United States: Mississippi Regulatory Compliance Group Quarterly Report, Vol. 27 No. 4

Last Updated: November 9 2016
Article by Butler Snow LLP

On August 4, 2016, the CFPB issued final rules amending the mortgage servicing provisions of RESPA Regulation X and TILA Regulation Z. At the same time, the Bureau issued an interpretive rule under the Fair Debt Collection Practices Act (FDCPA) relating to compliance with certain provisions by mortgage servicers who are also debt collectors under the FDCPA. Like the original mortgage servicing rules, the amendments are lengthy and complex. The CFPB issuance is 901 pages. Some changes will become effective 12 months after publication of the rule in the Federal Register, and others will take effect 18 months after publication. As of October 18, 2016, publication in the Federal Register had not yet occurred. In this article, we will summarize some of the key provisions in the amendments. But first, it might help to briefly review the basics of the current servicing rules.

The Current Mortgage Servicing Rules.

Issued in 2013 pursuant to Dodd-Frank and effective January 10, 2014, the CFPB rules generally apply to mortgage loan servicers including creditors and assignees servicing their own loans. The rules are split between Reg. Z and Reg. X. The Reg. Z mortgage servicing provisions apply to any closed-end, dwelling secured consumer credit transaction, first or subordinate lien, and whether or not the dwelling is the borrower's principal dwelling. The Reg. X servicing provisions apply to any "mortgage loan" which is defined as a "federally related mortgage loan" covered by RESPA, subject to the usual RESPA exemptions for business purpose loans, loans secured by 25 acres or more, and construction or other temporary financing, and excluding in this case, HELOCs. The Reg. X servicing amendments apply to first and subordinate lien loans except that the initial servicing disclosure and the servicing transfer disclosures apply only to first lien loans. Some of the Reg. X requirements apply only to loans secured by the borrower's principal residence.

The current Reg. Z servicing rules include:

  • Prompt payment crediting and payoff statements. Servicers must promptly credit periodic payments as of the date of receipt. Pyramiding of late fees is prohibited. Servicers are responsible for providing an accurate payoff to a consumer within a reasonable time, no later than seven business days, after receiving a written request. Prompt payment crediting and payoff statement requirements also apply to open-end consumer HELOCs.
  • ARM adjustment notices. On ARM loans, servicers must provide the first rate/payment adjustment notice at least 210 but no more than 240 days before the first payment at the adjusted level comes due. For subsequent rate adjustments, notice must be provided between 60 and 120 days before a payment at a new level becomes due. The rule sets forth detailed requirements for the contents and format of both notices.
  • Periodic billing statements. A periodic statement must be provided for each billing cycle. The rule sets forth detailed requirements for timing, form, and content of the billing statements and includes model forms. On fixed rate loans, a coupon or payment book may be used in lieu of sending billing statements, and the rule specifies the content of the payment book.

The current Reg. X servicing provisions include:

  • Servicing transfer disclosures. When loan servicing is transferred, each transferor servicer and transferee servicer must provide the borrower with a notice of transfer that meets the timing, content and format requirements specified in the rule.
  • Written servicing and information management policies and procedures. Servicers must establish and maintain comprehensive written policies and procedures for servicing loans, maintaining records, and managing information. Policies and procedures must be tailored to the size, scope, and nature of the servicer's operations and be reasonably designed to achieve the objectives and satisfy the requirements detailed in the rule.
  • Error Resolution and Information Requests. Servicers must acknowledge receipt of consumer requests for information and notices of error and, either, provide the requested information or investigate and correct any errors and provide the borrower with written notice of the corrective action taken, within the time limits specified in the rule. Delinquent loan payments cannot be required to be made before responding. Fees for responding to error notices are prohibited, and if the alleged error relates to a loan payment, no adverse information regarding the payment may be reported to the credit bureau for at least 60 days.
  • Force-placed insurance notices. No charge may be imposed for force-placed insurance unless the servicer has a reasonable basis to believe the borrower has failed to maintain required hazard insurance. The servicer must send two written notices to the borrower and not have received any verification that the borrower has insurance. Notices must meet the content, format and timing requirements in the rule, and the rule contains model forms. If a borrower provides proof of coverage, any overlapping force-placed insurance must be canceled and premiums refunded within 15 days. All charges must be bona fide and reasonable, and any costs other than regulated insurance premiums must be for services actually performed and bear a reasonable relationship to the servicer's costs of providing the service. If there is an escrow for insurance, the servicer must advance funds to the escrow account to pay insurance premiums even when the borrower is delinquent on the loan.
  • Early intervention with delinquent borrowers. For a loan secured by the borrower's principal dwelling, a servicer must make good faith efforts to establish live contact with the borrower by the time the account is 36 days delinquent and inform the borrower, where appropriate, that loss mitigation options may be available. In addition, the servicer must send written notice by the time the loan is 45 days delinquent. The rule specifies the content of the written notice and provides model forms.
  • Continuity of contact with delinquent borrowers. For a loan secured by the borrower's principal dwelling, a servicer must have and maintain reasonable written policies and procedures for providing a delinquent borrower with access to personnel who can assist them with any available loss mitigation options. The policies and procedures must be reasonably designed to achieve certain objectives specified in the rule.
  • Loss mitigation procedures. For a loan secured by the borrower's principal dwelling, a servicer is subject to limitations on initiating or continuing foreclosure and to procedural requirements when offering any loss mitigation option. Basically, a loss mitigation option is any alternative to foreclosure offered by the investor/owner of the mortgage available through the servicer. No specific loss mitigation options are required, but any that are offered must meet the procedural requirements of the rule.

