Increased Regulatory Enforcement in Mortgage Servicing Focuses on Loss Mitigation
Regulatory agencies have recently increased their focus on mortgage servicing, and the Consumer Financial Protection Bureau’s (CFPB) more recent entry into the mortgage servicing rulemaking arena has resulted in updated and new regulatory requirements.
Earlier in the year I attended the MBA National Mortgage Servicing Conference, which included representatives from the CFPB, the Federal Housing Finance Agency (FHFA), the Department of Housing and Urban Development (HUD), Ginnie Mae, and Fannie Mae. The conference provided insight on the regulatory changes impacting the mortgage servicing industry, and which areas were facing the most scrutiny. In order to avoid regulatory non-compliance, mortgage lenders should be aware of what may get an examiner’s attention, and create adequate policies to ensure they are compliant with the latest regulations.
The servicing transfer process is an area of particular regulatory scrutiny. Not only must disclosures be provided to the consumer, there are also stringent requirements concerning the transfer of loan documentation from the transferor to the new servicer.
A mortgage lender must maintain policies and procedures to ensure a timely transfer of documents and information to the new servicer. The new servicer also has a responsibility to engage in quality control to validate the data integrity of the documentation provided from the transferor, including procedures to identify and request any missing documents. Identifying missing documentation is particularly important for verifying the proper loss mitigation notices have been sent to borrowers in default as required before proceeding to foreclosure. Generally, a loss mitigation notice will inform the borrower of the lender’s contact information so they may discuss possible repayment options where the borrower has fallen behind in mortgage payments.
The following areas of the servicing transfer process are commonly noted as areas of non-compliance:
- Servicing transfer notices that are incorrect or not provided to the consumer within the required time period
- Incorrect loan information provided to the new servicer, especially loan terms such as the APR
- Unfair and Deceptive Acts and Practices concerns where loan modifications are not being honored by the new servicer
- Servicing transfer information omitting detailed descriptions of the data fields utilized
- Private mortgage insurance (PMI) administration and cancellation notices
A mortgage servicer must develop protocols to ensure consumer communication is consistent across all channels, including vendors with consumer contact.
Mortgage servicers should implement procedures to receive, resolve, and respond to complaints — the ability to track and analyze overall complaint trends is instrumental in developing an effective compliant management system. For example, it is important to have detailed documentation of consumer communication when a conversation log indicates a consumer was told a late fee would be waived, but the payment history does not reflect any waiver.
The following areas regarding consumer communication are commonly noted as areas of non-compliance:
- Consistency in debt validation letters
- Timely provision of payoff information
- Notices of servicing transfer
- Single point of contact for loss mitigation requests
- Force placed insurance notification
- Immediate and accurate crediting of payments received
- Rate adjustment notifications
- Misrepresentation of electronic payment options, such as omitting notification that an additional fee may be charged for using an electronic payment option.
One emerging issue is privacy concerns about complaints received through social media and the CFPB consumer complaint database. The CFPB is considering the addition of an optional narrative section to the complaint database where consumers may explain their experience. There would also be an option for the lender or servicer to reply to the consumer’s narrative in the same free-form format. The CFPB has recognized that personal information may be provided by the consumers and said it plans to take reasonable steps to remove it before the information is available to the public.
Most servicing regulatory enforcement actions have resulted from loss mitigation or other default related charges. A servicer must document when an application for loss mitigation was received and when it was completed. When an application for loss mitigation is received, a servicer must reply to the consumer in a reasonable amount of time with the decision or a notice that the application is incomplete. Common errors in the loss mitigation application process include improper denials where the borrower actually did qualify for a loss mitigation option but was not properly categorized or reviewed, omitting reasons for denial from the response, and excluding of the notice of the right to appeal.
The following areas of loss mitigation are commonly noted as areas of non-compliance:
- Requiring consumers to waive rights in order to obtain a loan modification
- Delaying permanent modification through unreasonably long trial period payment plans
- Failing to indicate that a consumer will not receive surplus escrow funds when in default
The Federal Housing Administration (FHA) servicing audit largely focuses on loss mitigation in the areas of outreach and proper evaluation of requests. If the servicing file does not document loss mitigation, the FHA will assume that the servicer did not engage in loss mitigation. The most appropriate FHA loss mitigation option as based on the borrower’s circumstances must be clearly documented. The FHA has proposed their new Servicing Handbook which is set to be finalized in June 2015.
How we can help
Bankers Advisory, a division of CliftonLarsonAllen, provides mortgage servicing quality control (QC) services, which include reports that have a 5-level risk grading on more than 60 compliance topics. Our independent QC inspection uses state-of the-art software, and goes beyond the standard requirements by offering customized strategies to optimize your QC program. We can help you adhere to regulations for the loss mitigation application process, develop protocols to optimize consumer communication, and meet requirements for the servicing transfer process.
Our services also include compliance testing through in-depth documentation analyses that cover all state and federal regulations.
We also have a Mortgage Rules of 2014 Implementation Guide available for purchase, which covers all the servicing and loss mitigation rules.