New Servicer Rules Address Disconnect in a "Broken System"

In remarks to a Mortgage Servicing Field Hearing this morning, Richard Cordray, Director of the Consumer Financial
Protection Bureau  (CFPB), announced the
release today of CFPB’s final Mortgage Servicing Rules spoke
and personally about the need for the new regulations.  The rules set for the responsibilities
of servicers to their borrowers, outlining requirements for servicers to meet in
collecting payments and maintaining performing loans in their portfolios and in
managing delinquent and defaulted loans from initial collection contacts
through foreclosure.

Cordray told of the first time in encountered a “foreclosure
crisis
.”  It was in 2004, several years
before the nationwide and ongoing one. 
As treasurer in his Ohio county he noticed there was suddenly an unusual
number of people losing their homes. 
This was puzzling to because there appeared to be no underlying economic
cause.  Local officials organized a “Save
our Homes” task force and mounted a public information campaign advising people
to “call your lender.”

The Director said this was the first time he realized that a
problem had been building for years and that foreclosure filings in Ohio had
set a new record each year from 1996 to 2009. 
“Predatory lending, equity stripping, and outright fraud created many of
the problems,” he said, but a notable feature of the situation was how often people
with a problem were entirely unable to find a solution.  ‘Call your lender,’ we had advised,” but then
we discovered a disconnect – “the direct link between borrower and servicer had
snapped.” “‘Call your lender’ was not the
answer if people did not know whom to call and could not get help even if they
did know.  People were trapped in a broken system, with deeply tragic
consequences.”

Cordray said the CFPB has been
writing rules to address the main flaws of that broken system.  Americans have about $10 trillion in mortgages
on their homes most of these mortgages are managed by servicers.   “Because
of what servicers do and the size of the market, their effects on borrowers can
be profound.”

The new mortgage servicing rules
achieve two main objectives.  First, they will help prevent all borrowers
from being caught off guard by surprises and getting the runaround from their
servicers.  Second, there are special protections for borrowers who are
having trouble making their mortgage payments.

The final rules will take effect on January 10, 2014 and
will be set
forth in two notices, one to amend
Regulation Z, which implements
the
Truth in Lending
Act, and one to amend
Regulation X, which
implements the Real Estate Settlement
Procedures Act
and cover nine major
topics. 
The rules implement
certain provisions of the Dodd-Frank Wall Street Reform and
Consumer Protection Act
(Dodd-Frank Act) that relate to
mortgage servicing.

The final rules include a number of exemptions and other
adjustments
for
small servicers, defined
as servicers that service 5,000 or fewer mortgage loans and
service only mortgage loans that
they or an affiliate originated or
own.  CFPB says this definition covers
substantially all of the community banks and credit
unions that
are
involved in servicing
mortgages
and should help reduce burdens
for these institutions
that have strong consumer service safeguards
already built
into
their business
models.

Here is a summary of the nine topic areas and rules.  The term
“servicers” where used is shorthand for “servicers, creditors, and
assignees” and each topic area notes that there are unspecified exceptions for
small servicers.

 1.  Servicers must provide a
periodic statement for
each billing
cycle containing,
among other
things,
information on current and past payments, fees imposed,
transaction activity, application of past
payments, contact information for the servicer
and
housing counselors,
and, where applicable,
information regarding
delinquencies.  Periodic
statements are not required for fixed-rate loans where the servicer provides a coupon book, so
long
as the coupon book contains information specified
in the rule.   

2.   Where the consumer has an adjustable rate mortgage
(ARM) the servicer must provide a notice between 210 and 240 days before the
first payment due after the first rate adjustment.  This
notice
may
contain an estimate of the new
rate and new
payment.  If a rate adjustment causes the payment to
change there must also be a notice between 60 and 120 days before the first
adjusted payment is due.  The current annual notice
that must be provided for
ARMs for
which the interest rate, but not the payment, has changed over the course of the year is no
longer required.

3.   Servicers must credit periodic payments from borrowers as
of
the day of receipt. A periodic payment consists of principal,
interest, and
escrow (if applicable). If a servicer receives a payment
that
is less than the amount
due for a periodic
payment, the payment may be held
in a suspense account,
but when the amount in the suspense account covers
a periodic payment the funds must be applied to the consumer’s account.
 Servicers must provide an accurate payoff balance to
a consumer no
later
than seven business
days after receipt
of a written request.

