent borrowers of availability of servicer personnel.
CFPB examiners will pay particular attention to servicers’ handling of loss mitigation in the context of transfers. A transferee that obtains the servicing of a mortgage loan for which an evaluation of the complete loss mitigation option is in process should continue the evaluation of a complete loss mitigation application to the extent practicable. CFPB examiners will carefully scrutinize any evaluations that take longer than 30 days from the date the transferor received the borrower’s complete application, especially where the borrower suffered negative consequences attributable to the delay.
One way to help manage the risk associated with pending loss mitigation applications or approved trial modifications is by ensuring that all applicable loss mitigation information was sent to the transferee by the date of transfer, including for example:
· All applicable loss mitigation notices and when they were sent;
· All documents and information submitted by a borrower to be evaluated for loss mitigation options; and
· Documents and information sufficient to show as applicable:
o If a borrower submitted an application and when that application was received by the transferor servicer;
o Whether documentation and information submitted by a borrower in response to the notice required by 12 C.F.R. § 1024.41 constituted a complete application;
o The date the transferor servicer received a complete application;
o Whether an evaluation had been completed and if a loss mitigation offer was made to a borrower;
o If the borrower was denied for a loan modification option, whether the borrower appealed and if so, the status of the appeal; and
o If a foreclosure sale is pending, the specifics regarding the sale.
If the borrower accepts an offer, all loss mitigation agreements, including trial and permanent loan modification agreements, forbearance agreements, short sale agreements, deed-in-lieu of foreclosure agreements, or other applicable agreements as well as documents and information sufficient to show whether the borrower accepted an offer and whether the borrower was performing in accordance with the terms of the offer.
Protections Under Federal Consumer Financial Law
The laws that apply to servicing in addition to RESPA include the Fair Credit Reporting Act which requires servicers to appropriately investigate disputes and report their existence with any other information that is reported to consumer reporting agencies; the Fair Debt Collection Practices Act imposes obligations on servicers to the extent they act as debt collectors.
Servicers must avoid in engaging in unfair deceptive acts and practices. Conduct that does not violate one of the specific prohibitions in any of the laws discussed, may nonetheless constitute an unfair deceptive act or practice.
The CFPB expects all servicers to maintain a robust compliance management system. They also expect servicers who identify any potential violations during transfer to undertake all necessary corrective actions.
Plans for Handling Servicing Transfers
The CFPB will, in appropriate cases, require servicers engaged in significant servicing transfers to prepare and submit written plans to the CFPB detailing how they will manage the associated consumer risks.
The information included in such a plan depends on the circumstances of the particular transfer. In general, however, the CFPB will request information regarding:
· The number of loans involved in the transfer;
· The total servicing volume being transferred (measured by unpaid principal balance);
· The name(s) of the servicing platform(s) on which the transferor stored all relevant account-level information for transferred loans prior to transfer and information about compatibility with the transferee’s system;
· A detailed description of how the servicer will ensure that it is complying with the applicable new servicing rule provisions on transfers;
· A detailed description of the transaction and system testing to be conducted to ensure accurate transfer of electronic information and a description of the summary report resulting from the transferee or transferor’s testing;
· A description of how the transferee will identify and correct errors in connection with the transfer, including a specified time period for reviewing files and resolving errors;
· A description of the training plan and actual training materials for staff involved in reviewing, assessing, utilizing or communicating information regarding the transferred loans; and
· A customer-service plan, specific to transferred loans, that provides for responding to loss mitigation requests or inquiries and for identifying whether a loan is subject to pending loss mitigation resolution or application.
Appendix A to Bulletin 2014-1 discussed key regulatory provisions related to servicing transfers. Such sections included 12 C.F.R. § 1024.33, 12 C.F.R. § 1024.38, and 12 C.F.R. § 1024.41.