The New CFPB Mortgage Rules: A Summary of What They Are and What They Mean
The Dodd-Frank Wall Street Reform Act and Consumer Protection Act (“Dodd-Frank Act”) amended both the Real Estate Settlement Procedures Act (“RESPA”), which is implemented by Regulation X, and the Truth in Lending Act (“TILA”), which is implemented by Regulation Z, in 2010. Both these Acts address the servicing of mortgage loans. The Consumer Financial Protection Bureau (“CFPB”) is the federal agency responsible for overseeing all federal financial laws that specifically protect consumers, including RESPA and TILA. In January 2013, the CFPB issued rules to implement the Dodd-Frank amendments (the “Mortgage Servicing Rules”) which took effect on January 10, 2014.
This article provides a summary of what you, as a mortgage servicer, must do to comply with these rules as they relate to closed-end consumer credit transactions secured by a dwelling (referred to in this article for convenience as “mortgage loans”). Some of these rules only apply to mortgage loans secured by the borrower’s principal residence. We’ve noted the limited applicability of those specific rules in this article. Additionally, the Mortgage Servicing Rules may apply differently to creditors or assignees of consumer mortgage loans or to different types of mortgage loans, such as open-end lines of credit or home equity lines of credit, reverse mortgages, timeshare loans, and fixed-rate loans that have coupon books. This article does not discuss how the Mortgage Servicing Rules apply to those types of mortgage loans.
Although this article covers many of the provisions of the Mortgage Servicing Rules, it is not meant to be a comprehensive summary of these rules. We recommend you consult the text of the final rules, in addition to this article, for guidance in specific situations. The rules can be found here and here.
I. Small Servicer Exemptions
Certain servicers are exempt from some provisions within the Mortgage Servicing Rules as “small servicers.” If you and any affiliates together service 5,000 or fewer mortgage loans per year, you may qualify for these limited exemptions as a small servicer. Your small servicer eligibility is determined each calendar year and is based on the loans you and your affiliates service from January 1 through the remainder of that year. Should you cross the 5,000-loan threshold or take on a loan you do not own or did not originate, the Mortgage Servicing Rules allow you 6 months to comply with any requirements you were previously exempt from as a small servicer.
However, if you service any consumer loans which you do not own or did not originate, you do not qualify for the small servicer exemption, no matter how few mortgage loans you service per year. Additionally, there are some provisions which apply to all consumer mortgage servicers, regardless of how few mortgage loans you service per year.
II. Fair Debt Collections Practices Act (“FDCPA”) Interplay
In addition, compliance with the Mortgage Servicing Rules often intersects with the Fair Debt Collections Practices Act (“FDCPA”), which applies to you if you are a debt collector under the FDCPA. We have also noted throughout Parts One and Two what actions you should take to comply with both your obligations under the Mortgage Servicing Rules, as well as your obligations to a borrower as a debt collector when those obligations conflict. Our guidance accords with the guidance published by the CFPB. The CFPB is the agency responsible for enforcing both the FDCPA and the Mortgage Servicing Rules.
III. Payoff Requests
You generally must provide accurate payoff information to a borrower within 7 business days of receiving a borrower’s written request for this information. Small servicers are not exempt from this requirement.
IV. Borrower Notifications: Error Notices and Information Requests
You generally must respond to written notices of error or information requests, other than requests for payoff information, that relate to the servicing of a mortgage loan. It’s important to remember that the Mortgage Servicing Rules do not displace your Fair Credit Reporting Act obligations. You must not report any adverse payment information relating to a payment for 60 days after your receipt of an error notice related to that payment.
Small servicers are not exempt from these requirements, nor are servicers that are debt collectors under the FDCPA who have received a written cease communication request from a borrower, unless the borrower specifically withdraws their error notice or information request in conjunction with their cease communication request.
You must first acknowledge your receipt of the notice or request, in writing, within 5 business days of receiving it. Then, you generally must investigate the notice of error or information request and respond in one of the following ways within 30 business days of receiving the notice or request:
- correct any error(s) discovered and provide written notice to the borrower of the correction;
- provide written notification that no error occurred;
- provide the information requested; or
- explain why the information is not available.
