CFPB Publishes New Mortgage Servicing Exam Procedures
By: Nanci L. Weissgold, Kerri M. Smith, Christopher Shelton*
*Mr. Shelton is not admitted to the practice of law in the District of Columbia.
The CFPB has released updated exam procedures for reviewing mortgage servicers, incorporating the Mortgage Servicing Rules (“the Rules”) that became effective on January 10, 2014. These updated exam procedures still focus on nine major modules covering routine servicing, default servicing, and foreclosure. However, they frequently cross-reference the TILA and RESPA exam procedures that were updated in November 2013 to reflect the Rules. Because of the overlap in coverage and the reliance on cross-referencing, the updated servicing exam procedures are shorter than the prior version of the CFPB’s Examination Manual, although there are some notable additions.
As might be expected, the updated exam procedures address the specific topics from the Rules, such as ARM disclosures, record retention and the servicing file, force-placed insurance, early intervention, and continuity of contact. However, they do more than simply catch up with the regulations. Some areas of focus appear rooted in findings from 2013 exams of mortgage servicers, as described in the CFPB’s Winter 2014 Supervisory Highlights. Notable changes that go beyond the Mortgage Servicing Rules include the following items:
• Additional focus on borrowers in bankruptcy
Under the updated procedures, examiners will scrutinize how the servicer identifies borrowers in active bankruptcy, communicates with bankrupt borrowers, and applies payments received from a bankruptcy trustee.
• Inclusion of compliance with “other laws” (such as the Servicemembers Civil Relief Act (“SCRA”))
The exam procedures contain new language about how “examiners may find evidence of violations of–or absence of compliance policies and procedures with respect to–other laws,” in which case the CFPB may refer the matter to other regulators. For example, the exam procedures suggest that servicers’ policies and procedures should address checking the DMDC website prior to completing a foreclosure and documenting the results. This is notable, as the CFPB does not have enforcement authority for SCRA.
• New areas of focus for disparate treatment analysis in loss mitigation
The two additional areas of focus include (1) the consideration of various types of income of an applicant or the spouse of an applicant, and (2) the servicing of loans held by borrowers with Limited English Proficiency (“LEP”). On the latter point, the CFPB notes that an examiner should assess whether the servicer:
a) identifies borrowers that may require non-English language assistance
b) provides an option for customer service calls in a language other than English;
c) has customer service personnel available to provide assistance in languages other than English and, if so, whether (1) they are dedicated service personnel, and (2) they receive the same training, and have the same authority, as other customer service personnel; and
d) provides translations of English language documents to LEP borrowers.
• Incorporating supervisory concerns described in the CFPB’s Winter 2014 Supervisory Highlights (such as heightened scrutiny for biweekly payment plan solicitations, and inaccurate credit reporting of short sales and loan modification outcomes).
• Addressing communications with borrowers about charging off loans for accounting purposes or about releasing liens but not related debts prior to full repayment of the loan.
While there were numerous additions to the exam procedures, there are certain areas that are notably absent from the latest version. Those include these deletions:
• Discussion of servicing fees, previously included in Module 2 under the heading “Fees Imposed to Protect the Owner’s Security Interest.”
• Multiple and targeted questions related to servicing transfers, due diligence obligations, and treatment of in-flight modifications. Instead, the new exam procedures require evidence that the transferee servicer honors the loss mitigation agreement of the prior servicer. The exam procedures also refer to the RESPA exam procedures, but those are not as specific as the prior servicing exam procedures.
• Discussion of “Payment Posting” and use of suspense accounts, previously addressed in Module 2.
Given the flood of new servicing regulations, as well as the Bureau’s increasing interest in certain new areas of servicing, mortgage servicers are likely to continue to see significant changes in their supervisory exams.