4.   Servicers
are
prohibited from charging a borrower
for force-placed insurance coverage unless
the
servicers has a reasonable basis to believe the borrower has
not maintained hazard insurance and
has
provided the
consumer with a notice at least 45 days before charging the borrower for
force-placed
insurance coverage,
and a second reminder
notice at least 30 days after the first
notice and 15
days before charging for
force-placed
coverage. If a borrower
provides proof of hazard
insurance coverage,
the servicer must cancel any force-placed
insurance policy
and refund any premiums paid
for overlapping periods
in
which the borrower’s coverage was in place. Charges related
to force-placed insurance (other than those subject
to State regulation or
authorized
by
Federal law for
flood insurance) must be for
a service that was
actually performed
and must bear a reasonable
relationship to
the servicer’s cost of providing the service. 

If the borrower has an
escrow
account for the payment of hazard
insurance premiums,
the servicer may not obtain force-place insurance where it
can
continue the borrower’s insurance, even if
this requires advancing funds
to the escrow account to do
so.
The rule exempts
small servicers as
defined above so long as
any
force-placed
insurance is less
expensive to
a borrower
than the disbursement the servicer
would have made to
maintain hazard
insurance coverage.

5.   The following applies to written customer requests for information or complaints.  Servicers may designate a specific address
for
borrowers
to
use and are
generally required to acknowledge the request or notice of error within five days. Servicers also
generally are required
to correct the error
asserted by the borrower and
provide the borrower written notification of the correction, or
to conduct
an investigation and
provide the borrower written notification that
no error occurred,
within 30 to
45 days. Further, within a similar
amount of time,
servicers generally are required to
acknowledge borrower written requests
for information and
either provide the information or
explain why the information is not
available.

6.   Servicers are
required to establish policies
and procedures
reasonably designed
to achieve objectives
specified
in the rule.  “Reasonably”
will take into account the size,
scope, and
nature of the servicer’s operations. Examples of the
specified
objectives include accessing
and
providing
accurate and timely information to borrowers, investors,
and
courts; properly evaluating
loss
mitigation applications according to eligibility rules established by investors; facilitating oversight of,  and
compliance by, service providers; facilitating transfer of information during 
servicing transfers;
and informing borrowers of the availability of written error  resolution and
information request
procedures. In addition,
servicers are required to
maintain certain documents
and information for
each
mortgage loan in a manner that enables
the
services to compile it
into
a servicing
file within five days. The Bureau and the
prudential regulators will be able to
supervise servicers within their
jurisdiction to assure compliance with these requirements but
there will not
be
a private right
of action to enforce
these provisions.

7.   Servicers
are required to make early intervention attempts with delinquency borrowers, establishing live contact by the 36th
day
of their delinquency or making good faith efforts to do
so.  Borrowers should be promptly
informed that loss mitigation options may be available and provided written
notification of loss mitigation options by the 45th day of delinquency. 

8.   Servicers are required to provide continuity of contact with
delinquent borrowers, giving them access to personnel to assist them with
loss
mitigation options
where applicable.  Personnel should be assigned to a delinquent
borrower by the time of the first written early intervention notice but in any
case by the 45th day of delinquency.  Assigned personnel should be
accessible to
the borrower
by
phone to assist the borrower
in pursuing
loss mitigation
options, and advise the borrower
on the status and timelines of any loss mitigation application.  Assigned personnel should have access to all of the information provided by the borrower to the servicer
and
provide that information,
when appropriate, to those responsible for evaluating the borrower for
loss
mitigation options.

9.   Servicers
are
required to follow
specified loss
mitigation procedures
for
a mortgage loan secured by a borrower’s principal residence.  If a borrower submits an application for loss
mitigation the servicer is generally required to
acknowledge receipt in writing within five days
and inform the borrower of any additional information required
to complete the application. The servicer
is required to exercise reasonable
diligence in obtaining
documents and
information to
complete the application.

For a complete loss mitigation application received
more than 37 days before a foreclosure sale, the servicer
is required to evaluate the borrower, within 30 days,
for all loss mitigation,
both home retention and non-retention, options for
which he may be eligible. Servicers
are
free to follow “waterfalls”
established by an investor to
determine eligibility
for particular loss mitigation options.

The servicer must provide the borrower
with a written decision,
including an explanation
of the reasons for
denying the borrower
a loan modification option and any inputs used to make a net present value calculation if such
inputs were the basis
for the denial. A borrower may appeal a denial of a loan modification program so long as the borrower’s complete loss mitigation application is received
90
days or more before a scheduled foreclosure sale.

The rule restricts
“dual tracking,”
specifically prohibiting a servicer
from making the first
notice or filing required
for a foreclosure process until a mortgage loan account is more
than 120 days delinquent. Even if a borrower
is more than 120 days
delinquent and submits
a complete application for
a loss mitigation option before the first notice or filing required
for a foreclosure process
is made a servicer may not start the foreclosure process
unless
(1) the servicer informs
the borrower that
the borrower is
not eligible for
any
loss mitigation option (and
any
appeal has been exhausted),
(2)
a borrower rejects
all
loss mitigation offers, or (3)
a borrower fails to comply with
the terms of a loss mitigation option such
as a trial modification.

