The New World of Mortgage Servicing

About the Authors:

Lynette I. Hotchkiss is first vice president, compliance counsel, at OneWest Bank, FSB, in Pasadena, California.

For years, one area of the mortgage industry was largely overlooked. Mortgage servicers worked away quietly, collecting and applying mortgage payments, managing escrow accounts, sending out statements, and dealing with a small percentage of delinquent borrowers, with few laws or regulations to govern their activities. Then, the mortgage crisis hit and mortgage servicing took center stage.

Suddenly, servicers were deluged with loans in default. "Default servicing" became the order of the day, and "loss-mitigation," "loan modification," and "foreclosure alternative" became household terms.

Borrower complaints to federal and state regulators skyrocketed and Internet complaint boards were riddled with stories of consumers' frustration with mortgage servicers. Media reports abounded about long waits for mortgage assistance, aggressive collection practices, "dual tracking," and foreclosure problems, including "robo-signed" foreclosure affidavits.

To address these concerns, Congress added new mortgage servicing requirements to the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA) and gave the newly created Bureau of Consumer Financial Protection (Bureau) the authority to write mortgage servicing rules.

But federal and state authorities did not wait for the Bureau to act. The Office of the Comptroller of the Currency and the Federal Reserve Board entered into consent orders with 14 mortgage servicers, requiring changes to mortgage servicing and foreclosure practices. States also aggressively pursued mortgage servicing practices, resulting in the top five mortgage servicers entering into a National Mortgage Settlement with 49 state attorneys general.

Still, a set of national mortgage servicing standards had not emerged. Enter the Bureau's mortgage servicing rules!

On January 17, 2013, the Bureau issued two final mortgage servicing rules amending Regulation X (which implements RESPA) and Regulation Z (which implements TILA). These two rules change existing requirements and add numerous new requirements for mortgage servicers.

This article provides only the briefest glimpse of the magnitude of the changes servicers must make before January 10, 2014.

Regulation X

The Bureau's rule amending Regulation X (Reg. X) creates new Subpart C, specifically devoted to mortgage servicing rules, and adds a Commentary, which will be the Bureau's primary vehicle for providing official interpretations. Some existing requirements have been tweaked, but the major change is the addition of new requirements, most of which impact the servicing of delinquent mortgage loans.

The Reg. X mortgage servicing rules apply to any "mortgage loan." "Mortgage loan" means any federally related mortgage loan (in general, a loan secured by a first or subordinate lien on 1-4 unit residential real property or by a manufactured home on real property) but does not include open-end lines of credit. A loan subject to one of the standard RESPA exemptions (e.g. business purpose loans, property of 25 acres or more, vacant land, temporary financing) is not a "mortgage loan."

Mortgage Servicing Transfers

The current mortgage servicing transfer disclosures are still required. The Servicing Disclosure Statement substantially survives in its current form. The notice of servicing transfer, however, has been completely transformed. The old model form is scrapped and replaced by a new Notice of Servicing Transfer model form. The notice now will be required not just for first lien loans, but for subordinate lien loans as well.

The Servicing Disclosure Statement must be provided within three business days after an application for a first lien loan is received and informs the borrower of the likelihood of whether the loan will be transferred. Note that the Bureau intends to change the Servicing Disclosure Statement requirement significantly as part of its TILA-RESPA Integrated Disclosure Rule, which it plans to finalize later this year.

The Notice of Servicing Transfer form must be provided to the borrower by both the transferor servicer and the transferee servicer within prescribed time frames in connection with the transfer of the servicing of a loan.

Escrow Account Payments and Refunds

Currently, if the borrower's payment is not more than 30 days overdue, Reg. X requires servicers to make timely payments from escrow accounts for taxes, insurance, and other escrowed charges.

The rule adds new requirements covering borrowers whose mortgage payments are more than 30 days overdue, but who have established an escrow account for payment of hazard insurance premiums. For these borrowers, the servicer may not purchase
force-placed insurance unless the servicer is unable to disburse funds from the escrow account to timely pay the borrower's hazard insurance premiums. Under the rule, an inability to disburse funds only exists if the servicer reasonably believes either that the borrower's hazard insurance lapsed or was cancelled for reasons other than non-payment of premiums or that the property is vacant. The fact there are insufficient funds in the escrow account to pay the hazard insurance premiums is not considered an inability to disburse funds.

The rule now also requires servicers to refund amounts remaining in escrow accounts within 20 business days of when a loan is paid in full.

Error Resolution and Information Requests

The rule creates new procedures for resolving errors and responding to information requests. Currently, Reg. X requires servicers to respond to borrowers' "qualified written requests" (QWRs) regarding a loan account. These QWR requirements are subsumed into the new error resolution and information request procedures.

