The CFPB Issues Compliance Guidance on Mortgage Servicing Transfers
On October 23, 2014, the Consumer Financial Protection Bureau (CFPB or Bureau) published in the Federal Register non-binding compliance and policy guidance regarding mortgage servicing transfers (Bulletin). The Bulletin replaces prior guidance on servicing transfers issued by the Bureau in February 20131 and provides further clarification as to the application to mortgage servicing transfers of the Bureau's Regulation X mortgage servicing rules, which implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).2 The Bulletin, which reflects the CFPB's heightened concern in the area of mortgage servicing transfers, sets forth examples of proper servicing transfer policies and procedures and warns that particular attention should paid to the transfer of servicing of loans in loss mitigation. The Bulletin also describes other federal consumer financial protection laws that may apply to mortgage servicing transfers and signals that servicers engaged in significant servicing transfers may be required to submit written plans to the CFPB detailing methods for the management of risk in connection with such transfers.
CFPB Authority Over Mortgage Servicing Transfers
The CFPB generally regulates mortgage servicing transfers through Regulation X, which implements the Real Estate Settlement Procedures Act (RESPA). When residential mortgage servicing rights or responsibilities are "assigned, sold, or transferred to any other person at any time,"3 both the transferor and transferee servicers4 must provide notice to the borrower in the form of a disclosure statement that describes the details of the transfer.
The CFPB has direct examination authority over certain mortgage servicers under the Dodd-Frank Act, including: (i) nondepository institutions,5 and (ii) insured depository institutions, credit unions, or affiliates thereof with total assets of more than $10 billion.6 The CFPB has indirect or discretionary examination authority over insured depository institutions and credit unions with less than $10 billion in total assets.7 The Bulletin generally provides expectations of CFPB examiners when reviewing the mortgage servicing transfer practices of institutions subject to CFPB examination.
General Transfer Related Policies and Procedures
The Bulletin notes that while there is no express transfer-related policy or procedure that servicers are required to implement, CFPB examiners will review servicers' policies and procedures as a whole, in light of particular facts and circumstances, to confirm that said policies and procedures are "reasonably designed to achieve the objective of facilitating the transfer of information . . . ."8 The Bulletin describes a number of general transfer-related practices that CFPB examiners will view favorably during the course of future examinations. These include:
- Ensuring that contracts require transferor servicers to include all necessary documents and information at loan boarding;
- Developing tailored transfer instructions for each deal that clearly address key issues such as descriptions of proprietary modifications, descriptions of data fields, potential document indexing problems, and specific applicable regulatory or settlement requirements;
- Conducting meetings to discuss and clarify transfer instructions;
- Using specifically tailored testing protocols to ensure that transferred data are compatible with both the transferor and transferee servicer's systems and data mapping protocols;
- Conducting quality control after the transfer of preliminary data to validate that the data has been accurately transferred;
- Implementing alternative protocols for when a transfer cannot be successfully implemented in a single batch, including the splitting of the transfer into several smaller transactions;
- Implementing a post-transfer process for data validation to ensure that the transfer was accurate and the data are functional;
- Developing procedures for identifying and addressing data errors for inbound loans;
- Effectively organizing and labeling incoming information;
- Ensuring that transferee servicers use information provided by transferor servicers before seeking information from borrowers; and
- Regular communication between transferor and transferee servicers to identify and resolve any potential loan-level problems.
Transfers Involving Loss Mitigation Applications
The Bulletin expounds upon the Bureau's concerns regarding the loss mitigation process by emphasizing the risks associated with the transfer of the servicing of mortgage loans of borrowers with pending loss mitigation applications. Due to a significant number of consumer complaints of service interruptions involving loans transferred during the loss mitigation process, CFPB examiners will review the policies and procedures of servicers engaging in such transfers with heightened scrutiny. The Bulletin notes that examples of best practices include:
- Flagging by the transferor servicer of: (i) all loans with pending loss mitigation applications (whether complete or incomplete), and (ii) approved loss mitigation and trial modification plans;9
- Assistance by the transferor servicer in ensuring that the transferee servicer's systems can properly process the loss mitigation data;
- Requiring the transferor servicer to provide a detailed list of loans of loss mitigation applications and loss mitigation plans;
- Ensuring that all applicable loss mitigation information and documentation is sent to the transferee by the date of transfer, including, for example: (i) all loss mitigation notices, (ii) any acknowledgement notices, (iii) any notices stating the servicer's determination of loss mitigation options, (iv) any denial notices, (v) information regarding the receipt of a borrower's application and whether and at what time the transferor determined the application to be complete, (vi) if and when the transferor requested additional documentation from the borrower, (vii) if the borrower was denied, whether the borrower appealed, and if so, the status of that appeal, and (viii) if a foreclosure sale is pending, the date of that foreclosure sale, if applicable, and whether the borrower submitted a complete application more than 37 days before the foreclosure sale;
- Requiring confirmation of receipt by the transferee servicer of any information and documentation either: (i) regarding loss mitigation discussions with borrowers, or (ii) that which is required to be submitted to complete a loss mitigation application before the transferee servicer attempts to obtain any such information from the borrower. If a borrower has already accepted an offer, the transferee should seek to obtain any and all loss mitigation agreements as well as documentation and information sufficient to show whether or not the borrower had accepted and offer and was performing in accordance with its terms; and
- Monitoring by the transferee servicer of newly transferred loans to determine if partial payments received are actually payments pursuant to any modification agreement.
