On Aug. 10, 2012, the Consumer Financial Protection Bureau (the “Bureau”) proposed a wide range of new mortgage servicing rules1 to implement requirements imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The proposed rules would amend existing rules under the Truth in Lending Act (“TILA”) and the Real Estate Settlement Procedures Act (“RESPA”), covering nine general topics: periodic billing statements, adjustable rate mortgage (“ARM”), interest rate adjustment notices, prompt payment crediting and payoffs, force-placed insurance, error resolution and information requests, information management policies, early intervention with delinquent borrowers, continuity of contact with delinquent borrowers, and loss mitigation procedures.
The proposed rules demonstrate the Bureau’s keen focus on the manner in which mortgage servicers’ activities will be conducted in the future, especially the interaction between servicers and borrowers. When the rules become final, sponsors of mortgage securitizations should take particular care in:
Comments on the proposed rules are due by Oct. 9, 2012, and the Bureau has stated that it expects to issue final rules by January 2013. The Dodd-Frank Act generally requires an implementation period of no more than 12 months from the adoption of final rules. While the Bureau has indicated that it is considering a staggered implementation schedule and perhaps an extended transition period for smaller servicers, the Bureau has also indicated its belief that the rules should become effective as soon as possible.
Periodic Billing Statements (TILA)
Creditors (or assignees of the original creditors) and servicers of closed-end residential mortgage loans would be required to send the borrower a periodic statement for each billing cycle. The statement would be required to disclose a variety of specified information, including: the amount due; an explanation of the amount due (including a breakdown showing allocation to principal, interest and escrow, as well as fees or charges imposed and any past due payments); a breakdown of how previous payments were applied; transaction activity; certain required messages (e.g., information on funds held in a suspense account); certain required account information (including the amount of the principal obligation, current interest rate, how the interest rate might change, information on prepayment penalties and late fees, servicer contact information, and housing counselor information); and certain required additional delinquent information when the borrower is more than 45 days delinquent. The statement would have to be sent within a reasonably prompt time after the close of the grace period (four days being deemed reasonable). The statement would have to meet certain specified content and layout requirements, and the rules would include sample forms deemed acceptable by the Bureau. These rules would not apply to reverse mortgages or home equity lines of credit (“HELOCs”).
ARM Interest Rate Adjustment Notices (TILA)
Creditors (or assignees of the original creditors) and servicers would be required to send a notice to ARM borrowers 60 to 120 days before any adjustment that causes the payment to change. The notice would contain: a statement that the interest rate and payment will change; a table setting forth the current and new interest rates; the current and new payment amounts and the due date for the first new payment; for interest-only and negative amortization loans, the amount of the current and new payments allocable to interest, principal, property taxes and mortgage-related insurance; an explanation of how the interest rate is determined; a disclosure of any interest rate or payment limits and any unapplied carryover interest; an explanation of how the new payment is determined; for interest-only and negative amortization loans, a statement regarding the allocation of payments of principal and interest; and the circumstances under which a prepayment penalty may be imposed. This notice also would be required when an ARM converts to a fixed rate mortgage, and would not apply to HELOCs or construction loans with terms of one year or less.
Creditors (or assignees of the original creditors) and servicers also would be required to send a separate notice to ARM borrowers 210 and 240 days before the first interest rate adjustment. This notice would contain similar information to the notice required before any adjustment, but also would include a list of alternatives that the borrower could pursue before the interest rate adjustment, a telephone number for the creditor, assignee or servicer, and the website address for the list of homeownership counseling agencies and programs provided by either the Bureau or the Department of Housing and Urban Development. Again, this notice would not apply to HELOCs or construction loans with terms of one year or less.
All disclosures would have to be in a specified tabular form and order, and the rules would include sample notice forms deemed acceptable by the Bureau.