The new procedures detail the manner in which borrowers are to assert errors or request information and include conditions under which a servicer may designate a specific address for receiving error notices and information requests.

Servicers are required to acknowledge receipt of and respond to error notices and information requests within specified time limits, which are much shorter than current QWR requirements:

  • Requests must be acknowledged within 5, rather than 20, business days of receipt.
  • Responses must be provided within between 7-30 business days for error notices and 10-30 business days for information requests, depending on the request category, rather than the 60 business days currently permitted for QWR responses.

Reg. X lists 11 categories of covered errors, including a catch-all for "any other error relating to the servicing of a borrower's mortgage loan." A servicer is not required to comply with the error resolution procedures if an error does not fall into one of these categories.

A servicer must respond to an error notice by either correcting the error and notifying the borrower of the correction or conducting an investigation and, if no error is found, notifying the borrower accordingly and providing specific information about the determination that no error occurred.

A servicer must respond to an information request by either providing the requested information or searching for that information and, if the information is not available to the servicer, notifying the borrower of that determination and the basis for that determination.

In all cases, the notification to the borrower must be in writing and must include contact information the borrower may use for further assistance.

The error resolution and information request procedures do not apply if the servicer reasonably determines that a request is duplicative of a previous request, is overbroad, or the servicer receives the request more than one year after either the servicer transferred servicing or the loan was paid in full. In addition, for information requests, the procedures do not apply if the information requested is confidential, proprietary, or privileged, is not directly related to the borrower's account, or is unduly burdensome. If the servicer determines that the procedures do not apply, the servicer must give the borrower a written notice of that determination not later than five business days after the determination is made.

Force-placed Insurance

The rule places restrictions on force-placed insurance. A servicer is not prohibited from force-placing insurance, but cannot assess charges for doing so unless the servicer has a reasonable basis to believe the borrower doesn't have required insurance in place and until the servicer satisfies new notice requirements.

The servicer must send two separate notices to the borrower, informing the borrower that the servicer does not have evidence demonstrating that the secured property is properly insured:

  1. An initial notice must be sent at least 45 days before a charge is assessed.
  2. A reminder notice must not be sent until at least 30 days after the initial notice, but must be sent at least 15 days before a charge is assessed.

If, by the end of this 15-day waiting period, the servicer receives evidence that the borrower has had proper hazard insurance coverage in place continuously, the servicer may not assess a charge for force-placed insurance.

To renew existing force-placed insurance, the servicer must send the borrower a renewal notice at least 45 days before assessing a charge for the renewed insurance. If the servicer receives evidence demonstrating that the borrower has purchased proper insurance coverage, the servicer may not assess a charge for renewing the force-placed insurance.

The rule includes model forms which may be used to meet the notice requirements.

A servicer must cancel force-placed insurance within 15 days of receiving evidence that the borrower has purchased proper insurance coverage. The servicer must refund all force-placed insurance charges that the borrower paid, and remove all charges assessed to the borrower's account, for any period during which the borrower's insurance was in place.

Early Intervention

The rule requires servicers to make specific efforts to reach delinquent borrowers and to provide those borrowers with information about help that may be available.

The servicer must establish live contact (or make good faith efforts to do so) with a delinquent borrower not later than the thirty-sixth day of the borrower's delinquency. Promptly after establishing live contact, the servicer must inform the borrower about the availability of loss mitigation options.

The servicer must give the borrower a written notice not later than the forty-fifth day of delinquency. This notice must encourage the borrower to contact the servicer, provide a telephone number to access personnel assigned to the borrower's account, provide information about loss mitigation options that may be available and how to obtain more information about those options, and provide information on how to find homeownership counselors. The rule includes model clauses that may be used meet the notice requirements.

The rule does not require the servicer to communicate with the borrower in a manner that is otherwise prohibited by law, such as a state foreclosure regime that prohibits certain types of contact with borrowers, or a communication that would violate the federal Fair Debt Collection Practices Act or the Bankruptcy Code's automatic stay provisions.

Continuity of Contact

Servicers are to assign personnel (either a single person or a team) to a delinquent borrower's account and make the assigned personnel available by telephone to assist the borrower. The personnel must be assigned by the time the servicer sends the written notice required by the early intervention rule and must remain assigned until the borrower has made two consecutive mortgage payments without incurring a late charge.