By contrast, the Bulletin notes that in the following situations, CFPB examiners may determine servicers' policies and procedures to be insufficient under the mortgage servicing requirements and perhaps even in violation of the Dodd-Frank Act's prohibition of "unfair, deceptive, or abusive acts and practices" (UDAAP):10
- A servicer fails to properly identify at the time of transfer loans that were in a trial or permanent modification with the prior servicer; and
- A transferee servicer attempts to independently confirm that the transferor servicer properly offered a trial or permanent modification or that the modification met the borrower's criteria, without first obtaining sufficient information from the transferor servicer. In such an instance, the borrower may be asked to produce duplicative information, could incur significant delay in the underwriting process, and could receive a revised modification with inferior terms.
Transfers After Loan Boarding
The CFPB will pay close attention to any transferor servicer who follows a policy of transferring relevant data or documents to a transferee servicer in the days after a loan boarding. The Bulletin notes that such a practice may preclude the transferor from complying with the requirement that its policies and procedures be "reasonably designed to timely transfer all information and documents."11
Thus, a practice of regularly withholding information and documents until after loan boarding is ill-advised under the CFPB's guidance, particularly if the information was in the transferor's possession prior to loan boarding.
Applicability of Other Aspects of the New Mortgage Servicing Rules to Transfers
Apart from the servicing transfer-related issues addressed above, the Bulletin describes several instances in which transfers could trigger other elements of the CFPB's mortgage servicing requirements. These include:12
- Procedures for Error Resolution and Information Requests. If a transferee servicer receives a notice of error or an information request from a borrower or his or her agent, then the procedures for error resolution and information requests under Regulation X must be timely followed, even if the transferor servicer was servicing the loan at the time of the notice. Under these circumstances, the existence of a servicing transfer does not relieve a transferee servicer of its obligations to comply with these provisions.
- Force-Placed Insurance. If a servicer has obtained a force-placed insurance policy on a borrower's behalf prior to a servicing transfer, the transferee must take care to comply with the force-placed insurance and escrow account payment provisions of the mortgage servicing requirements under Regulation X.13 Specifically, a transferee may not: (i) assess any premium charge without providing notice to the borrower,14 or (ii) replace an existing force-placed insurance policy with a new policy without having a reasonable basis to conclude that the borrower has failed to comply with the loan contract's requirement to maintain hazard insurance.
- Early Intervention Requirements for Borrowers. Transferee servicers must begin or continue good faith efforts to establish live contact with a delinquent borrower and timely discharge the servicer's written notice obligation, per the early intervention provisions of the mortgage servicing requirements, regardless of whether the delinquency began while the loan was being serviced by the prior servicer.
- Continuity of Contact. A transferee servicer must assign personnel, and implement reasonably designed associated policies and procedures, to facilitate continuity of contact when a delinquent loan is transferred. The Bulletin notes that CFPB examiners will view several specific practices favorably, including: (i) identifying which borrowers are 45 days or more delinquent at the time of transfer and ensuring that personnel are available to assist those borrowers, (ii) ensuring that personnel are equipped to discharge the required functions of servicer personnel, particularly in the area of obtaining accurate information from the borrower, (iii) ensuring that personnel can retrieve all necessary information from the borrower, including a complete borrowing history and any information or documentation previously provided to the transferor servicer, and (iv) deliberating over the most effective methods of informing borrowers of the availability of servicer personnel, such as establishing a customer service line.
Applicability of Protections Under Federal Consumer Financial Protection Laws
The Bulletin stresses that certain federal consumer financial protection laws will continue to apply in the servicing transfer context. For example, mortgage servicers must abide by the requirements of the Fair Credit Reporting Act (FCRA) and the Fair Debt Collection Practices Act (FDCPA). The FCRA prohibits the furnishing of information to a consumer reporting agency that a servicer knows or has reasonable cause to believe is inaccurate, while the FDCPA imposes obligations on servicers when acting as debt collectors, including a detailed notice requirement regarding the debt collection process.15 Both transferor and transferee servicers must be aware of the applicability of these statutes throughout the servicing transfer process.