If the information request involves information beyond contact information for the mortgage loan owner or assignee, you may extend the deadline for investigation and response by 15 business days, as long as you provide notice to the borrower of the extension before the original 30-business day deadline expires.
You are not required to provide any supporting documentation with your response. However, if the borrower requests documentation either showing no error occurred or why the information is not available, you must provide copies of the documents you relied on to reach that determination to the borrower within 15 business days of receiving the borrower’s request.
If you receive a notice of error related to a mortgage loan that has a foreclosure sale scheduled more than 7 days before the scheduled sale date, you must respond to the error request within 30 business days or prior to the foreclosure sale date, whichever is earlier. If you cannot respond before the scheduled foreclosure sale, you should cancel the foreclosure sale in order to do so. You do not need to respond to error notices received less than 7 days prior to a scheduled foreclosure sale date.
The Mortgage Servicing Rules do not require a response to error notices or information requests that are irrelevant, duplicative, overbroad or unduly burdensome, untimely (i.e., those received more than one year after you transferred or discharged the mortgage loan), or those that involve confidential, proprietary, or privileged information. You must notify the borrower of your determination that no response is warranted for one of these reasons within 5 business days of receiving the request or notice.
V. Force-Placed Insurance
Before you can charge a borrower for force-placed insurance, you must have a reasonable basis to believe that the borrower has failed to maintain property insurance, as required by the mortgage, and you must be unable to disburse funds from the borrower’s escrow account to maintain the borrower’s hazard insurance for a reason other than that the escrow account is deficient.
Small servicers are generally not exempt from these requirements, nor are servicers that are debt collectors under the FDCPA who have received a written cease communication request from a borrower. However, a small servicer may choose to purchase force-placed insurance rather than advance funds to the borrower’s escrow account in order to maintain the borrower’s insurance if doing so would cost less to the borrower.
The Mortgage Servicing Rules also require you to send 2 separate notices to the borrower prior to the imposition of any force-placed insurance charges to a borrower’s account, the first notice at least 45 days prior to imposition and the second notice at least 15 days prior to imposition. You must also send notice at least 45 days prior to your renewal or replacement of existing force-placed insurance. The Mortgage Servicing Rules set out the specific information that must be included in each notice and also include sample forms.
You must cancel any force-placed insurance within 15 days of receiving evidence that the borrower has proper insurance in place. You must refund all forced-place premium charges and related fees and remove all force-placed insurance charges and fees from the borrower’s account for any overlapping period within 15 days, as well.
VI. Servicing Policies and Procedures
The Mortgage Servicing Rules generally require you to tailor your policies and procedures to achieve certain specific objectives, including:
- access to and provision of timely and accurate information, including that information necessary to promptly identify and facilitate communications with successors in interest to a deceased borrower’s mortgage loan;
- proper evaluation of loss mitigation applications;
- compliance oversight of service providers;
- proper transfer of information during servicing transfers; and
- properly informing consumers of the written error resolution and information request procedures.
These rules specifically require you to retain records of your actions on mortgage loans until 1 year has passed since the mortgage was either discharged or transferred and to maintain all loan transaction data, all security instruments that establish mortgage liens, and any notes created by your personnel in a manner that allows you to compile a servicing file within 5 days, if necessary. Small servicers are exempt from these requirements.
VII. Early Intervention
Generally, you must make good faith efforts to establish live contact with borrowers on mortgage loans secured by the borrower’s personal residence by the 36th day of their delinquency. For the purposes of this rule, a mortgage loan is considered delinquent on the day a payment sufficient to cover principal, interest, and escrow, if applicable, is due and unpaid for a given billing cycle, regardless of any grace period that may be allowed before a late fee is assessed. A recorded phone message does not qualify as live contact. Additionally, you must provide written notice to the borrower of loss mitigation options that may be available, that include housing counseling information, by the 45th day of their delinquency. You do not need to send this written notice more than once during any given 180-day period.
Small servicers are exempt from these requirements, as are servicers that are debt collectors under the FDCPA who have received a written cease communication request from a borrower. You are also exempt from this requirement while a borrower is a debtor in bankruptcy.
