October 11, 2016
by Graham H. Kidner
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)
In June the Consumer Finance Protection Bureau (CFPB or Bureau) published its Supervisory Highlights Mortgage Servicing Special Edition summarizing its recent supervisory examination observations that focus on compliance with the Mortgage Servicing Rules (MSRs) and on unfair, deceptive or abusive acts or practices by loan servicers. As noted in the Highlights, the Bureau recently updated its Supervision and Examination Manual and enhanced the section related to consumer complaints, in particular, to review whether servicers have adequate processes in place to expedite the evaluation of complaints or notices of error where borrowers face foreclosure. Additionally, the CFPB is increasing its focus on compliance with the Equal Credit Opportunity Act (ECOA). For the latter half of 2016, the Bureau will be conducting a more targeted review of ECOA compliance.
The issues most extensively addressed in the Supervisory Highlights based on recent supervisory observations are in the following areas: loss mitigation acknowledgment; loss mitigation offers and related communications; loan modification denial notices; policies and procedures; and servicing transfers. The Highlights provide numerous anecdotal examples of specific violations, the alleged harm to borrowers as a result, and the remedies required by the Bureau, without identifying the at-fault servicers.
Loss Mitigation Acknowledgment Notices
Bureau examiners found numerous violations relating to the requirement that a servicer must acknowledge in writing within 5 days the receipt of a loss mitigation application received 45 days or more before foreclosure sale. If the application is incomplete, the acknowledgment must inform the borrower of the additional documents and information needed, and a date by which they must be provided. In addition to process defects, the CFPB reported that it had found some statements contained in acknowledgment notices to be deceptive, such as when servicers informed borrowers that their homes would not be foreclosed on before the deadline to submit additional loss mitigation materials, but the foreclosure sales proceeded anyway.
The Bureau found other errors, including the failure to timely send the acknowledgment notices, failing to inform the borrowers about additional material needed, requesting documents not relevant to loss mitigation review, and denying loss mitigation before the deadline had passed for the borrower to submit additional materials.
Loss Mitigation Offers
The CFPB found fault with the way in which some servicers handled proprietary loan modifications, including misleading or deceiving borrowers about whether and when outstanding charges would be deferred or assessed. Some servicers were found to have made the language in their offers impossible for many borrowers to comprehend, exposing borrowers to risks that they did not understand. Other servicers sent loss mitigation option letters that did not match the terms approved by their underwriting software, thus misrepresenting the actual terms being offered.
Additionally, the Bureau observed numerous situations where servicers had sought to require borrowers to waive their legal rights to bring claims in court in return for the receipt of a loss mitigation option, in violation of Regulation Z. Servicers should already be aware of the well-publicized administrative proceeding from July 2015, In re Residential Credit Solutions, in which the servicer paid a hefty penalty for engaging in similar behavior.
Loan Modification Denial Notices
Further, the Bureau found that some servicers failed to provide a reason for the denial of a loss mitigation application, or provided an incorrect reason. The MSRs require that such an explanation be provided in a denial notice so that the borrower knows whether to appeal. If the servicer receives a complete loss mitigation application 90 days or more before foreclosure sale or during the pre-foreclosure review period, the borrower has a right to appeal the denial but is deprived of that right if the servicer fails to inform the borrower of the right to appeal, the amount of time available to appeal, or the reasons for denial.
Servicing Policies, Procedures, and Requirements
The CFPB reports a miscellany of errors as the result of servicers failing to have necessary policies and procedures in place to deal with a wide range of borrower inquiries or requests. These range from the failure to provide borrowers with loss mitigation application forms to identifying which loss mitigation options were available for the particular borrowers who sought relief. Some of these failings were the result of inadequate communications among servicer personnel, or the failure of servicer employees to understand the loss mitigation options allowed by their loan investors.
While improvements have been observed by the Bureau, there continue to be problems in honoring already-agreed-upon loss mitigation resolutions following servicing transfers, as well as the loss of documents and information provided to the transferor servicers by the borrowers.
The Highlights were positive in many respects, with the CFPB noting considerable improvements made by many servicers to properly staff effective compliance management programs, improve employee training, better utilize technology systems, and actively review borrower complaints for allegations of legal violations. Nonetheless, servicers would be wise to study the Highlights and continually strive to improve their loss mitigation policies, procedures, and processes so as to better serve their customers and avoid adverse action by the Bureau.
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