On September 29, 2014, the CFPB took action against Flagstar Bank for violating the CFPB’s new mortgage servicing rules by “illegally blocking borrowers’ attempts to save their homes.” The CFPB focused on the Flagstar’s actions from 2011 to present and found that Flagstar failed to devote sufficient resources to administering loss mitigation programs for distressed homeowners. They cited “average call wait times of 25 minutes, average call abandonment rates of 50%, and backlog in loss mitigation applications of over a thousand.” In taking action against Flagstar, the CFPB found that there were “unfair and deceptive acts and practices” (UDAAP) committed by Flagstar. Flagstar was ordered to pay $37.5 million in fines and restitution, signalling the CFPB’s intent to aggressively pursue mortgage servicing violations with claims of UDAAP and violations of mortgage servicing rules.
CFPB Bulletin 2014-01, which was issued on August 19, 2014, provides new guidance on mortgage servicing transfers. The guidance wholly replaces CFPB bulletin 2013-01, which was released in February 2013 which also addressed servicing transfers. The CFPB bulletin makes clear that under revised Regulation X, which went into effect on January 14, 2014 of this year, servicers are required to maintain policies and procedures that are “reasonably designed to achieve the objectives of facilitating the transfer of information during mortgage servicing transfers and of properly evaluating loss mitigation applications.” The CFPB Bulletin 2014-01 provides guidance as to what examiners expect to see in the operational procedures of mortgage servicers when transferring loans to another servicer. For servicers engaged in “significant” servicing transfers, the CFPB may require servicers to prepare and submit informational plans describing how they will be managing the related risks to consumers.
Mortgage Servicing Rules Implemented Across the Board
As previously mentioned on this blog, the revised mortgage servicing rules issued by the CFPB are being implemented across the board by the other federal banking agencies. Mortgage servicers, unless statutorily exempt, will likely be held to the standards set forth in the CFPB bulletins on mortgage servicing transfers. CFPB Deputy Director Steven Antonakes gave a speech at an MBA conference in February, 2014, highlighting that “mortgage servicing rule compliance is a significant priority” for the CFPB and that the new mortgage servicing rules are subject to federal supervision and “enforcement across the entire marketplace.” The speech also made clear that the CFPB is going to be vigilant in enforcing the servicing rules and that “business as usual has ended in mortgage servicing.”
CFPB’s mortgage servicing examinations target various aspects of a servicer’s policies and procedures, including but not limited to the following:
- Mortgage servicing contract provisions relating to servicing transfers
- Servicing transfer instructions
- Testing protocols to evaluate compatibility of transferred data between servicers
- Plans for quality control work post transfer, including monitoring loan payments received to determine that such payments are properly applied
- Plans and procedures for implementing small batch transfers to ensure compliance with servicing obligations
- Plans and procedures for loans involving loss mitigation applications
- Operational processes for flagging and reporting on loans with pending loss mitigation applications
- Operational processes for transferring loan data, loss mitigation discussions with the borrower, loan documentation, and approved loss mitigation plans
Not surprisingly, loans where a servicer is simultaneously handling loss mitigation of the loan while transferring the loan to another servicer are subject to heightened scrutiny. Servicers will need to design their policies and procedures in a way that efficiently transfers loans while continuing to properly evaluate loss mitigation applications. To the extent that a servicing transfer impedes such loss mitigation, a servicer is subjecting itself to heightened risk. The CFPB has indicated that it will consider instructing its examiners to also review post-transfer policies and procedures for transferee servicers to determine if servicers are meeting the requirements of the new servicing rules.
CFPB Deems Certain Servicing Transfer Results “Unfair”
The CFPB’s scrutiny of servicing transfers is specifically designed to ensure that servicers are not engaged in “unfair practices” that harm the borrower. Examples of “unfair practices” resulting from servicing transfers include: (i) subjecting borrowers to substantial delays while re-underwriting their loans, (ii) requiring borrowers to submit additional paperwork or provide copies of financial documents that were already submitted to the transferor servicer, and (iii) borrowers receiving a new modification on inferior terms than previously presented to them. Whether these practices will be deemed “unfair” is based on an analysis of the particular facts and circumstances. To the extent that the CFPB has determined that a servicer has engaged in “unfair practices”, the CFPB will often publicize these findings in Supervisory Highlights, which is a CFPB publication that shares information about examination findings without identifying specific companies.
CFPB Bulletin 2014-01 and the new mortgage servicing rules requires servicers to not only reexamine their internal policies and procedures but also consider renegotiating prior servicing agreements, mortgage servicing rights purchase agreements, and servicing released mortgage loan purchase agreements, which often contained allocation of responsibilities between parties for servicing transfers. Implementing appropriate servicing transfer policies and procedures that meet the requirements of CFPB Bulletin 2014-01 also requires coordination with a servicer’s implementation of other servicing rules, including the new rules regarding Error Resolution Procedures (12 CFR 1024.35), Requests for Information (12 CFR 1024.36), Early Intervention (12 CFR 1024.39) and Continuity of Contact (12 CFR 1024.40), to name a few. In addition, to the extent that a servicer oversees “sub-servicers” or third party vendors that conduct servicing processes that relate to these areas, servicers may need to consider reviewing their vendor management oversight policies.