The Mortgage Servicing Rules list specific information the 45-day delinquency notice must include and also include examples of compliant notice language.
VIII. Continuity of Contact with Delinquent Borrowers
To ensure delinquent borrowers have access to personnel who can assist them with loss mitigation options, the Mortgage Servicing Rules require you to assign a specific individual or team to each delinquent borrower by the 45th day of their delinquency, if not sooner. For the purposes of this rule, a mortgage loan is considered delinquent on the day a payment sufficient to cover principal, interest, and escrow, if applicable, is due and unpaid for a given billing cycle, regardless of any grace period that may be allowed before a late fee is assessed. This requirement is not applicable to those mortgage loans not secured by the borrower’s principal residence. Small servicers are exempt from this requirement.
Policies and procedures should be tailored so that delinquent borrowers can reach the assigned personnel by phone and the assigned personnel should be able to timely retrieve the borrower’s payment history and loss mitigation documents, as well as have familiarity with loss mitigation options, applications, the status of their assigned borrower’s application, and the circumstances which necessitate referral to foreclosure, as well as the Mortgage Servicing Rules. The personnel team or individual should remain assigned to a delinquent borrower until that borrower makes 2 consecutive payments without incurring a late charge.
IX. Loss Mitigation Requirements
The Mortgage Servicing Rules have put various guidelines in place relating to the evaluation of and response to loss mitigation applications received in relation to mortgage loans secured by the borrower’s principal residence, in addition to the commencement and continuation of foreclosure. These new rules do not require you to use any certain evaluation criteria or to offer specific loss mitigation options to specific borrowers. However, many different types of contact can qualify as a loss mitigation application under the Mortgage Servicing Rules, including an oral assertion from a borrower indicating interest in being evaluated for loss mitigation options, if that assertion contains any information you might consider in evaluation an application.
Small servicers are primarily exempt from these requirements, subject to 2 exceptions discussed below. Receipt of a written cease communication request from a borrower as a debt collector under the FDCPA does not exempt you from these requirements unless the requesting borrower has also specifically withdrawn his or her request for loss mitigation assistance.
If you receive a loss mitigation application 45 days or more before a scheduled foreclosure sale (or when no foreclosure is scheduled), you must notify the borrower within 5 business days whether or not it is complete and what, if any, documents or information are needed to complete it. You must exercise “reasonable diligence” to complete an incomplete application. Once you receive a complete loss mitigation application, you must follow the evaluation guidelines below.
If you receive a complete loss mitigation application within 37 days before a scheduled foreclosure sale (or when no foreclosure sale is scheduled), you must evaluate the application within 30 days and provide written notice to the borrower of which loss mitigation options are available, if any, as well as give specific reasons supporting your decision to deny any loss mitigation options, if applicable. A loss mitigation application is considered complete for purposes of calculating this deadline once you receive all the information requested that is within the borrower’s control.
How much time you must afford a borrower to accept or reject an offered loss mitigation option depends on the proximity of a scheduled foreclosure sale. A borrower must be given at least 14 days if their completed application was submitted 90 days or more before any scheduled foreclosure sale date (or when no sale date was scheduled), but only need to be given 7 days if the completed application was submitted between 37 and 90 days before a scheduled foreclosure sale. You can consider a lack of response to your offer as a rejection unless the borrower is making payments under a trial payment plan or the borrower has the right to an appeal.
The rules require you to afford borrowers the right to appeal denials of loan modification options, based on complete applications received 90 days or more before a scheduled foreclosure sale (or when no sale has been scheduled). Appeals must be independently evaluated by different personnel than those who reviewed the original application and you must respond by accepting or rejecting the loss modification option that was originally denied within 30 days of the appeal.
Under the Mortgage Servicing Rules, you may not refer a mortgage loan to foreclosure (applicable to those mortgage loans where no sale date is scheduled or a complete loss mitigation application was received more than 45 days prior to a scheduled sale date) or move for foreclosure judgment or order of sale, or hold a sale (applicable to those mortgage loans on which a complete loss mitigation application was received less than 45 days but more than 37 days before a foreclosure sale) unless:
- The borrower’s application has been evaluated, the borrower has been determined ineligible and properly notified of this determination, and the appeals process has either been exhausted or is not available;
- The borrower has rejected any options offered; or
- The borrower fails to perform under a loss mitigation option. Small servicers are not exempt from this limitation, but are exempt from the previous two.
