On January 18, 2023, the Consumer Financial Protection Bureau (CFPB) released an updated version of its Mortgage Servicing Examination Manual. As the CFPB described in a corresponding blog post, the manual outlines “the types of information that CFPB examiners gather to evaluate mortgage servicers’ policies and procedures; assess whether servicers are complying with applicable laws; and identify risks to consumers related to mortgage servicing.” Therefore, it is an important tool for servicers’ compliance professionals, in-house counsel, and internal examination teams to ensure they are meeting the CFPB’s expectations and avoiding potential scrutiny.
The last time the CFPB updated the mortgage servicing examination procedures was in 2016, so this update included many developments since that time. For the most part, though, the updates to the mortgage servicing manual incorporate issues and findings that have already been publicized by the CFPB. For example, the Fall 2022 Supervisory Highlights report outlined a potential issue whereby servicer personnel verbally conveyed to a borrower that a certain payment amount would be required to accept a loss mitigation option while written correspondence contained a different required payment amount. The last Supervisory Highlights also addressed issues the CFPB had observed with phone payment fees and CARES Act forbearances. Those issues are now directly addressed in the new manual and presumably will be tested across the board going forward.
Below is an outline of the changes and updates made by the CFPB in this version of the manual:
- The exam procedures now incorporate and reference the various bulletins, circulars, advisory opinions and final rules that have been enacted since 2016 that relate to mortgage servicing. This includes rules and guidance still in effect related to handling of COVID-19 issues.
- There are a handful of instances where the prior version of the manual indicated that examiners “may” conduct interviews of consumers from the loan samples being tested. These references were changed to say that examiners “should” conduct such interviews. This applies to Module 1 – Servicing and Loan Ownership Transfers; Module 2 – Payment Processing, Account Maintenance, and Optional Products; Module 5 – Consumer Reporting; Module 7 – Collections and Accounts in Bankruptcy; and Module 8 – Loss Mitigation, Early Intervention, and Continuity of Contact.
- In multiple contexts, the CFPB will now assess whether servicers discuss and provide information about “forbearance, loan modifications (including streamlined modifications), and other loss mitigation alternatives.” Previously the manual just referred to “loss mitigation alternatives” generally.
Module 1 – Servicing and Loan Ownership Transfers
- CFPB Bulletin 2020-02, which noted continued inadequacies in servicers’ policies and procedures for transferring all the loan information and documents to a new servicer in a timely and accurate manner, is incorporated for examiners to reference when evaluating mortgage servicing transfer activity. However, Module 1 does not otherwise change the substantive instructions for what examiners are to evaluate.
Module 2 – Payment Processing, Account Maintenance and Optional Products
- Examiners are now instructed to assess whether the servicer charged fees for making payments (phone and online). If such fees are assessed, examiners will then seek to determine whether the servicer disclosed the fees before charging them, whether the disclosures were clear, prominent and specific, whether customers were first offered another payment method with lower fees, and whether the servicer accepts referral fees from a third-party company in connection with processing the fees.
- Examiners are instructed to evaluate whether the servicer monitors electronic fund transfers and refrains from initiating subsequent transfers to particular accounts after being advised that the account was closed.
- Examiners will assess whether the servicer charges fees, such as those related to home inspections and broker price opinions, that exceed the actual expense incurred.
- Examiners will evaluate whether the servicer’s procedures for maintaining or modifying existing credit arrangements are consistent with the Equal Credit Opportunity Act (ECOA) and Regulation B’s anti-discrimination requirements and whether the servicer is complying with ECOA and Regulation B’s adverse action notification provisions.
- Examiners will determine compliance with Regulation Z’s limitations on modifying home equity plans per 12 CFR 1026.40(f).
Module 4 – Maintenance of Escrow Accounts and Insurance Products
- Examiners will assess whether the servicer correctly disburses funds from escrow accounts and refrains from using funds from particular consumers’ escrow accounts to pay home insurance premiums owed by other consumers.
- Examiners will confirm whether the servicer accurately represents the reason(s) consumers are ineligible to cancel their private mortgage insurance.
Module 8 – Loss Mitigation, Early Intervention, and Continuity of Contact
- Examiners will assess whether information about the servicer’s participation in the Homeowner Assistance Fund (HAF) is provided and, if it is, whether that information is accurate. Notably, it’s not clear from the added examination procedure/question whether the CFPB is, in essence, mandating that HAF information be provided to borrowers; it is clear, however, that if any such information is provided, it must be accurate.
- Examiners will evaluate whether the servicer sends loss mitigation offer letters with response deadlines that have already passed or were about to pass by the time consumers received the letters. In our experience, this is a significant issue in the industry and one that presents substantial risk to servicers. Though this issue is certainly not limited to instances with an impending scheduled foreclosure sale, that is when this issue may be most prevalent.
- Examiners will determine whether the servicer sends loss mitigation denial notices with appeal deadlines that are less than 14 days from the day the consumers received the notices. Pursuant to Regulation X, a servicer must permit a borrower to make an appeal within 14 days after the servicer “provides” the evaluation notice, and there is nothing in Regulation X that outlines when that notice is “provide[d].” Here, however, the CFPB seems to be suggesting that the deadline should run from when the consumer “receive[s]” the notice. This new approach is likely to cause issues for servicers who only allocate 14 days from the loss mitigation decision for the borrower to appeal.
- Examiners will evaluate whether the servicer accurately represents the payment amounts, if any, required for consumers to accept any permanent loss mitigation options at the end of forbearance periods. This is just one of many areas in the new exam procedures where the CFPB is clearly trying to ensure that servicers’ short-term/informal loss mitigation processes are sound.
Module 9 – Foreclosures
Examiners will determine whether foreclosures were initiated when the borrower was told foreclosures would not be initiated or continued. Examiners will also consider whether servicers tell consumers that foreclosure will begin before the “servicer actually intends to initiate foreclosure.” Also, examiners will determine if servicers began foreclosure actions when they knew or should have known that the prior servicer waived the charges that caused the default.