On August 4, 2016, the CFPB finalized its proposed amendments to its Mortgage Servicing Rules. The final rule clarifies, revises, or amends provisions regarding a wide range of topics, and focused primarily on amending provisions regarding force-placed insurance notices, policies and procedures, early intervention, loss mitigation requirements under Regulation X’s servicing provisions, and prompt crediting and periodic statement requirements under Regulation Z. Significantly, the final rule finalizes guidance regarding the policies and procedures mortgage servicers must have in place to extend certain protections to borrowers who are successors in interest. The final rule also makes minor technical corrections and clarifications to wording throughout several provisions of Regulations X and Z.
The majority of the proposed provisions will go into effect 12 months after publication in the Federal Register. However, the amendments regarding successors in interest and periodic statements will take effect 18 months after publication of the rule. The final rule is expected to be published in the Federal Register sometime in August 2016. As a result, some of the new provisions could become effective as early as August 2017.
We highlight a number of the most significant amendments to the Mortgage Servicing Rules below.
Successors in interest. Successors in interest are individuals who did not originally borrower money but to whom an ownership interest in the property securing the mortgage loan has been transferred. The relevant transfers may or may not involve the death of the borrower, as discussed more fully below. The Final Rule finalizes three key sets of rule changes relating to successors in interest:
- The Bureau adopted definitions of successor in interest for purposes of Regulation X and Regulation Z that are modeled on the categories of transfers protected under the Garn-St Germain Act. For example, successors in interest generally include individuals who receive an ownership interest in a property securing a mortgage loan by certain transfers resulting from the death of the borrower, as well as due to transactions not involving the borrower’s death, such as transfers to the borrower’s spouse or children, or transfers resulting from divorce.
- The Bureau finalized the process for confirming a successor in interest’s identity and ownership interest. Under the new rules, a servicer must generally respond to a written request that indicates that the person making the request may be a successor in interest by providing that person with a description of the documents the servicer reasonably requires to confirm the person’s identity and ownership interest, and, upon receipt of such documents, confirm the person’s status.
- The Bureau provided that a confirmed successor in interest is considered a borrower for the purposes of the Mortgage Servicing Rules under Regulation X and Regulation Z, and thus eligible for the existing protections under the rules.
Definition of delinquency. Under the current rules, a generally-applicable definition of the term “delinquency” does not exist. However, the new rule adopts a uniform definition of delinquency that applies to all of the servicing provisions of Regulation X and the provisions regarding periodic statements for mortgage loans in Regulation Z. Under the new rules, delinquency means “a period of time during which a borrower and a borrower’s mortgage loan obligation are delinquent.” The rule provides that a delinquency begins 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.
Requests for information. The new rule changes how a servicer must respond to requests for information asking for ownership information for loans in trust for which Fannie Mae or Freddie Mac is the owner of the loan or the trustee of the securitization trust in which the loan is held. In particular, the new rule provides that for such loans, a servicer may respond to requests for information asking only for the owner or assignee of the loan by providing only the name and contact information for Fannie Mae or Freddie Mac, as applicable, without also providing the name of the trust.
Force-placed insurance. The Bureau is finalizing amendments to the force-placed insurance disclosures and model forms to account for when a servicer wishes to force-place insurance when the borrower has insufficient, rather than expiring or expired, hazard insurance coverage on the property. The new rule also provides that the force-placed insurance notices must include a statement that the borrower’s hazard insurance is expiring, has expired, or provides insufficient coverage, as applicable, and that the servicer does not have evidence that the borrower has hazard insurance coverage past the expiration date or evidence that the borrower has hazard insurance that provides sufficient coverage, as applicable. Additionally, under the new rule servicers will have the option to include a borrower’s mortgage loan account number on the forced-placed insurance notices.
Early intervention. The Bureau is clarifying the early intervention live contact obligations for servicers to establish or make good faith efforts to establish live contact so long as the borrower remains delinquent.
- The Bureau is also clarifying requirements regarding the frequency of the written early intervention notices, including when there is a servicing transfer.
- Regarding certain borrowers who are in bankruptcy or who have invoked their cease communication rights under the FDCPA, the Bureau is finalizing exemptions for servicers from complying with the live contact obligations but requiring servicers to provide written early intervention notices under certain circumstances.
