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The Consumer Financial Protection Bureau Strikes Again

On August 13, the Consumer Financial Protection Bureau issued another 750 pages of proposed regulatory changes to RESPA and Regulation Z relative to mortgage servicing pursuant to Dodd Frank and descriptions of how the Bureau decided upon the changes that it made. This is on top of the 1100 page issuance on the new combination RESPA/Regulation Z mortgage disclosure rules, the almost 300 pages amending the HOEPA rules and the near 100 pages defining the final rule for consumer reporting for larger participants. One thing you can say for the CFPB is that it has been busy. In this week’s article, I will provide a discussion of the RESPA changes, and I will address Regulation Z next week.

Force Placed Insurance
If a required casualty insurance (other than flood insurance) policy lapses or is canceled, the mortgage servicer must send the borrower a notice that if the policy is not replaced within 45 days, that the servicer will force place the coverage and the estimated cost of the force placed policy. Then, 30 days after the initial notice, the servicer must send a second letter containing fundamentally the same information. The servicer may force place the coverage immediately when it learns that its collateral is uninsured, but if the borrower replaces the coverage within the 45 day period, the servicer may only charge the proportionate amount of the premium for the period that the borrower did not provide coverage. It is my understanding that most uninsured portfolio protection insurance policies provide for that rebate; so, other than the notice requirements the new change should not be a significant issue for community banks.

Escrow Requirements
There are several tweaks to the escrow rules; the only significant one being that if a lender has established an escrow account, the lender must make a disbursement from the escrow for flood insurance even though the borrower is delinquent and there are insufficient funds in the escrow to pay the premium. While this sounds onerous, most, if not all, lenders will maintain casualty insurance on their collateral even during foreclosure. The amount paid is added to the mortgage balance; so, the new rule puts the lender in the same position it would have been in absent the rule.

Requests for Information
If a borrower requests information, either verbally or in writing, from his or her mortgage servicer about his or her mortgage, the servicer must acknowledge receipt of the request within 5 business days and must provide the requested information within 30 days. There are a couple of exceptions to providing the information requested such as if the servicer has already provided it or the request is frivolous. The kicker to this requirement is contained in another portion of the regulation under Reasonable Information Management. Under that provision, a servicer must provide a borrower, upon request, a “servicing file” containing:

  • a copy of the promissory note;
  • a copy of the mortgage or deed of trust;
  • a schedule of all payments that have been made including escrow payments and any
  • payments to a suspense account;
  • all collection notes by servicing personnel regarding collection notes of conversations
  • with the borrower; and
  • a report of any data fields relating to a borrower’s loan created by a servicer’s electronic systems in connection with collection practices including records of all automated or manually dialed telephonic communication.

This creates a couple of problems. First, the cost of complying with the request will be fairly substantial. Second, it is the practice of many lenders to place a partial payment into a suspense account and then apply the suspense account to the loan when enough is received to make a complete payment. Often, no record is made of the suspense account after it has been applied, or, if a record is retained, it is not a part of the loan file and not easily found or retrieved. Finally, make sure that servicing personnel do not make any comments in the loan record that they do not want the borrower to receive.

Notice of Error
If a borrower provides a servicer a notice of error such as a claim that the borrower’s payment was improperly applied, etc., the lender must respond promptly and correct the error if indeed there was an error.

Reasonable Information Management
A servicer must have a policy and procedures for reasonable information management. The crux of the issue is the complaint of many delinquent borrowers that they begin working with one person in a lender’s servicing department and when they contact the lender again, they work with another person who has no knowledge of what went on before. The new rules require that the person dealing with a borrower have a continuity of information of the borrower’s dealings with the servicer. For most community banks with relatively small servicing departments, other than the task of writing the policy and procedures, this should not be a major issue. For large servicers, it could be a substantial issue.

Early Intervention
For the purpose of this provision, loan mitigation means the various alternatives available from the servicer to the borrower to avoid foreclosure. If a borrower is delinquent 30 days, the loan servicer must first attempt to contact the borrower by telephone and must make at least three attempts. When the servicer speaks to the borrower, it must remind the borrower that the loan is delinquent, provide some other information and advise the borrower of the various loan mitigation options that the lender provides. If the loan has not been brought current, then, 40 days after delinquency, the servicer must send the borrower a letter containing the same information. There are then some fairly stringent rules if the borrower makes a formal request for loan mitigation. The problem is that the rule seems to have been written for large servicers who have several formal loan mitigation programs. Most community banks have a loan mitigation policy but no formal loan mitigation programs. Loans are dealt with on a case-by-case basis, and any mitigation provided is based upon a myriad of factors. With most community banks, loan mitigation is on a case by case basis based upon the loan, the circumstances of the borrower, the adequacy of the collateral, etc. I don’t know of any community bank that wants to foreclose on anything. Most community banks will bend over backwards to avoid a foreclosure, but sometimes foreclosure is the only alternative. To try to explain to a borrower the various types of relief that the bank might grant without first meeting with the borrower and getting additional information is unrealistic. It will be interesting to see how this provision plays out.

The one thing that appears obvious from reading the proposal is that there are no bankers or people with loan servicing experience on the CFPB staff. There are a lot of people who have listened to borrower complaints, but they do not understand the real world of what transpires in a mortgage servicing department. Hopefully, they will learn and take that into account in a final regulation.
The above article was provided to Andrews Hooper Pavlik PLC (AHP) courtesy of TriComply, the compliance arm of TriNovus. AHP does not guarantee accuracy of the information provided in the article and it should not be construed as professional advice. If you have any questions regarding this article, please contact Randy Morse, CPA, partner and leader of AHP’s Financial Institution practice. AHP provides a broad range of accounting, auditing, tax, and consulting services to financial institutions throughout the state of Michigan and beyond.

TriComply compliance service offer banks a full compliance package that provides them with quality assistance at an affordable price. TriComply provides the TriComply knowledgebase, compliance manual, policy manual (written and reviewed), compliance newsletter (weekly), advertisement review, compliance calendar, helpful resources and an online training library of compliance webinars.

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