The CFPB has proposed new mortgage servicing rules as amendments to Regulation Z and Regulation X, the implementing regulations of the Truth in Lending Act and the Real Estate Settlement Procedures Act, respectively. In announcing the proposals, Director Richard Cordray stated that the rules "arm consumers" with information needed to "avoid costly surprises" and "address the problem of consumers getting the runaround." The proposals adopt four categories of the National Mortgage Settlement among the five largest servicers, the Federal government and state attorneys general: (1) foreclosure and bankruptcy information and documents, (2) loss mitigation, (3) servicing fees, and (4) force-placed insurance. Importantly, based upon the report of the Small Business Review Panel, the proposals would exempt small servicers—those that service 1,000 or fewer mortgage loans and exclusively service mortgage loans that they or an affiliate originate or was the entity to which the obligation was initially payable—from the requirement to provide periodic statements for certain loans.
Regulation Z
The proposal amending Regulation Z contains several significant changes to the regulation including periodic billing statements required by the Dodd-Frank Act's amendments to TILA, limitations on force-placed insurance, requirements for adjustable rate mortgages, and prompt crediting of payments.
Adjustable-rate mortgages. Under the proposal, servicers must provide a notice six months prior to the initial rate adjustment for all hybrid adjustable rate mortgages and an additional notice 60 to 120 days prior to each interest rate adjustment that results in a corresponding change in payment. The proposal, however, does eliminate the annual notice requirement, where the adjustment does not result in an increase in the monthly payment.
Periodic billing statement. The proposal requires the creditor, assignee or servicer to provide a statement for each billing cycle, unless (1) the mortgage is fixed rate; and (2) a coupon book is provided containing substantially the same information as in the statement.
Prompt payment. Servicers must also promptly credit payments from borrowers—generally the day of receipt. For partial payments received, the servicer must hold these payments in a suspense account until the amount in the account equals a full payment (principal, interest and, if applicable, escrow) and credit the payment to the most delinquent outstanding payment.
Regulation X
The proposal amending Regulation X implements requirements mandated by the Dodd-Frank Act, and also creates new mortgage servicing standards under authority granted by Dodd-Frank.
Error resolution. The proposal contains error resolution procedures including failures related to borrower payments, such as failures to credit a payment to the borrower's account as of the date of receipt that results in a charge to the borrower or negative information reported to a consumer reporting agency; failures to provide information to the borrower, such as failures to provide an accurate payoff balance upon request; and failure to suspend a scheduled foreclosure sale after receipt of a loss mitigation application. Servicers are required to acknowledge the notice of error within five days of receipt of the notice of error. Under the proposal, the servicer must correct or respond within 30-45 days. Finally, under the proposal, a servicer is generally not required to suspend the foreclosure proceedings to respond to a notice of error. A servicer is not required to comply with the error resolution procedures if a notice relates to something other than the list of covered errors.
Early intervention requirements. Citing servicers' inconsistency in managing delinquencies to limit foreclosures, the proposal requires servicers to provide borrowers with two notices: (1) an oral notice of late payment and loss mitigation options when the account is 30 days delinquent, and (2) a written notice about the foreclosure process and loss mitigation options when the account is 40 days delinquent. Further, the proposal sets forth timelines for servicers' loss mitigation programs. For example, under the proposal, servicers are required to evaluate the borrower for all available loss mitigation options within 30 days of receiving the borrower's complete application.
Force-placed insurance. The proposal also places restrictions on the practice of force-placed insurance (see April 17, 2012 Alert) by prohibiting force-placed coverage unless the servicer has a reasonable basis to believe the borrower has not maintained hazard insurance and has provided the required notices. Force-placed insurance is defined to include "hazard insurance." The notices are required to include disclosures reminding the borrower of the obligation to maintain hazard insurance and a statement of the procedures by which the borrower may demonstrate that s/he has insurance coverage among other things.
Loss mitigation requirements. The proposal sets forth three objectives for servicers who make loss mitigation options available to borrowers "in the ordinary course of business": (1) that servicers provide loss mitigation information to borrowers and respond in a timely manner (e.g., within 30 days of receipt of the complete application), (2) that servicers are prohibited from proceeding with a foreclosure sale until the borrower and servicer have terminated discussions regarding loss mitigation options, and (3) timelines for the loss mitigation process so as not to interrupt or require the suspension of the foreclosure process by borrowers by the use of loss mitigation options to strategically extend the foreclosure process. Importantly, while the proposal prohibits servicers from proceeding with a foreclosure sale during loss mitigation negotiation, servicers would not be prohibited from taking other steps in the foreclosure process.
Information management. Under the proposal, servicers are generally required to establish policies and procedures for maintaining and managing information and documents related to the borrower's account. A servicer meets this requirement if the policies and procedures are "reasonably designed" to achieve the objectives identified in the proposal such as providing accurate and timely disclosures to borrowers and facilitating compliance by third-party service providers. Further, under the proposal, servicers are required to maintain records that document actions taken by the servicer for one year after the loan is discharged or transferred and provide a copy of the servicing file on demand from the borrower. The proposal for information management was not contained in the Dodd-Frank Act amendments to Regulation X.
Continuity of Contact. Under the proposal, within five days after a servicer has notified the borrower (or made a good faith effort to notify the borrower) of payment delinquency, the servicer must assign someone within the organization to be available to the borrower by telephone. This individual serves four functions: (1) provides the borrower with accurate information about such things as loss mitigation options available, (2) provides access to such things as the borrower's payment history and all the documents the borrower has submitted in connection with his/her loss mitigation application, (3) provides loss mitigation documents to assigned servicer personnel, and (4) provides the borrower with information upon requesting including information on how to file a notice of error or make an information request. The proposal carves out a safe harbor for servicers if the servicer's personnel do not engage in a pattern or practice of failing to perform these functions.
Comments on the proposal are due October 9, 2012. In particular, the CFPB is seeking comment on the implementation period recognizing that the changes will require significant changes to the internal processes of servicers and creditors. The CFPB plans to finalize rules by January 2013. The CFPB also provided a summary of the proposals, factsheet and a summary of the findings on the development of the disclosures.
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