Prompt Payment Crediting and Payoffs (TILA)
Servicers would be required to promptly credit all full payments received from borrowers, generally on the date they are received. If a servicer holds partial payments in a suspense account, the periodic statement must disclose the amount of funds held in the suspense account and when they will be applied to outstanding payments. Once the amount in the suspense account covers a full contractual payment, the servicer would have to apply them to the oldest outstanding payment owed. The rules would apply to any consumer credit transaction secured by a consumer’s principal dwelling. They would not require the use of a suspense account; consistent with the terms of the contract, the servicer instead could reject the payment or credit it immediately to the borrower’s account.
A creditor (or assignee of the original creditor) or servicer would be required to send to the borrower an accurate payoff balance no later than seven business days after it receives a written request. This requirement would apply to any consumer credit transaction secured by a dwelling, whether or not it is the consumer’s principal dwelling.
Force-Placed Insurance (RESPA)
Under the proposed rules, a servicer may not obtain force-placed insurance unless it has a reasonable basis to believe the borrower has failed to maintain required hazard insurance. The proposed rules give examples of what constitutes a “reasonable basis,” such as receipt of a notice of cancellation or non-renewal. Before charging a borrower for force-placed insurance, the servicer would be required to send two notices to the borrower warning the borrower that the servicer may obtain force-placed insurance if the borrower does not provide evidence of coverage. The notice would have to include a variety of other specified disclosures, including the cost of force-placed insurance (or a good-faith estimate if the exact cost is not known), and would have to be in the format specified by the rules. The first notice would be required to be sent at least 45 days before charging for forced-place insurance coverage, and the second would be required to be sent no earlier than 30 days after the first notice. The servicer would be required to accept any reasonable form of written confirmation from the borrower of existing hazard insurance.
Within 15 days of receiving confirmation from the borrower of existing coverage, the servicer would be required to terminate any force-placed insurance and refund any premiums paid for periods in which the borrower’s policy was in effect. If a servicer makes payments for a borrower’s hazard insurance from an escrow account, the servicer would have to continue to make those payments timely unless it has a reasonable basis to believe that the insurance has been canceled or not reused for reasons other than nonpayment of premium, even if there is insufficient money in the escrow account.
Charges related to force-placed insurance, other than charges subject to state regulation as the business of insurance or authorized by the Flood Disaster Prevention Act (the “FDPA”), must be bona fide and reasonable. In other words, they must relate to a service that was actually performed and must bear a reasonable relationship to the servicer’s cost of providing the service.
“Force-placed insurance” subject to these rules would be hazard insurance obtained by a servicer on behalf of the owner or assignee or a mortgage loan on the property securing the loan, but would not include flood insurance required by the FDPA or hazard insurance obtained by the borrower but renewed by the servicer in accordance with regulatory requirements.
Error Resolution and Information Requests (RESPA)
The proposed rules state very specific procedural requirements for responding to information requests and for error resolution.
There are a limited number of types of covered errors that would invoke the rules’ error resolution procedures. These include: the failure to accept a proper payment; the failure to properly apply an accepted payment; the failure to credit a payment timely; the failure to make proper escrow account disbursements; the imposition of a fee or charge without a reasonable basis; the failure to provide an accurate payoff balance on request; the failure to provide accurate information regarding loss mitigation options; the failure to accurately and timely transfer information to a transferee servicer; and the failure to suspend foreclosure proceedings when the borrower has properly applied for loss mitigation.
Error claims could be asserted either orally or in writing, though servicers could designate a specific phone number and address for notices of error. The servicer would have to acknowledge a complaint within five days after receipt, and generally would have to conduct a reasonable investigation, respond and (if applicable) correct the error within 30 days (with the possibility of a 15–day extension if it notifies the borrower of the reasons for the delay in responding).
Similar procedures would apply to information requests by a borrower to a servicer. The servicer would have to acknowledge the request within five days after receipt and generally would have to conduct a reasonable search for the information, respond to the borrower and (if applicable) provide the information within 30 days (with the possibility of a 15–day extension if it notifies the borrower of the reasons for the delay in responding). The information request requirements would not apply to certain specified types of information, including confidential or proprietary information, information not directly related to the borrower’s account, and requests that are overbroad or unduly burdensome.
