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Servicing Changes Ahead

By Jon Tavares, JD, LLM, CRCM, NCCO 14 Jun 2017

Last August, the CFPB issued a rule to amend its 2013 Mortgage Servicing Rule. The rule made several changes, including: (i) clarifying, revising, and amending provisions regarding force- placed insurance notices, policies and procedures, early intervention, and loss mitigation requirements under Regulation X's (12 CFR Part 1024) servicing provisions; (ii) clarifying, revising, and amending provisions prompt crediting and periodic statement requirements under Regulation Z's (12 CFR Part 1026) servicing provisions; (iii) addressing certain servicing requirements when a person is a successor in interest, is a debtor in bankruptcy, or sends a cease communication request under the Fair Debt Collection Practices Act ("FDCPA"); and (iv) making non-substantive, technical corrections to several provisions of Regulations X and Z.

 

The majority of the provisions of the rule will be effective on October 19, 2017 with a couple of provisions that will not be effective until April 19, 2018. A future article will address the changes that will become effective next April. The changes to Regulation X's loss mitigation provisions are so numerous that it could be the subject of its own article. In fact, the CFPB spends almost 200 pages discussing these changes. As luck would have it, that will be the subject of my next article and I don't really like writing 200 pages on anything. This article will focus on the remaining provisions that will be effective in October.

 

The first significant clarification the rule makes is to the scope of the RESPA Mortgage Servicing requirements. The early intervention, continuity of contact, and loss mitigation requirements apply to a mortgage loan that is secured by a property that is a borrower's principal residence. A comment is added to make it clear that once the property ceases to be the borrower's principal residence, it is no longer a loan secured by the borrower's principal residence and the requirements no longer apply.

 

There currently is no standard definition of delinquency. The only definition of delinquency applies to the early intervention requirements. This caused concern for servicers trying to comply with other requirements, such as the prohibition on foreclosures until the loan was more than 120 days delinquent, or the periodic statement requirements. When was a borrower delinquent? What happened if the borrower made a payment but it was not sufficient to bring the loan current? The new definition of delinquency applies to all servicing provisions of Regulation X and the provisions regarding periodic statements for mortgage loans in Regulation Z. Delinquency means a period of time during which a borrower and a borrower's mortgage loan obligation are delinquent. A borrower and a borrower's mortgage loan obligation are delinquent beginning on the date a periodic payment sufficient to cover principal, interest, and, if applicable, escrow, becomes due and unpaid, until such time as no periodic payment is due and unpaid. When a borrower makes a payment that does not bring the loan current, whether it advances the date of delinquency will depend on how the payment is applied based on the legal obligation. For Example, as of June 15, I am 105 days past due on my mortgage with Silly Example Bank and I pay one month's principal and interest. If Silly Example, based on the loan agreement, applies it to my April payment, I would be 75 days (as of June 15) delinquent. But if my loan agreement provides that the payment is applied to the current payment due, it would be applied to my June payment and I would remain 75 days past delinquent.

 

How a servicer must respond to requests for information asking for ownership information for loans in trust for which the Federal National Mortgage Association ("Fannie Mae") or Federal Home Loan Mortgage Corporation ("Freddie Mac") is the trustee of the securitization trust in which the loan is held is changing. Currently when a consumer requests information about the ownership of a loan owned by a trust, the servicer must provide the name of the trust and the name, address, and relevant contact information for the trustee. For loans where Fannie Mae and Freddie Mac are the trustee, the rule will permit the servicer to provide only the name and contact information unless the request specifically requests the name or number of the trust or pool. For all other loans owned by a trust, the requirements do not change.

 

The force-placed insurance disclosures and model forms are changed to account for when a servicer wants to force-place insurance because the borrower has insufficient hazard insurance coverage on the property. The current regulation requires a servicer to send a notice stating that the borrower's insurance has expired or is expiring. It does not consider situations where a borrower has insurance but it is not sufficient. The rule amends the disclosure requirements and the model forms to state that the borrower's hazard insurance is expiring, has expired, or provides insufficient coverage, as applicable.

 

Currently, the customer contact requirement is ambiguous as to whether a servicer must make live contact once per delinquency or for each billing cycle and how often written notice must be sent. The rule clarifies that live contact must be made for each payment that is past due. It also makes it clear that a written notice need not be sent more than once during any 180-day period. If a borrower is 45 days or more delinquent at the end of any 180-day period after the servicer has provided the written notice, a servicer must provide the written notice again no later than 180 days after the provision of the prior written notice. If a borrower is less than 45 days delinquent at the end of any 180-day period after the servicer has provided the written notice, a servicer must provide the written notice again no later than 45 days after the payment due date for which the borrower remains delinquent. A partial exemption regarding borrowers who are in bankruptcy or who have invoked their cease communication rights under the FDCPA is also created.

 

New comments are added to clarify how servicers must handle periodic payments made by consumers who are performing under a temporary loss mitigation program or permanent loan modification. Periodic payments made under a temporary loss mitigation program continues to be credited according to the loan contract and periodic payments made under a permanent loan modification are credited under the terms of the new permanent loan agreement.

 

Clarifications are made to the periodic statement requirement. First, the loan amount for mortgage loans that have been accelerated, are in temporary loss mitigation programs, or have been permanently modified, is the amount due under the legal obligation. The periodic statement must be accurate when provided. If the amount due is accurate only for a specified period when the loan is accelerated, the periodic statement should state that that the amount due is only accurate for a set period and may include the as of or good through date and provide an amount due that will reinstate the loan. Second, it exempts servicers from the periodic statement requirement for charged-off mortgage loans if the servicer will not charge any additional fees or interest on the account and provides a periodic statement including additional disclosures related to the effects of charge-off.

 

Finally, the small servicer determination is slightly expanded. Currently, a small servicer is a servicer that: (i) services, together with any affiliates, 5,000 or fewer mortgage loans for which the servicer (or an affiliate) is the creditor or assignee; (ii) is a Housing Finance Agency; or (iii) is a non-profit entity that services 5,000 or fewer mortgage loans, including any mortgage loans serviced on behalf of associated non-profit entities, for all of which the servicer or an associated non-profit entity is the creditor. Generally, a servicer cannot be a small servicer if it services any mortgage loan for which the servicer or its affiliate is not the creditor or assignee. But it excludes mortgage loans voluntarily serviced by the servicer for a creditor or assignee that is not an affiliate of the servicer and for which the servicer does not receive any compensation or fees. The rule revises this to exclude any mortgage loan voluntarily serviced for a non-affiliate, even if the non-affiliate is not a creditor or assignee, from being counted toward the 5,000 loan limit. It also adds an exclusion for certain seller-financed transactions.

 

As you can see, there are several changes that are coming to the Servicing Rule. Even though many of these changes seem insignificant, don't do yourself a disservice and wait until the last minute to start working on those changes.

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