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By Mike Ferullo
The Consumer Financial Protection Bureau (CFPB) issued new standards Jan. 17 for the mortgage servicing industry, including procedures for managing delinquent loans and helping troubled borrowers avoid foreclosure.
The final rules under the Truth in Lending Act and the Real Estate Settlement Procedures Act address a wide range of loan servicing topics, from collecting payments and providing mortgage statements to early intervention with delinquent borrowers and the foreclosure process.
Some of the changes are mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, while others were promulgated under the CFPB's discretionary authority to regulate the mortgage industry.
CFPB Director Richard Cordray discussed mortgage servicing regulations Jan. 17 at an agency field hearing in Atlanta. “We believe that today's rules are all the more important because of the basic structure of the mortgage servicing market,” he said in prepared remarks.
“For the consumer, this relationship often is not a matter of voluntary choice. After a borrower chooses a lender and takes on a mortgage, the responsibility for managing that loan can be transferred to another provider without any say-so from the borrower,” Cordray said. “So if consumers are dissatisfied with their customer service, they have no opportunity to protect themselves by switching to another servicer.”
Dodd-Frank requires that periodic mortgage statements to borrowers disclose the amount of the principal obligation, the current interest rate and the reset date if applicable, information on prepayment penalties and late fees, as well as contact information for the servicer, and home counseling information.
The CFPB rules mandate that other information also be included, including upcoming payment obligations, the application of past payments, a list of recent transaction activity, and other account information.
On interest-rate resets, servicers will be required to provide consumers with a notice between 210 and 240 days prior to the first payment due with the adjusted rate.
When collecting from borrowers, servicers will be required to credit payments on the same day they were received. Servicers also must provide an accurate mortgage payoff balance to a consumer no later than seven business days after a borrower requests such information, according to the rules.
The regulations set new procedural requirements for servicers to respond to other information requests or complaints from borrowers. Servicers must respond to borrowers within five days.
The rules also state that servicers are generally required to conduct investigations when errors are asserted by the consumer. The error must be fixed, or the servicer must provide written notification that no error occurred, within 30 to 45 days, according to the bureau.
The CFPB regulations also provide special protections for borrowers who experience trouble making their monthly mortgage payments.
Early-intervention procedures require servicers to establish contact or make “good-faith efforts” to establish contact with borrowers within 35 days of their delinquency and inform them of loss mitigation options. The servicer also must provide written notice of those potential options within 45 days of the borrower's delinquency.
The rule also places significant restrictions on the industry practice of “dual tracking,” in which a servicer can proceed with foreclosure while also evaluating a borrower for a potential loan modification or other assistance.
During a Jan. 16 conference call with reporters, a senior CFPB official said that the final rule provides stronger protections than were initially proposed by the bureau in August (24 BBLR 1078, 8/16/12).
The proposed rule focused on the “back-end” of the process as borrowers neared foreclosure. But the final rule states that borrowers must be notified and evaluated for potential assistance options during the “beginning, middle and end” of a prolonged period of loan delinquency, the official said.
Servicers also must provide delinquent borrowers with direct access to employees who handle loan modifications and those personnel are responsible for alerting borrowers to any missing information on their applications and informing them about the status of their requests.
During the review process, servicers must consider “all options” available from the mortgage owners or investors, ranging from deferment of payments to refinancings to loan modifications, the CFPB also said.
To give borrowers additional time to submit applications, the regulations prohibit servicers from filing foreclosure notices until the loan is more than 120 days past due.
Even if a borrower is more than 120 days delinquent, if a borrower then submits a complete application for a loan modification, servicers would be required to at least evaluate the application, the agency said.
If a borrower is rejected for assistance, the servicer must explain the decision. For example, if the decision was based upon a financial model, the servicer must provide the borrower with the specific inputs used in making their calculations, according to CFPB.
If a workout cannot be achieved, the servicer must consider the borrower for alternatives to foreclosure, such as a short sale, the rules states.
Many elements of the CFPB regulations are similar to the terms of the $25 billion national mortgage settlement reached in February 2012 between the nation's five largest servicers and a coalition of federal agencies and 49 states (24 BBLR 222, 2/16/12).
The larger servicers signed and filed thousands of foreclosure affidavits with state courts without reviewing the validity or accuracy of the documents. Federal and state regulators found a host of other problems related to mortgage servicing, such as inadequate staffing and resources to handle borrower inquiries.
The CFPB's final regulations provide a number of exemptions and other adjustments for small loan servicers that handle 5,000 or fewer mortgages. The agency had initially proposed a threshold of 1,000 loans, but received negative feedback from community banks and credit unions during the rule's comment period (24 BBLR 1378, 10/25/12).
An exemption for servicers that handle 1,000 loans or less, “is likely to be of little practical utility,” the Credit Union National Association (CUNA) wrote in an Oct. 9 letter.
Elsewhere, the CFPB rules will require more transparency in the process of force-placed, or lender-placed, insurance.
Servicers are responsible for ensuring borrowers maintain property insurance. If the borrower does not insure, the servicer has the right to purchase insurance to protect a lender's interest in the property.
However, this force-placed insurance is typically much more expensive than insurance the borrower could buy privately.
The CFPB regulations require servicers to give advance notice and pricing information before charging consumers for the insurance. The servicer will have to notify a borrower twice before the servicer charges the borrower for the insurance--first, at least 45 days before, and then again at least 15 days before.
The servicer is also required to end the insurance within 15 days if it gets evidence that the borrower has the necessary insurance and the insurer would refund the force-placed insurance premiums.
The final mortgage servicing standards are available at http://www.consumerfinance.gov/regulations.
A fact sheet about the final rules can be found at http://files.consumerfinance.gov/f/201301_cfpb_servicing-fact-sheet.pdf.
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