On October 22, 2014, the CFPB finalized amendments granting nonprofit small servicers an exemption from new mortgage servicing rules. These mortgage servicing rules are part of several rules regulating mortgages, including the Ability-to-Repay rules, that went into effect on January 10, 2014. The servicing related changes impacts nine key areas:
- Periodic billing statements
- Interest rate adjustment notices for adjustable rate mortgages
- Periodic payments and payoff statements
- Force-placed insurance
- Error resolution and responses to borrower information requests
- Policies and procedures for servicers
- Early intervention with delinquent borrowers
- Continuity of contact between borrowers and servicer personnel
- Loss mitigation for delinquent borrowers
Who is impacted by the rules?
Based on the broad definition in these regulations, and recent actions from the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), virtually all mortgage servicers, regardless of size, should familiarize themselves with these rules. A “servicer” is any person responsible for the servicing of a federally related mortgage loan, which is anyone that receives scheduled periodic payments from a borrower, including escrow amounts and makes principal and interest payments to the owners of the loan or other third parties. The only entities specifically excluded as a “servicer” are certain government sponsored entities, federal agencies, and with respect to certain of the rules, small servicers and nonprofit small servicers.
To qualify as a small servicer, you must either (i) service 5,000 or fewer closed-end consumer credit transactions secured by a dwelling and also act as the creditor or assignee of such loans or (ii) be a housing finance agency. This is calculated as of January 1 of the calculating year and if an entity crosses the threshold and ends up servicing more than 5000 loans, a servicer has the later of (i) six months after crossing the threshold and (ii) the next January 1 to comply with the requirements for which such servicer was exempt as a small servicer. A nonprofit entity that services 5000 or fewer mortgage loans, including any mortgage loans serviced on behalf of associated nonprofit entities, also is deemed a type of small servicer under the new rules.
Community banks and regional banks with under $10 billion dollars in total assets might conclude that they are not subject to these rules because the CFPB does not have supervisory authority over such entities. The federal banking agencies (OCC and FDIC), however, appear to be following the CFPB’s lead in this area. On February 25, 2014, the FDIC released a Financial Institutions Letter (FIL-9-2014) which applies to all FDIC supervised institutions with under $1 billion in total assets. The Financial Institutions Letter states that the FDIC will evaluate compliance with certain Dodd-Frank residential mortgage loan rules, including the mortgage servicing rules of RESPA and TILA. In March 2014, the OCC adopted examination procedures which reflect the RESPA and TILA amendments. In fact, the federal agencies are making an effort to share resources and work more closely together, as confirmed in recent testimony by Thomas J. Curry, that the OCC has established protocols with the CFPB for the two agencies to share information, schedule exams and coordinate supervisory activities.
Rules will Require Operational Changes
The mortgage servicing business has traditionally been organized as a low margin, “factory style” business on the theory that most loans will not require individualized attention and/or frequent judgment calls. For problem loans, servicing was often transferred to a “special servicer” who specialized in servicing delinquent loans. During times of low default, this method of operating made sense and was productive. In light of the new servicing rules, many servicers will either need to change their operational model or require more operations to be outsourced to specialized servicers. The new rules mandate a level of attention and specified communication that will likely require technology changes, increased staffing and training, and new compliance and loss mitigation procedures in order to comply.
An example is the final rule relating to “continuity of contact” between borrowers and servicer personnel. Servicers must demonstrate “continuity of contact” with delinquent borrowers by providing such borrowers access to dedicated personnel that may assist them with available loss mitigation options. There are specific timing requirements built into the rules as well as qualification requirements for the servicing personnel. Another example is the final rule requiring servicers to follow specified loss mitigation procedures which deviate from previously accepted industry loss mitigation and foreclosure procedures. As with the “continuity of contact” rules, the loss mitigation rules mandate specific timelines for responding to borrowers’ request for modification, forbearance and other loss mitigation options. The effect of these rules is to prevent the servicer from “dual tracking,” where a servicer is simultaneously evaluating a consumer for a loan modification while preparing to foreclose on the property. A servicer is prohibited from making the first foreclosure notice or filing unless the borrower is more than 120 days delinquent and not pursuing a loss mitigation option. If a borrower appeals, the servicer’s ability to foreclose will be delayed even longer.
Virtually All Servicers Impacted
All financial institutions that service mortgage loans, not just those directly supervised by the CFPB, should already be familiar with these regulations and have a plan in place to ensure operational compliance. Because banking regulators appear to be following the CFPB in their examination approach and enforcement actions, smaller community and regional banks that service mortgage loans will not be exempt from these rules. Virtually all servicers, unless statutorily exempt, will need to comply.