Given the growing complexity of the mortgage servicing rules faced by both bank and non-bank mortgage servicers, it is worthwhile to shine a spotlight on some rules which at first glance seem fairly straight forward, but upon scrutiny, require more analysis.
As previously discussed on this blog, the CFPB amended the Truth in Lending Act (TILA) which became effective on January 10, 2014. Certain requirements in the regulations were not applicable to community banks, credit unions and small servicers, such as the requirement to provide a single point of contact for delinquent borrowers. However, one rule for which community banks, credit unions and small servicers are not exempt from is the duty to provide borrowers with timely mortgage payoff statements. In declining to exempt these “small servicers”, the CFPB noted that there was no compelling justification put forth during the rulemaking proceeding to warrant an exemption.
The applicable rule states that for “any loan secured by the consumer’s dwelling, the creditor, assignee or servicer, as applicable, must provide an accurate statement of the total outstanding balance required to pay the obligation in full if a request is made in writing by the consumer or someone acting on behalf of the consumer.” The statement must provide the payoff amount as of a specified date and, with limited exceptions, must be provided within a reasonable time but no later than seven business days after a creditor, assignee or servicer receives a written request. Payoff statements for high cost mortgages must be provided within five business days of receiving a request for such statement.
Amendment Increases Coverage of Rule
Prior to the amendment, the payoff statement requirement was required to be given for “residential mortgage loans.” The amendment expands this requirement to all “home loans” which is not defined in the statute. The regulation implementing the statute states that this requirement applies to any consumer credit transaction secured by a “consumer’s dwelling.” This means that open-ended home equity lines of credit (HELOCS) are now subject to this requirement. In addition, the statute does not limit the requirement to a consumer’s “principal residence.” Consumer credit transactions which secure 2nd homes or vacation homes are also subject to this rule.
In addition, the prior rule requiring delivery of payoff statements only applied to servicers. The statute expands the obligation to comply to include the “creditor, assignee or servicer” of the loan, as applicable. A creditor or assignee that does not currently own the mortgage or the mortgage servicing rights for the loan is not subject to the requirement to provide a payoff statement. In extending this requirement to “assignees”, the CFPB cited that the extension was necessary to ensure “meaningful disclosure of credit terms and to protect the consumer against unfair billing practices and to prevent circumvention or evasion of TILA.” In addition, CFPB believes that subjecting creditors and assignees to these requirements also promotes consistency with Section 1026.20(c) and Section 1026.20(d) of TILA as it relates to ARM disclosures which also applies to all 3 parties. By obligating creditors and assignees for this duty, even if there is a servicer that is already assigned the task of actually delivering the payoff statement, creditors and assignees may be subject to liability in the event that they have violated the statute’s requirements.
Ambiguity in the Statute
The CFPB had received a number of comments from credit unions indicating that the requirement to deliver the payoff statement within 7 business days of receiving a written request is not practicable in many situations. For example, when a loan is in bankruptcy or foreclosure, or the loan is a reverse mortgage or shared appreciation mortgage, or simply if there is a natural disaster or other business interruption, financial institutions may not be able to meet the 7 business day deadline. In addition, there are state statutes that permit payoff statements to be delivered up to 21 days after a request. Rather than set a longer time period, the CFPB chose to provide that the payoff statement must be provided within a “reasonable time” but declined to define what constitutes a “reasonable period of time.”
As far as state statutes that may be inconsistent with TILA, the CFPB declined to preempt state laws and does not believe there is any direct conflict between state laws and the timeline of CFPB’s rule. If states stipulate a shorter time period to deliver the payoff statement than what the CFPB requires, creditors, assignee or servicers could comply with both state law timelines and the CFPB’s rule timelines by providing the payoff statement within the shorter state timeline. If state laws permit a longer timeline, creditors, assignees or servicers should comply with the CFPB’s shorter timeline.
The CFPB did not provide any direct guidance as to whether Regulation Z as amended would preempt the remedy provisions of any applicable state payoff statement law. Based on the current statutory interpretations of TILA, there is unlikely to be any preemption of remedies. If a creditor, assignee or servicer is required under state law to provide a payoff statement that is less than 7 business days, and there has been a violation of that state law, the consumer should be able to pursue any applicable remedies available under the state payoff statement statute. Similarly, if a creditor, assignee or servicer fails to comply with CFPB’s 7 business day requirement but is in compliance with state requirements, a consumer still has remedies under TILA for statutory damages and attorney fees.
Interaction with RESPA
Dodd Frank added several provisions to RESPA (and Regulation X), including how mortgage servicers must respond to information requests and notices of errors submitted by borrowers. Small servicers are not exempt from these error resolution and information request procedures. As such, a failure to provide an accurate payoff statement is subject to the error resolution requirements under RESPA. Under RESPA, a mortgage servicer must respond within seven days after receiving a notice of error to provide accurate payoff information and there are no time extensions allowed for this error. The CFPB believes that this shortened timeframe is appropriate because a mortgage servicer’s failure to correct a payoff balance error may prevent a borrower from pursuing options in the interim, including a refinancing transaction.
This does not mean, however, that mortgage servicers have to treat a borrower’s request for payoff balances as a request for information under RESPA. In other words, a servicer should be able to treat a request for information seeking a payoff statement as subject to the requirements of Regulation Z (TILA) instead of handling the request as a Regulation X procedure. However, clients should consult with their attorneys based on the facts and circumstances surrounding the borrower’s request.