20 Feb Federal Regulatory Update
On February 11, 2013, the Consumer Financial Protection Bureau (the “CFPB”) issued Bulletin 2013-01 as guidance to residential mortgage servicers and subservicers (collectively, “servicers”) to address potential risks to borrowers that may arise in connection with transfers of servicing. The CFPB is concerned by the number and size of recent servicing transfers. The CFPB is requiring servicers engaged in significant servicing transfers to prepare and submit plans describing how they manage the related risks to borrowers. The term “transfer” broadly covers transfers of servicing rights as well as transfers of servicing responsibilities through subservicing or whole loan servicing arrangements.
The CFPB’s examiners will review servicers’ compliance with federal laws applicable to servicing, including the Real Estate Settlement Procedures Act (“RESPA”), the Fair Credit Reporting Act (“FCRA”), the Fair Debt Collection Practices Act (“FDCPA”), and prohibitions on unfair, deceptive, or abusive acts or practices (“UDAAPs”). With certain exceptions, if the servicer changes on a first-lien mortgage loan, RESPA’s implementing regulation, Regulation X, requires that both the transferee and transferor servicers deliver a written Notice of Transfer containing specific information. In addition, during the 60-day period beginning on the effective date of transfer, if the transferor (rather than the transferee servicer that should receive payment on the loan) receives payment on or before the applicable due date (including any grace period allowed under the loan documents), a late fee may not be imposed on the borrower with respect to that payment. The payment may not be treated as late for any other purpose.
The FCRA protects borrowers by prohibiting the furnishing of information to a consumer reporting agency that the servicer knows or has reasonable cause to believe is inaccurate. A servicer that provides information to consumer reporting agencies must establish and apply reasonable written policies and procedures regarding the accuracy and integrity of the information provided considering applicable federal guidelines and must periodically review the policies and procedures and update them as necessary to ensure effectiveness. The FCRA also gives borrowers the ability to dispute credit reporting information with consumer reporting agencies and directly with their servicers. Servicers must appropriately investigate the disputes.
The FDCPA imposes obligations on servicers who act as debt collectors within the meaning of the FDCPA. The FDCPA requires that within five days after the initial communication with a borrower in connection with collecting a debt, a debt collector must send the borrower a notice including the amount of the debt, to whom the debt is owed, the borrower’s right to request verification of the debt, as well as other required information. The FDCPA also prohibits deceptive representations, the use of unfair or unconscionable means, and abusive conduct in debt collection.
In addition to the notice requirements and other borrower protections described above, servicers must avoid engaging in UDAAPs. Conduct that does not violate a law discussed above may still be considered a UDAAP. If the CFPB decides that a servicer has engaged in any acts or practices that are unfair, deceptive, or abusive, or that otherwise violate federal consumer financial laws and regulations, it will take supervisory and enforcement actions to address violations and seek all appropriate corrective measures, including aiding harmed borrowers.
The CFPB has concerns related to servicing transfers arising from borrower complaints and supervisory work related to servicing transfers. Borrowers have complained about service interruptions when their loans are transferred during the loss mitigation process. Transferee servicers sometimes fail to honor the terms of trial loan modifications provided by predecessor servicers because relevant documents are not transferred to the transferee servicer, or the transferee servicer does not take adequate steps to identify mortgages subject to trial loan modifications. The CFPB is making servicing transfer-related issues a focus of supervisory activities in the mortgage servicing area.
During the course of supervision, examiners are assessing the policies, procedures, systems, and controls that servicers use to address the risks to borrowers in connection with servicing transfers, including whether mortgage servicers are adequately staffed and are properly training their employees to handle borrower communications.
The CFPB will direct attention to the following areas regarding servicing transfers:
- How a transferor servicer has prepared for the transfer of servicing rights and/or responsibilities, including:
- What steps it takes before the transfer to ensure that information is transferred in a manner that is compatible with the transferee’s servicing system;
- What procedures were in place before the transfer to ensure that adequate information is provided to the transferee servicer to facilitate that servicer’s compliance without unnecessary interruption in servicing; and
- In what manner and how timely, after the transfer, the transferor intends to respond to inquiries from the transferee or the borrower about transferred loans;
- How a transferee servicer handles the files transferred to it, including:
- What due diligence is performed to ensure accurate information to borrowers, including, for example, information regarding amounts they owe and their delinquency status, if applicable;
- What procedures were in place to identify loss mitigation in process (e.g., trial or permanent modifications, forbearance plans, or short sale/deed-in-lieu agreements) at the time of transfer;
- What due diligence is performed to ensure that the servicing platform or other systems accurately reflect all account-level information including, for example, fees assessed to a borrower’s mortgage loan account;
- What training is conducted to ensure that all staff who have operational access to the servicing platform are able to interpret, operate, manage, access, and utilize the transferred loan information; and
- What post-transfer audits are conducted to confirm that all data were properly transferred, and whether the transferee servicer corrects identified errors; and
- For loans with loss mitigation in process (e.g., pending loss mitigation applications, trial modifications, forbearance plans, or short sale/deed-in-lieu agreements), what policies the transferor and transferee implemented, including what procedures they adopted to ensure that:
- The transferee receives information regarding which loans are in any kind of loss mitigation prior to the effective date of the transfer;
- The transferor sends, and the transferee receives, loss mitigation applications, financial documents, previous loss mitigation history (e.g., borrower failed a loan modification previously) and executed copies of prior servicers’ loss mitigation agreements and documents;
- The transferee is properly applying, after transfer, payments due under an applicable loan modification agreement or other applicable payment modification agreement;
- The transferee properly considers applicable loan modification or forbearance agreements before demanding or collecting amounts due;
- The transferee has documented circumstances in which it will require new supporting documentation from the borrower to be considered for a trial modification or converted to a permanent modification; and
- The transferor or transferee accurately informs the borrower of the status of any pending loss mitigation application at the time of transfer.
The CFPB will require servicers engaged in significant servicing transfers to prepare and submit written plans to the CFPB detailing how they will manage borrower risks. The CFPB will use these plans to assess borrower risks and inform further examination planning. Servicers do not need approval from the CFPB before moving forward with servicing transfers. The CFPB issued this bulletin to give servicers advance notice that it may require such plans in the course of its supervisory activities. The information that should be included in the plan depends on the circumstances of each transfer.
The CFPB requires 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 before the transfer and information about compatibility with the transferee’s systems;
- 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 to be generated as a result of this testing;
- A description of how the transferee will identify and correct errors identified 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 the transferred loans that provides for responding to loss mitigation requests or inquiries and identifying whether a loan is subject to a pending loss mitigation resolution or application.
On January 17, 2013, the CFPB issued servicing rules that will be effective on January 10, 2014. These rules will require servicers to maintain policies and procedures that are reasonably designed to achieve the objectives of facilitating the transfer of information during mortgage servicing transfers. We will report on these rules closer to their effective date.