The rule sets time limits for consideration of loss mitigation applications. Generally, servicers must acknowledge receipt within 5 days, inform the borrower of any additional information needed and the deadline for providing it, and evaluate the borrower for all available loss mitigation options within 30 days after receiving the completed application. A borrower must be given 7 to 14 days to accept or reject any mitigation offered, depending on how far in advance of a scheduled foreclosure the completed application was received. If the application is denied, written notice of the denial must be given to the borrower which must include a description of any appeal rights and, in some cases, a statement of the specific reasons for the denial. The borrower may appeal the denial, and any appeal must be reviewed by different personnel than those who decided the initial application. The borrower must be given notice of the determination on the appeal within 30 days, and if the appeal results in an offer of loss mitigation, the borrower must be given 14 days to accept or reject.

  • Delinquency and foreclosure. Servicers are prohibited from starting foreclosure until the loan is at least 120 days delinquent. The rule prohibits "dual tracking", or proceeding with foreclosure while at the same time dealing with a borrower on a pending loss mitigation request. Also, a servicer may not seek a judgment of foreclosure, move for an order of sale, or conduct a foreclosure sale if the borrower is performing under the terms of any permanent or temporary loss mitigation agreement.

Small servicer exceptions under the current rule. A "small servicer" is one that, together with any affiliates, services 5,000 or fewer mortgage loans in a calendar year, and only services mortgage loans originated or owned by it or its affiliate. Loans serviced on a pro bono basis for an unaffiliated entity, such as Habitat for Humanity, do not count for the threshold determination. Small servicers are exempt from Reg. Z requirements for billing statements/payment books and are also exempt from Reg. X requirements for written loan servicing and information management policies and procedures, early intervention with delinquent borrowers, continuity of contact with delinquent borrowers, and loss mitigation procedures. Small servicers are still subject to the 120 day foreclosure rule and the other Reg. Z and Reg. X requirements listed, with one small twist on force-placed insurance. Small servicers may force place insurance when the borrower is in default rather than having to advance funds to an existing escrow account, but only if the force-placed insurance costs less than the amount the servicer would disburse from escrow to maintain the borrower's existing coverage.

Key Provisions of the 2016 Mortgage Servicing Rule Amendments. The most significant changes contained in the 2016 amendments include the following:

  • Successors in interest. Under the current rule, a servicer's written servicing policies and procedures must reasonably ensure that upon receiving notice of a borrower's death, the servicer can promptly identify and facilitate communication with the successor in interest of the deceased borrower with respect to the property securing the loan. The 2016 amendments make three sets of changes relating to successors in interest.

First, the Bureau defines the term "successor in interest" for purposes of Reg. X and Reg. Z in a fashion consistent with the types of transfers that are protected from enforcement of a due-on-sale clause under section 341(d) of the 1982 Garn-St.Germain Act. A successor in interest is a person to whom an ownership interest in a property securing a mortgage loan is transferred from a borrower in one or more of the following ways: (i) a transfer by inheritance or through a right of survivorship on the death of a joint tenant or tenant by the entirety; (ii) a transfer to a relative resulting from the death of a borrower; (iii) a transfer where the spouse or children of the borrower become an owner; (iv) a transfer resulting from a divorce, legal separation, or property settlement agreement by which the spouse of the borrower becomes an owner; or (v) a transfer into an inter vivos, or living, trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of occupancy rights. While small servicers are generally exempt from the requirement to maintain written servicing policies and procedures, the Bureau noted that small servicers must still respond in a timely manner to requests for information which might include providing a written description of the documents the servicer reasonably requires to confirm a successor's identity and ownership interest in the property.

Second, the 2016 amendments clarify how a mortgage servicer confirms a successor in interest's identity and ownership interest. Generally, a servicer must respond to a written request from a person who may be a successor in interest by providing that person with a written description of the documents the servicer reasonably requires to confirm the person's identity and ownership interest in the property. A servicer's policies and procedures must be reasonably designed to ensure the servicer can: (i) upon receipt of notice of the borrower's death or a transfer of the property, promptly facilitate communication with any potential or confirmed successors in interest, (ii) promptly determine what documents the servicer requires to confirm the person's identity and ownership interest, (iii) promptly provide to any potential successor in interest a description of those documents and how the person may submit them; (iv) upon receipt of those documents, promptly make a determination and notify the person that his or her status is confirmed, that additional documents are needed (and what those documents are), or that the servicer has determined the person is not a successor in interest.

Third, the 2016 amendments extend the protections of the Reg. X and Z mortgage servicing rules to successors in interest once their status has been confirmed. Essentially, a successor in interest is treated as a "borrower" under Reg. X and as a "consumer" under Reg. Z for purposes of the mortgage servicing requirements, including the right to receive periodic statements and other notices, prompt crediting of payments and payoff statements, responding to notices of error and information requests, communication with delinquent borrowers, and loss mitigation. A servicer may not condition its review of a loss mitigation application upon a confirmed successor in interest agreeing to assume liability on the loan, but may condition consummating a loan modification or other loss mitigation option on assumption by the successor.

While confirmed successors in interest are entitled to receive periodic statements and notices such as escrow statements, rate/payment adjustment notices, force-placed insurance notices, etc., duplicative notices are not required. If the servicer is already sending those notices to another borrower on the loan, it is not required to also send those notices to a successor, but the servicer may still have to provide that information to the successor in response to a written request for information. A servicer may also disclose non-public personal information relating to the mortgage loan to a confirmed successor in interest, but may redact financial, contact, or location information about other borrowers to protect their privacy.

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