The assigned personnel should be able to:

  1. Provide accurate information about loss mitigation options, including loss mitigation processes, deadlines, application status, and circumstances for a foreclosure referral;
  2. Promptly retrieve a record of the borrower's payment history and all written information the borrower has provided in connection with a loss mitigation application;
  3. Provide loss mitigation documents and other information to persons required to evaluate the borrower for loss mitigation options; and
  4. Provide a delinquent borrower with information about procedures for submitting an error notice or an information request.

If the borrower does not receive a live response when contacting the assigned personnel, the personnel must ensure that borrower receives a live response in a timely manner.

Loss Mitigation

The rule does not establish a specific loss mitigation program, but instead establishes procedures and a rather complex set of timelines servicers must follow in evaluating borrowers for loss mitigation options. The timelines depend on where the loan is in the foreclosure process when the servicer receives a loss mitigation application.

If the servicer receives a loss mitigation application 45 days or more before a foreclosure sale, the servicer must promptly review the application to determine if it is complete and, within five business days of receipt, give the borrower a written notice acknowledging that the application was received and stating whether or not the application is complete. If the application is incomplete, the notice must tell the borrower what additional documents are needed and the date by which those documents should be submitted. The acknowledgement notice also must suggest that the borrower contact servicers of any other mortgage loans secured by the same property to discuss available loss mitigation options.

If a servicer receives a "complete loss mitigation application" more than 37 days before a foreclosure sale, the servicer must, within 30 days of receipt:

  1. Evaluate the borrower for all loss mitigation options available to the borrower; and
  2. Give the borrower a written notice stating which loss mitigation options, if any, the servicer will offer the borrower.

If the borrower is denied for a trial or permanent loan modification, the written notice also must include the specific reasons for the servicer's determination for each trial or permanent loan modification option denied and information on how to appeal that denial.

In general, if the borrower is offered a loss mitigation option, the borrower must be given at least 14 days to either accept or reject the offer. If the borrower appeals a loan modification denial, this deadline is extended until 14 days after the servicer provides the borrower with its determination regarding the appeal. If, however, the servicer receives the complete application less than 90 days before the foreclosure sale, the borrower's response time period may be reduced to 7 days, and no appeal period applies.

With regard to the foreclosure process, a servicer may not make the first notice or filing required for any judicial or nonjudicial foreclosure process (a foreclosure referral) until the borrower is more than 120 days delinquent.

If a borrower has submitted a complete application more than 37 days before a foreclosure sale, the servicer may not "dual track" by taking final steps, depending on the stage in the process, to either make a foreclosure referral or proceed to a foreclosure sale unless:

  1. The servicer has evaluated the complete application and determined the borrower is not eligible for any loss mitigation option and the appeal process, if applicable, has been completed,
  2. The borrower rejects all offered options, or
  3. The borrower fails to perform under a loss mitigation agreement.

Policies and Procedures

The rule requires servicers to establish and maintain policies and procedures that are designed to achieve a specific set of objectives. Many of these objectives, which are itemized in detail in the rule, correlate to the other new servicing requirements. In a nutshell, the policies and procedures must be reasonably designed to ensure that the servicer can:

  1. Access and provide accurate and timely mortgage loan information to borrowers, mortgage loan owners and assignees, and courts;
  2. Properly evaluate loss mitigation applications;
  3. Facilitate oversight of, and compliance by, third-party service providers;
  4. Facilitate the transfer of information during servicing transfers, whether as the transferor or the transferee servicer; and
  5. Inform borrowers of error resolution and information request procedures.

The rule also requires servicers to maintain a defined set of documents and data for each mortgage loan serviced in a manner that facilitates compiling the documents and data into a servicing file within five days.

Servicers must retain records that document actions the servicer has taken with respect to a borrower's loan until one year after a loan is discharged or servicing is transferred.

Regulation Z

The Bureau's rule amending Regulation Z (Reg. Z) changes existing requirements and adds significant new requirements.

ARM Disclosures

Currently, Reg. Z requires that the borrower be given new disclosures when there is an adjustment to the interest rate for an adjustable rate mortgage (ARM). For purposes of these ARM disclosures, an adjustable-rate-mortgage is a closed-end consumer credit transaction secured by the consumer's principal dwelling in which the annual percentage rate may increase after consummation. The rule changes the timing and content of these disclosures.

In general, for interest rate adjustments that result in a payment change, a disclosure must be provided at least 60 (rather than the current 25), but no more than 120, days before the first payment at a new level is due. For ARMs with certain features, the current 25-120 day timeline continues to apply. The disclosure must include much more information than what currently is required.