If a borrower submits
a complete application for
a loss
mitigation option after the
foreclosure process
has commenced but more than 37 days before a scheduled
foreclosure sale, a servicer
may
not move for a foreclosure judgment or order of sale, or
conduct a foreclosure sale, until one of the three conditions
above has been satisfied. In all of these situations, the servicer
is responsible for promptly instructing
foreclosure counsel retained by the servicer whether or not to proceed with
filing for foreclosure judgment
or order of sale or to
conduct a foreclosure sale.

While this section includes an exemption for
small servicers they are required to comply with two
requirements: (1) a small servicer may not make the first
notice or filing
required for a foreclosure process unless a borrower
is more than 120 days
delinquent,
and (2) a small servicer may not proceed to
foreclosure
judgment or order of sale,
or conduct a foreclosure sale, if a borrower is performing pursuant
to the terms of a loss
mitigation agreement.

So far reaction to the new rule has been received from
the Center for Responsible Lending (CRL), the Mortgage Bankers Association
(MBA) and the Center for American Progress (CAP).  MBA President and CEO David H. Stevens commended
CFPB for continuing to produce regulations that enhance transparency and
certainty for borrowers and servicers alike. 
 “Overall,
the objective of this effort is the right one – create one set of rules so that
borrowers know how they will be treated and servicers know what is expected of
them. 

Stevens
said that MBA needs time to evaluate the full rule but that the information so
far indicates that CFPB made productive changes and had listened to suggestions
from MBA and other stakeholders.  “As with any rule of this size, the devil is truly in the
details, and for servicers, that means how the rules are implemented and
operationalized.”   He pointed to a few initial concerns; what he
called a too narrow definition of “small servicer” and to some apparent
inconsistencies between the rule’s dual tracking regulations and existing
timelines mandated by the GSEs, FHA, and some states.

CRL President Mike Calhoun said, “New
rules from the Consumer Financial Protection Bureau will benefit millions of
Americans by fixing several key problems that have plagued mortgage servicing.
The rules establish basic standards such as requiring a timely application of
monthly mortgage payments and a prompt correction of errors.  The rules
also restrict servicers from forcing borrowers into high-cost homeowners’
insurance policies-a common, needless and deceptive practice.

“A specific improvement from the CFPB’s original proposal requires servicers to
wait 120 days after a missed payment before beginning the foreclosure process.
 Combined with the rules’ strong requirement for servicers to reach out
early to delinquent borrowers, this 120-day period gives time for everyone –
servicers, investors, and borrowers alike – to see if an alternative to
foreclosure can be found.  This eliminates unnecessary costs and increases
the likelihood that borrowers can stay in their homes.”

CRL also had concerns with parts of the rule:

  • Some
    protections for borrowers who apply for foreclosure alternatives after the
    foreclosure process has started should be stronger.
  • The
    deadline requiring a borrower to complete an application for a foreclosure
    alternative at least 37 days before a scheduled foreclosure sale is an
    improvement over the 90-days initially proposed, but a 14-day deadline would
    have been better.
  • Rather
    than preventing servicers from seeking a foreclosure judgment or holding a sale
    until an application for relief is reviewed, the foreclosure proceedings should
    be put on hold during the review.
  • The
    rule limits a borrower’s ability to appeal when a request for an alternative to
    foreclosure is denied, which will prevent some borrowers from having an
    improper denial corrected.

Julia Gordon, CAP’s Director of
Housing Finance and Policy congratulated CFPB on several specific improvements
it had made from earlier drafts and said, “The new rule takes a critically
important step toward providing comprehensive standards for all mortgage
servicers. While bad lending practices and risky products triggered the housing
crisis, the abject failure of the mortgage-servicing industry to mitigate
losses or to follow the law when pursuing foreclosures greatly exacerbated the
damage done to homeowners, communities, the housing market, and the larger
economy. The rule addresses some of the most pernicious practices causing
unnecessary damage to families, including dual-tracking foreclosures and
force-placed insurance. What’s more, individual homeowners now have the ability
to enforce these rules, a crucial piece that has been missing from previous
foreclosure-prevention programs.”

But due to concerns about the extent of its
authority
, the Consumer Financial Protection Bureau missed an opportunity to
mandate that all servicers offer affordable loan modifications to homeowners
who qualify. We urge the bureau to work closely with other regulators to ensure
that affordable and sustainable loan modifications remain broadly available
after the Home Affordable Modification Program expires.

Article source: http://www.mortgagenewsdaily.com/01172013_servicer_reforms.asp

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