A few short weeks after releasing a special edition Supervisory Highlights report that focused exclusively on mortgage servicing observations and, in particular, loss mitigation and servicing transfer issues, the CFPB released a 901-page set of amendments overhauling the existing mortgage servicing regulatory framework. A significant portion of those amendments relate to the same areas that were identified by the CFPB in its June report as posing particular compliance challenges—loss mitigation and servicing transfers. Some of the new requirements and commentary in the 2016 final rule will be helpful as they clarify existing areas that are subject to different interpretations and are applied inconsistently across the industry. However, much of the new rule is likely to pose the same types of technological stresses and compliance challenges that the CFPB just highlighted in June.
If this is an area you would like to learn more about, we encourage you to join us for Part 4 of our “CFPB Mortgage Servicing Amendments” Webinar Series, which is scheduled for Thursday, October 6, and will focus entirely on the new rules related to loss mitigation and default servicing. This includes amendments related to the definition of delinquency, early intervention obligations, various aspects of the loss mitigation process, and loss mitigation applications that are in-flight when the servicing of a loan is transferred to a new servicer.
Supervisory Highlights Mortgage Servicing Special Edition
As we previously reported, towards the end of June, the CFPB released a special edition of its semi-annual Supervisory Highlights report focusing entirely on issues uncovered over the past couple of years during reviews of mortgage servicers. The CFPB noted that it continues to observe compliance risks, particularly in the areas of loss mitigation and servicing transfers, and has concluded that many of these problems can be traced back to “[o]utdated and deficient servicing technology.”
The report, which is the first of its kind to focus entirely on one product line, details more than 30 violations and issues that have been uncovered during supervisory examinations of mortgage servicers. Those violations primarily relate to loss mitigation procedural requirements, policies and procedures, and servicing transfers that occur during the loss mitigation process. In those areas, the CFPB identified notices with deficient content, notices that were not timely sent to borrowers, inadequate policies and procedures, and servicers failing to properly handle loss mitigation in connection with a servicing transfer.
2016 Final Rule
With respect to loss mitigation and servicing transfer-related requirements, the CFPB’s 2016 final rule generally includes two types of amendments. First, the CFPB is expanding upon existing requirements to provide the industry with additional clarity and detail on how it expects servicers to handle certain scenarios. In addition, the CFPB is also adding entirely new obligations, many of which may be challenging to implement, and comply with, given existing technology limitations.
- Clarifying Amendments
Some of the CFPB’s amendments related to loss mitigation provide much-needed clarity with respect to existing requirements that are ambiguous and subject to different interpretation. For example, when selecting a “reasonable date” for an incomplete loss mitigation application acknowledgment letter, the existing commentary explains that servicers “should” select the date that preserves the maximum borrower rights, and that servicers “should consider” certain milestones when setting that date.
As a result of the uncertain language used by the CFPB in the last iteration of the rule, this is an area where servicers across the industry have struggled to ensure compliance and have taken a variety of different approaches. Some servicers provide a set number of days in all acknowledgment letters (perhaps with a reminder letter being sent at expiration), others have created formulas based upon the enumerated milestones with outer limits for the amount of time that can be given, while others have chosen to always select the next milestone date regardless of how far in the future it may be.
Unlike the existing framework, the 2016 final rule provides prescriptive and clearly defined guidance on how to select a “reasonable date.” Going forward, as a result of the CFPB’s amendments, servicers very likely will all use the same formula when choosing the reasonable date for an incomplete loss mitigation application acknowledgment letter.
Another area where the CFPB’s existing regulatory framework produced inconsistent results is when a borrower submits a complete loss mitigation application, but the servicer is missing information and/or documentation outside of the borrower’s control. In those instances, servicers have been unclear on how to handle applications when the 30-day evaluation timeframe expires and the servicer is unable to complete its review. Because the existing rule does not specifically address these scenarios, some servicers choose to deny applications in order to meet the 30-day evaluation requirement, while others send notices informing borrowers that a decision will be made once all information and/or documentation is received. Again, the CFPB recognized this was an area of concern and has provided well-defined requirements that will guide servicers through these difficult scenarios.
- New Obligations
In addition to providing clarity to areas where it was badly needed, the 2016 final rule also adds a significant number of new obligations that will pose the same types of compliance challenges that were highlighted in the June Supervisory Highlights report. Among other things, the rule imposes entirely new notice requirements, revised content requirements for existing notices, new policies and procedures that must be maintained, and procedural requirements that utilize data points that may not currently be captured by many servicers’ technology platforms.
For example, the new rule will require servicers to send borrowers a new notice after offering a short-term forbearance or short-term repayment plan containing, among other things, the terms of the agreement. Servicers may also have to develop new notices for when a complete loss mitigation application is received, and when necessary third-party information and/or documentation is needed at the end of the 30-day evaluation period. Finally, the 2016 final rule adds prescriptive and complex notice and dual tracking requirements for loans that are transferred while the loss mitigation process is underway.
The result is that, while many servicers have spent the past few years developing and refining systems and processes to comply with the existing regulatory framework, everyone must once again shift their focus towards implementation of the new regulations. Given the 2016 final rule’s proximity to the CFPB’s Supervisory Highlights report, servicers should pay particular attention to technology limitations and necessary systems changes that will be needed for compliance with the 2016 final rule.
Register to attend Part 4 of our “CFPB Mortgage Servicing Amendments” Webinar Series
In Part 4 of our “CFPB Mortgage Servicing Amendments” Webinar Series, we will discuss all of the CFPB’s amendments that relate to default servicing. We will discuss the implications these rules may have and will provide practical implementation tips based upon prior experience in this area.
Please join us on Thursday, October 6, from 11:30 a.m. to 12:30 p.m. CT, to learn “What You Need to Know” about the new requirements related to loss mitigation. Click here to RSVP to the webinar. Webinar login information will be provided prior to the event.