United States

Key amendments to mortgage servicing rules

INSIGHT ARTICLE  | 

In November 2014, the Consumer Financial Protection Bureau (CFPB) proposed a number of changes to the Truth in Lending Act (TILA/Regulation Z) and the Real Estate Settlement Procedures Act (RESPA/Regulation X). The comment period ended on March 16, 2015. The industry responded and after thorough analysis by CFPB, the final rule (over 700 pages) was issued on Aug. 2, 2016 with staged effective dates. On Oct. 19, 2016, the final rule was published.

Generally, all new regulations have an effective date of Oct. 19, 2017 except for the following which have an effective date of April 19, 2018:

Periodic statement exemption for bankruptcy (1026.41(e)(5))

  1. Modified periodic statements for borrowers in bankruptcy (1026.41(e)(f))
  2. Successors in interest

The amendments cover nine areas:

  1. Successor in interest
  2. Definition
  3. Requests for information from borrower
  4. Forced placed insurance
  5. Early intervention prior to loss mitigation efforts
  6. Loss mitigation
  7. Prompt payment crediting
  8. Periodic statements
  9. Small servicer determination

The changes with the greatest impact are:

1. An expansion of parties who can qualify as successors in interest. A new set of borrowers can effectively step into the shoes of the former borrower, may not be liable for outstanding debt and will receive the same protections under Section 1024 (Regulation X). This expanded list of parties is now consistent with successors in interest noted in the Garn-St Germain Depository Institutions Act of 1982, Section 341(d).

Note: Successors in interest received the most commentary from the industry and the final rule has a sizable section relating to the topic.

Safe harbor from liability exists.

2. Forced placed insurance notifications must include language if there is insufficient coverage.

3. Bankruptcy is no longer an exemption not to provide periodic statements unless borrower has:

Made a determination to surrender the property

Avoided the lien securing the mortgage loan

Requested that servicer cease providing periodic statements

Note: To determine if a consumer in bankruptcy qualifies for an exemption, there is a two-part test. 

This new rule reverses a prior CFPB decision to allow bankruptcy as an exemption and challenges the Bankruptcy Code’s automatic stay. After additional study and public commentary from bankruptcy judges, bankruptcy attorneys and trustees, and servicers, the CFPB has limited the use of the bankruptcy exemption and believes the borrower should receive the periodic statement for information purposes. Further, the periodic statement would be modified pursuant to 1026.41(f).

4. Bankruptcy is no longer an exemption not to provide written notice to borrower after 45 days of delinquency unless:

No loss mitigation options are available

Borrower has provided a cease communication pursuant to the Fair Debt Collections Protection Act (FDCPA), section 805(c)

Note: Bankruptcy is still a valid exemption for not performing live contact with borrower after 36 days of delinquency since the servicer’s control of live contact communication would be difficult and could lead to violations under the Bankruptcy Code or FDCPA.

No safe harbor from liability exists.

5. FDCPA notification from borrower is no longer an exemption not to provide written notice to borrower after 45 days of delinquency unless both of these occur:

There are loss mitigation options available

Borrower is not in bankruptcy

Note: The CFPB has issued a safe harbor from liability when issuing written notices to borrowers who fall under the conditions noted above.

The written notice would be modified and cannot request for a payment and must continue to comply with applicable provisions of FDCPA.  Also, failure to provide a modified written notice could delay future foreclosure action since a written notice must be sent prior to the first legal action to foreclose.

6. Upon receiving a complete loan application, servicer must inform borrower within five days. Further, if additional information is later needed by underwriting and borrower satisfies the request, servicer needs to issue a notice to borrower that application is complete.

7. Servicer cannot deny application for missing information not in borrower’s control.

8. Actions required by servicer to delay the foreclosure process when in receipt of a complete loan application after the first legal action to foreclosure.

9. Borrower may receive more than one loss mitigation application if borrower became current and endured a subsequent hardship.

10. Loss mitigation requirements for transferor and transferee servicer include:

Pending loss mitigation application received by transferee servicer gets no extension of time for transferee servicer unless no five-day letter (acknowledgement letter) was sent to borrower.

If a complete application is received by transferee servicer and is pending a decision as of transfer date, the transferee has 30 days from date of transfer to evaluate for possible loss mitigation options.

Existing appeals at date of transfer must be evaluated and if transferee cannot make a decision to accept or reject appeal, application is considered pending and effectively the application must be reevaluated for all possible loss mitigation options again.

11.  Small servicer determination does not include loans serviced for seller financer.

12.  The CFPB issued concurrently with the final rule an interpretive rule (CFPB’s opinion) for purposes of FDCPA and provides safe harbors from liability for servicers acting in compliance with the following specified mortgage servicing rules:

            a.     Servicers do not violate FDCPA, Section 805(b) when communicating to successors in interest

Servicers do not violate FDCPA, Section 805(c) when providing written early intervention notice (required by 1024.39(d)(3)) to a borrower who has invoked the  cease communication right under 805(c)

Servicers do not violate FDCPA, Section 805(c) when responding to borrower-initiated communications concerning loss mitigation after the borrower has invoked the cease communication right under FDCPA, Section 805(c)

For more details concerning the above areas, see our white paper which breaks down the 700-page final rule in more user-friendly detail and can help you identify any risks in your organization.  If you would like to discuss, please contact Roger Hase at roger.hase@rsmus.com or +1 312 634 4372.

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