You should promptly notify your foreclosure counsel upon receipt of any complete loss mitigation applications on files referred to counsel.
Even if no loss mitigation application has been received, the first notice or filing required to begin the foreclosure process cannot be made or filed until the borrower is at least 120 days delinquent. Such notices or filings include any notices required by law to accelerate a mortgage loan. Small servicers are subject to this requirement.
X. Interest Rate Adjustment Notices for Adjustable-Rate Mortgages (“ARMs”)
You must provide notice to a borrower in connection with the initial interest rate adjustment on an ARM that secures a borrower’s principal dwelling and has a term of more than one year between 210 and 240 days before the first payment at the new adjusted rate is due. You must provide additional notice between 60 and 120 days before the first payment at the new rate is due following any subsequent interest rate adjustment. The Mortgage Servicing Rules contain sample notices.
These regulations apply to all ARMs regardless of whether they were originated before or after January 10, 2014. However, you don’t need to provide the initial rate adjustment notice on those loans where the first payment under the new rate is due less than 209 days from the effective date, or before August 7, 2014. The same goes for notices of subsequent interest rate adjustments for which payments are due prior to March 10, 2014 (or less than 59 days from the effective date).
Small servicers are not exempt from these requirements. Servicers that are debt collectors under the FDCPA who have received a written cease communication request from a borrower are not exempt from sending the initial required notice, but are exempt from sending any subsequent notices related to subsequent interest rate adjustments.
Certain ARMs, such as those with a short look back period, those that frequently adjust, or those that adjust soon after consummation, may be subject to different timing rules. You should consult the Mortgage Servicing Rules for specific information relating to notices required on these types of ARMs.
XI. Periodic Statements
You are required to provide clear periodic statements each billing cycle or once a month to all mortgage loan borrowers with ARMs, whichever is shorter, unless you transfer the loan to another servicer, the loan is fully paid off, the loan is discharged in a foreclosure sale, or a borrower files for bankruptcy. Small servicers are exempt from this requirement.
Your periodic statements must include:
- the amount and due date of the next payment;
- a summary of mortgage terms (e.g., interest rate, etc.);
- a breakdown of past payments by principal, interest, fees, and escrow;
- recent transaction activity; and
- certain delinquency information once a borrower is 45 days delinquent.
The Mortgage Servicing Rules specifically state how this required information should be formatted.
You may be able to use coupon books rather than periodic statements for your fixed-rate loans. Note that periodic statements are required to be sent on all ARMs, regardless of whether or not coupon books are also sent. The requirements for coupon books are stated in the Mortgage Servicing Rules. Note that even if coupon books are used, you are still required to send certain notice to borrowers who reach 45 days of delinquency.
XII. Payment Processing
You must credit a periodic payment received on a mortgage loan secured by the borrower’s principal dwelling that covers the principal, interest, and escrow amounts owed for that pay period on the date you receive it, regardless of whether or not that payment also covers any fees owed for that period. You may credit a partial payment upon receipt, return a partial payment to the borrower, or retain a partial payment in a “suspense account.” Small servicers are not exempt from these requirements.
If you choose to retain a partial payment, you must credit the “suspense account” funds to the borrower’s account, as you would a periodic payment, once the retained amount equals a full payment, exclusive of any fees. You also must be sure to include information about the retained funds in the periodic statement sent for the loan, also required by the Mortgage Servicing Rules (as described above in the Periodic Statements section). You should consult your loan agreements for any additional rules which may further govern receipt of a partial payment made on a consumer mortgage loan account. Small servicers are not exempt from these requirements.
Keep in mind that compliance with the Mortgage Servicing rules must be achieved in addition to compliance with any secondary market mortgage servicing rules you may also need to follow on mortgage loans you service. In addition, it’s important to remember that these rules set forth minimum compliance requirements and nothing in these rules prevents you from setting higher servicing standards.
For further personalized guidance regarding establishing compliance with the Mortgage Servicing Rules discussed herein, please contact our office.
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