In addition, the Bulletin emphasizes that even if a specific course of conduct is not in violation of the mortgage servicing rules or any other federal consumer financial protection law, that conduct may nevertheless amount to a UDAAP under the Dodd-Frank Act. The CFPB expects servicers to establish and maintain a Compliance Management System (CMS) consisting of strong policies and procedures, effective board oversight, regular training, internal monitoring, external auditing, and complaint review to help monitor and avoid potential violations of the UDAAP prohibition.
Requirements for Significant Servicing Transfers
Servicers engaged in significant servicing transfers may be required by the CFPB to submit written plans describing how risks to the consumer will be managed. Servicers falling into this category may, however, proceed with a transfer without receiving approval from the Bureau unless such approval is mandated through a consent order.
Though the information required by the Bureau may vary depending upon the facts and circumstances, the Bulletin notes that the CFPB will generally require the following to be included in a significant servicer's written plans:
- The number of loans involved in the transfer;
- The total servicing volume being transferred;
- The name(s) of the servicing platforms on which the transferor servicer has stored relevant account information;
- Information about the compatibility of the transferor and transferee servicer's systems;
- A detailed description of how the transferee servicer will comply with the mortgage servicing requirements;
- A detailed description of the transaction and the system testing to be conducted to ensure accurate transfer of information;
- A description of how and within what time period the transferee servicer will identify and correct errors associated with the transfer;
- A description of the servicing personnel training plan and associated training materials; and
- A customer service plan specific to loans transferred in a particular transaction, providing procedures for responding to loss mitigation requests or inquiries and for determining whether a loan is subject to a pending loss mitigation application or resolution.
The CFPB's compliance guidance should be closely reviewed by mortgage servicers. The CFPB has expressed a clear concern regarding servicing transfers, which it considers to be a "high-volume" business for mortgage servicers and one that involves exposing the consumer to considerable risk. The CFPB has indicated that it will continue to devote resources to the supervision of servicing transfers, not only through thorough examination, but potentially by engaging in further rulemaking. Servicers on both sides of a mortgage servicing transfer should therefore be aware of the CFPB's expectations for compliance with both the newly implemented mortgage servicing requirements and the broader set of applicable federal consumer financial protection laws.
Consumer Financial Protection Bureau, Mortgage Servicing Transfers, CFPB Bulletin 2013-01 (Feb. 11, 2013), available here (hereinafter Bulletin 2013-01).
"Transferee servicer" means a servicer that "obtains or will obtain the right to perform servicing pursuant to an agreement or understanding," while "transferor servicer" means a "servicer, including a table-funding mortgage broker or dealer or a first-lien dealer loan, that transfers or will transfer the right to perform servicing to an agreement or understanding." 12 C.F.R. § 1024.31.
See Dodd-Frank Act § 1026(a)(1)-(2), 12 U.S.C. § 5516 (2012). The Bureau's "indirect" examination authority allows for CFPB examiners to be included on examinations conducted by an institution's prudential regulator on a "sampling basis." Dodd-Frank Act § 1026(c)(1).
The Bulletin notes that the CFPB will "carefully scrutinize" any evaluations by the transferor servicer of complete loss mitigation applications that take longer than 30 days from the transferor's receipt of the application. See 79 Fed. Reg. at 63,298.
For further reading on the applicable standards for UDAAPs, see Consumer Financial Protection Bureau, Prohibition of Unfair, Deceptive, or Abusive Acts or Practices in the Collection of Consumer Debts, CFPB Bulletin 2013-07 (July 10, 2013), available here.
Section B of the Bulletin also describes loss mitigation as a separate area of the mortgage servicing requirements. However, specific loss mitigation issues identified by the Bureau in this Section are discussed, supra, within the context of servicing transfers involving pending loss mitigation applications.
The Bulletin notes that if a transferor servicer has sent such notice prior to transfer, the transferee servicer need not resend the notice, but must ensure that the borrower has received the notice before any premium charge may be assessed. 79 Fed. Reg. at 63,297.
The Bulletin highlights that servicers on both sides of a transfer must ensure that the FDCPA's notice requirements are satisfied. Notice must be sent within five days of the initial communication with the borrower and must include: (i) the amount of debt, (ii) the creditor's name, and (iii) the borrower's right to request verification of the debt, as well as any other information that may be required under the circumstances. See 79 Fed. Reg. at 63,298.