United States: Supervisory Highlights, Fall 2015: Totally Sanitized Limerick Edition!

Don't know about you, but we've been dreaming about wrapping ourselves in a big cabled sweater, drinking a pumpkin-spiced beverage and cozying up to the Fall 2015 issue of Supervisory Highlights. Usually haiku is how we roll, but haiku really evokes spring, and in honor of everyone's favorite season of decay, we've decided to give limericks a try this time. Let's get started!

There once was a bank from Nantucket . . .

. . . JUST KIDDING! Okay, here are some real highlights from this issue of Supervisory Highlights, in the form of (totally PG) limericks:

Allocating payment on student loans

Requires methods the Bureau condones.

To do it proportionally

Can rack up the late fees;

Supervision may have you atone!

Once again, Supervision devoted a significant amount of space in this issue to student loan servicing—in particular, methodology for allocating partial payments in proportional allocation. Most student loan servicers have default payment allocation methodologies that govern how a payment that is less than the monthly minimum is allocated among multiple loans when the borrower does not provide instructions. When partial payments are allocated proportionately among multiple loans, all of the loans could become delinquent and incur a separate late fee.

Supervision believed that servicers using this methodology failed to communicate the ramifications of this methodology to borrowers. In this regard the CFPB believes that consumers should be notified and given the opportunity to direct the order of payments. The agency expressed concerns that allocation of partial payments could be an unfair practice, because servicers could do so "in a way that maximizes late fees."

The Bureau has written about this issue before, in the Fall 2014 issue of Supervisory Highlights.

Mortgage servicers once bore the brunt

Of the compliance violation hunt.

Now they've got a gold star

For coming so far,

Man, limericks are super difficult!

We may have failed to write a complete limerick for this one, but Supervision wants you to know that it doesn't just care about failures. It recognizes successes, too! This time, the Bureau wants us to know that mortgage servicers have made "significant improvements" in compliance practices in response to Bureau feedback. These achievements include thorough audits of a business unit's internal controls, with clear identification of issues and detailed management responses, as well as evidence that the issue was addressed on a clearly delineated timeline. Some servicers also conducted formal reviews of IT structures and identified the causes of problematic system outages that posed compliance risks. A little good news is nice for a change!

But wait mortgage servicers, look

You thought you were all off the hook?

In loss mitigation

They found violations

Like disclosures and waivers mistook.

It's not all smiles and sunshine, however. The issue also points out a few substantive servicing issues—in particular, persistent process issues with loss mitigation applications, such as denying borrowers for loss mitigation before the borrower's deadline to submit documents or information missing from the original application. Some servicers also failed to inform borrowers of a specific right to appeal the denial of a trial or permanent loan modification. Generally stating in a denial letter that a borrower may have a right to appeal under certain circumstances was not enough—in the Bureau's view, Regulation X requires that the servicer make an advanced determination of whether an individual borrower was entitled to appeal, rather than leaving it up to the borrower to figure it out.

In addition to Regulation X issues, Supervision identified one potential violation of Regulation Z, which states that "a contract or other agreement relating to a consumer credit transaction secured by a dwelling . . . may not be applied or interpreted to bar a consumer from bringing a claim in court pursuant to any provision of law for damages or other relief in connection with any alleged violation of any Federal law." 12 C.F.R. § 1026.36(h)(2). Some servicers require that borrowers sign a waiver of "defense, set-off or counterclaim" to their indebtedness in order to enter mortgage repayment or loan modification plans. The Bureau posited that borrowers were "likely to read the waiver as barring them from bringing claims—including Federal claims—related to the mortgage" and deemed the language deceptive.

Consumer reporting is tricky

And tracking disputes can be sticky.

But the FCRA's letter

Says you can do better

Even if it seems kinda picky!

Supervision identified a number of different observations that amounted to purported violations by furnishers under the FCRA and Regulation V. Some furnishers failed to provide consumers with notice of the results of investigations of disputed information furnished to CRAs, or, when users of the information, failed to provide consumers with adverse action notices when the furnishers took adverse action based in whole or in part on information in a consumer report. The most significant observation, however, concerned policies, processes, and procedures for handling FCRA disputes. Some entities failed to distinguish FCRA disputes from generalized complaints or other communications, or failed to monitor and track the FCRA disputes received. In the Bureau's view, these conditions compromise the ability to assess compliance with an entity's dispute obligations under the FCRA, including conducting a reasonable investigation, reviewing the relevant information, and responding within a certain timeframe.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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