A servicer or lender would not be prohibited from pursuing its remedies, including foreclosure proceedings, unless the alleged error relates to the servicer’s improperly proceeding with a foreclosure sale during the borrower’s evaluation for loss mitigation alternatives.
Information Management Policies and Procedures (RESPA)
The proposed rules would require a servicer to establish reasonable information management policies and procedures. These procedures (the reasonableness of which would take into account the servicer’s size, scope, and nature of its operations) would satisfy the requirement of the rule if the servicer regularly achieves certain specified document retention and servicing file requirements, as well as various other objectives. The document retention and servicing file requirements would require the servicer to retain records relating to each mortgage until one year after the mortgage is discharged or servicing is transferred and to create a mortgage servicing file for each loan containing certain specified documents and information. The other required objectives include: providing accurate and timely disclosures to borrowers; investigating and responding to errors; responding to information requests; providing owners and assignees of loans with accurate information about their loans; submitting accurate foreclosure documents; providing accurate information and documents regarding loss mitigation options; evaluating borrower applications for loss mitigation; oversight of service providers; and facilitation of servicing transfers.
Early Intervention with Delinquent Borrowers (RESPA)
If a borrower is late in making its payments, the servicer generally would be required to orally notify (or make good faith efforts to notify) the borrower of its loss mitigation options no later than 30 days after the payment due date. Three phone calls on separate days would satisfy the “good faith efforts” requirement. The servicer also would be required to provide a written notice no later than 40 days after the payment due date. The information required in this notice would include examples of loss mitigation options available, information on how to obtain more information about loss mitigation options, and information about the foreclosure process. The proposed rule contains model language that could be used for these notices.
Continuity of contact with delinquent borrowers (RESPA)
The proposed rules would require servicers to assign dedicated contact personnel for a borrower no later than five days after providing (or making good faith efforts to provide) the required oral early intervention notice. These personnel could consist of a single person or a team, in the servicer’s discretion, and borrowers would be required to have telephone access to these personnel. The servicer would be required to establish reasonable policies and procedures designed to ensure that its personnel perform certain specified functions, including: providing the borrower with accurate information about how and when to apply for a loss mitigation option and about the status of the application; accessing all of the borrower’s records; and providing contact information for error notices or information requests.
Loss Mitigation Procedures (RESPA)
If a servicer offers loss mitigation options in the ordinary course of its business, it would be required to comply with a variety of procedures designed to ensure that borrowers receive complete loss mitigation information, including that applications are timely evaluated and that foreclosure sale is delayed until the loss mitigation process is complete, but the required procedures generally do not require the foreclosure sale date to be delayed.
If the borrower submits an incomplete loss mitigation application, the servicer would have to exercise reasonable diligence to obtain the missing information, including providing a notice to the borrower within five days of receiving the incomplete application. Within 30 days of receiving a complete application, the servicer would be required to evaluate the borrower for all available loss mitigation options and provide a notice of its determination as to whether it will offer any loss mitigation options. If the servicer denies a loss mitigation application, the notice must state the specific reasons for the denial and inform the borrower of his or her right to appeal within no less than 14 days. Any appeal would have to be decided within 30 days by different personnel than those who made the initial denial. Once a complete application for loss mitigation has been received, the servicer could not proceed with a foreclosure sale unless: the application is denied and no appeal was made or the appeal deadline passed; an appeal is denied; the servicer offered a loss mitigation option which the borrower declined or failed to accept within 14 days; or the borrower failed to perform his or her loss mitigation options.
The deadline for submitting a loss mitigation application could be no earlier than 90 days before a scheduled foreclosure sale.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:Sweet-Charles
This article was originally published by Bingham McCutchen LLP.