Loss mitigation. The new rule sets out 9 lengthy loss mitigation requirements for servicers to meet. The abridged version is that the amendment:
- Requires servicers to meet the loss mitigation requirements more than once in the life of a loan for borrowers who become current on payments at any time between the borrower’s prior complete loss mitigation application and a subsequent loss mitigation application.
- Modifies an existing exception to the 120-day prohibition on foreclosure filing to allow a servicer to join the foreclosure action of a superior or subordinate lienholder.
- Clarifies how servicers must provide the reasonable date by which a borrower should return outstanding documents and information in order to complete an application.
- Provides clarification regarding a servicer’s obligations if the servicer has already made the first foreclosure notice or filing, and a borrower timely submits a complete loss mitigation.
- Requires servicers to provide written notice to a borrower about the status of their application within five days (excluding Saturdays, Sundays, or legal holidays) after they receive a complete loss mitigation application, and requires that the notice satisfy certain content requirements.
- Sets forth how servicers must attempt to obtain information not in the borrower’s control and evaluate a loss mitigation application while waiting for such third party information.
- Permits servicers to offer a short-term repayment plan based on an evaluation of an incomplete loss mitigation application.
- Clarifies that servicers may not stop collecting documents and information for any loss mitigation option based only upon the borrower’s stated preference for a different option. However, the final rule provides that a servicer may stop collecting information after learning that the borrower is ineligible for the specific option.
- Addresses and clarifies how the loss mitigation procedures and timelines apply in connection with transfers of residential mortgage servicing rights.
Prompt payment crediting. The new amendments provide that periodic payments made pursuant to temporary loss mitigation programs must continue to be credited according to the loan contract and could, if appropriate, be credited as partial payments. For example, if a consumer submits a payment under a temporary loss mitigation program that is less than an amount sufficient to cover principal, interest, and escrow (if applicable) for a given billing cycle, the servicer should generally treat the payment as a partial payment, even though the consumer may have made the payment due under the temporary loss mitigation plan. For loans that have been permanently modified, however, periodic payments must be credited under the terms of the permanent loan agreement under the new rule. Additionally, these payment crediting and processing requirements apply even when a third party makes mortgage payments on behalf of a consumer or as a successor in interest to the transferor consumer.
Periodic statements. The final rule:
- Clarifies certain periodic statement disclosure requirements relating to mortgage loans that have been accelerated, are in temporary loss mitigation programs, or have been permanently modified, to conform generally the disclosure of the amount due with the Bureau’s understanding of the legal obligation in each of those circumstances, including that the amount due may only be accurate for a specified period of time when a mortgage loan has been accelerated.
- Requires servicers to send modified periodic statements (or coupon books, where servicers are otherwise permitted to send coupon books instead of periodic statements) to consumers who have filed for bankruptcy, subject to certain exceptions, with content varying depending on whether the consumer is a debtor in bankruptcy under chapter 7 or 11, or a chapter 12 or 13 bankruptcy case. The new rule also includes proposed sample periodic statement forms that servicers may use for consumers in bankruptcy to ensure compliance the provisions.
- Exempts servicers from the periodic statement requirement for charged-off mortgage loans, as long as 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 that a servicer must provide before exercising the exemption.
Small servicer. The small servicer exemption generally applies to servicers who service 5,000 or fewer mortgage loans for which the servicer is the creditor or assignee. The final rule excludes certain transactions from being counted toward the 5,000 loan limit, including mortgage loans voluntarily serviced for a non-affiliate that is not a creditor or assignee and also certain seller financed transactions. As a result servicers will be able to service some seller-financed transactions while still qualifying as small servicers.
Fair Debt Collection Practices Act. The Bureau issued the final rule concurrently with an interpretive rule on “Safe Harbors from Liability under the Fair Debt Collection Practices Act for Certain Actions Taken in Compliance with Mortgage Servicing Rules under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z).” The interpretive rule creates three safe harbors from FDCPA liability for servicers acting in compliance with the following mortgage servicing rules:
- The requirement to communicate about an existing mortgage loan with confirmed successors in interest.
- The requirement to provide to provide early intervention notices regarding loss mitigation, regardless of whether a borrower invoked the FDCPA’s cease communication protections.
- The requirement to respond to borrower initiated communications regarding loss mitigation, regardless of whether a borrower invoked the FDCPA’s cease communication protections.