A new disclosure is required in connection with the initial interest rate adjustment, whether or not that adjustment results in a payment change. The disclosure must be provided at least 210, but no more than 240, days before the first payment at the adjusted level is due. If the first payment at the adjusted level is due within 210 days after consummation, the disclosure must be provided at consummation. This disclosure must meet specific form and detailed content requirements. The rule includes model and sample forms for these disclosures.

The rule eliminates the current requirement to provide ARM borrowers with an annual notice for rate adjustments that are not accompanied by a corresponding payment change.

Periodic Statements

Servicers will be required to provide borrowers with periodic statements for closed-end consumer loans secured by a dwelling. The periodic statement requirement does not apply to reverse mortgages or to small servicers. Also note that Reg. Z already includes periodic statement requirements for open-end credit plans.

The periodic statement must meet specific timing and form requirements. The content that must be included is very specific, detailed, and comprehensive, requiring a wealth of information about the current payment requirements and status of the account, past account history and transaction activity, partial payment information, and contact information for the servicer. In addition, specific information must be provided to borrowers who are more than 45 days delinquent to ensure that they understand the status of their account, the risks of continued delinquency, and help that may be available.

The rule includes sample periodic statement forms.

Payment Processing

Currently, for loans secured by the borrower's principal dwelling, Reg. Z requires servicers to credit a payment to a loan account as of the date the payment is received. The rule adds new requirements for treatment of "partial payments" that are less than the required periodic payment amount. The rule clarifies that a "periodic payment" is an amount sufficient to cover principal, interest, and escrow (if applicable) for a given billing cycle.

If the servicer retains a partial payment in a suspense account, it must disclose the amount in suspense on the borrower's periodic statement. Once sufficient funds are accumulated in the suspense account to cover a periodic payment, the servicer must apply those funds to the loan account.

Payoff Statements

Reg. Z currently requires a servicer to provide a payoff statement "within a reasonable time" after receiving a request for such a statement. The rule clarifies that the statement must be provided no more than seven business days after receiving a written request. If, for certain specified reasons, the payoff statement cannot be provided within seven business days, it must be provided within a reasonable time.

Conclusion

The Bureau has developed the mortgage servicing rules to serve as national mortgage servicing standards. The rules are detailed, nuanced, and complex. Mortgage servicers and their third-party service providers will need to dive deeply into the new standards to understand the changes that must be made to current practices. In addition, servicers must consider how the new national standards interact with other applicable federal and state laws, as well as with investor requirements, to determine the full scope of the changes needed.

There is much to be done before next January.

Additional Resources

"Force-placed insurance" is hazard insurance obtained by a servicer on behalf of the owner or assignee of a mortgage loan that insures the property securing such loan. The term does not include flood insurance required by the Flood Disaster Protection Act of 1973 or hazard insurance obtained by the borrower but renewed by the servicer. As revised, Reg. X defines a "day" as a calendar day, but for several timing requirements, Reg. X notes that the day count excludes legal public holidays, Saturdays, and Sundays. For ease of reference, any Reg. X day count that does not include legal public holidays, Saturdays, and Sundays is referred to in this article as a "business day."

Additional Resources

The early intervention, continuity of contact, and loss mitigation rules apply only to mortgage loans secured by the borrower's principal residence.

Reverse mortgages are not subject to the rules regarding early intervention, continuity of contact, loss mitigation, or policies and procedures.

Small servicers are exempt from the rules regarding early intervention, continuity of contact, and policies and procedures, and portions of the loss mitigation rule. A "small servicer" is a servicer that services 5,000 or fewer mortgage loans, for all of which the servicer (or an affiliate) is the creditor or assignee.

Delinquency begins on the day a payment sufficient to cover principal, interest, and, if applicable, escrow for a given billing cycle is due and unpaid, even if the borrower is afforded a grace period. A borrower who is performing as agreed under a loss mitigation option is not delinquent for purposes of the rule. Nor is a borrower delinquent during the 60-day period following a transfer of servicing if the transferee servicer learns that the borrower has made a timely, but misdirected, payment.

Additional Resources

The date by which the documents should be submitted must be the earliest remaining of the following dates:

  1. The date by which any document submitted will be considered stale or invalid;
  2. The date that is the 120th day of the borrower's delinquency;
  3. The date that is 90 days before a foreclosure sale; or
  4. The date that is 38 days before a foreclosure sale.

A "complete loss mitigation application" is "an application in connection with which a servicer has received all the information that the servicer requires from a borrower in evaluating applications for loss mitigation options available to the borrower."

The rule includes an appeal process that applies only to denials of trial or permanent loan modifications and only if the borrower's complete loss mitigation application was submitted 90 days or more before a foreclosure sale or before a foreclosure referral.

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