The Consumer Financial Protection Bureau (CFPB) recently revised its policy guidance to residential mortgage servicers and subservicers regarding transfers of residential servicing rights.  Compliance Bulletin 2014-01 was issued due to concerns about potential risks to consumers that might arise out of a continuing high volume of servicing transfers.

A mortgage servicer collects and processes loan payments on behalf of the owner of the mortgage note.  There are frequent transfers of loans from servicer to servicer, sometimes because the mortgage owner may sell the mortgage servicing rights (MSR) away from the note ownership or hire a vendor (a subservicer) to perform the servicing duties.  MSR owners may also sell the MSR as an asset or transfer entire portfolios of loans needing special handling to specialist servicers.  Since the financial crisis the latter type of transfer has become more common.

The revised Regulation X of the Real Estate Settlement Procedures Act (RESPA) which took effect on January 20 requires servicers to maintain policies and procedures designed to facilitate the transfer of information when loan servicing is transferred and of properly evaluating loss mitigation activity.   In addition to RESPA other regulations apply to loan servicing including those put forth by the Truth in Lending Act (TILA), the Fair Credit Reporting Act (FCRA) the Fair Debt Collection Practices Act (FDCPA) and Dodd-Frank's prohibitions on unfair, deceptive, or abusive acts or practices (UDAAPs).

CFPB mortgage servicing examinations now include reviews for compliance with the new servicing rule.  The compliance Bulletin lays out a number of examples of policies and procedures the examiners may consider as facilitating compliance such as ensuring that contracts include the requirement to transfer all appropriate documents along with the loans, developing transfer instructions specific to each deal, using tailored testing protocols to evaluate compatibility of data, and engaging in quality control work post-transfer to validate accuracy of the transferred data.   The Bureau said it is also considering including other examinations of post transfer policies and procedures such as ensuring that the transferee servicer uses transferred information before seeking information from borrowers.

The January servicing rule requires servicers to maintain policies and procedures to reasonably assure that loss mitigation applications are properly evaluated because of the heightened risk in transferring these loans.  Examiners will pay particular attention to these transfers and where loans are transferred with pending loss mitigation applications or approved trial modification plans.  Policies and procedures that will contribute to meeting consumer protection objectives could include arrangements between the transferor and transferee to specifically flag such loans, ensure the new system can appropriately process the loss mitigation information, ensure delivery of loss mitigation documents, and evidence on the part of the transferee that transferred documents are identified, reviewed and used appropriately, and that partial payments received are in compliance with modification agreements. 

Where an evaluation of a complete loss mitigation option is in process at the time of transfer the transferee should continue the evaluation to the extent practicable and CFPB will carefully scrutinize any evaluations that take longer than 30 days after complete loss mitigation application data is received.   Examiners will consider whether the transferee servicer obtained information about loss mitigation discussions from the transferor before attempting to obtain it from the borrower.

CFPB said that its examiners have found that the absence of such policies and procedures are often indicated by the failure of servicers to recognize a loan with a modification or that servicers had failed to honor modification offers without an independent confirmation that the offer was proper and met investor criteria.  Servicers sometimes required borrowers to submit additional paperwork, to provide copies of financial documents they had already submitted to the transferor servicer or subjected borrowers to substantial delays while re-underwriting their loans. In some cases, the borrowers subsequently received a new modification with inferior terms, and in others, the servicer actually conducted a foreclosure sale.

The servicing rule states that the early intervention requirements - that services make good faith efforts to establish live contract when a borrower is delinquent for 36 or more days and provide written notice with certain information no later than the 45^th day of delinquency - must be continued by the new servicer even when the delinquency began under the old one.  CFPB will be looking for policies and procedures such as those that allow identification of borrowers delinquent at transfer and ensuring that personnel are available to assist them as soon as the loan is boarded or that servicer personnel can, in a timely manner, retrieve a record of borrower history and information provided by the borrower to previous servicers.

CFPB will also be looking at policies and procedures established by servicers to handle error resolutions and requests for information.  The rules say that transfer of MSR does not relieve the transferor of the obligation to respond to information or error resolution requests received from the borrower for up to one year after the loan was transferred or discharged.

Servicers must also comply with certain requirements regarding force-placed insurance coverage including the Regulation X requirement of having a reasonable basis to conclude the borrower has failed to comply with his mortgage contract's requirement to maintain hazard insurance.  If the borrower has not received required notices from the transferor regarding forced placement then it is the transferee's obligation to provide them.

The guidance notes that other financial laws apply when loans are transferred and parties to transfers should have established policies and procedures to abide by these requirements.  FCRA generally prohibits a source furnishing information to a consumer reporting agency if there is reasonable doubt about its accuracy.  The law also gives consumers the ability to dispute credit information both with reporting agencies and with sources. 

The FDCPA imposes obligations on servicers to the extent they act as debt collectors and among other obligations, are some requiring notice of attempts to collect that debt.  In addition to the notice requirements and other consumer protections described above, servicers must avoid engaging in UDAAPs. The CFPB emphasizes that conduct that may not violate one of the specific prohibitions in the laws discussed above may nonetheless constitute a UDAAP.

CFPB said it expects all servicers under its jurisdiction, including those with significant transfer volume, to maintain a robust Compliance Management System (CMS) which must, among other things, both ensure that violations of Federal consumer financial law do not occur during a transfer and contain mechanisms for promptly identifying and remediating any such violations that do occur.

CFPB expects if servicers identify any potential violations during a transfer they will undertake all necessary corrective measures which should include both steps to prevent the violation from occurring for subsequently transferred loans and to remediate any actual harm caused to the consumer whose loan was transferred. If the CFPB determines that a servicer has engaged in any acts or practices that violate the new servicing rule, that are unfair, deceptive, or abusive, or that otherwise violate Federal consumer financial law, it will take appropriate actions to address violations and seek all appropriate corrective measures including remediation of any harm to consumers. In determining the appropriate action, the CFPB will consider a variety of factors, including the timeliness of identification and the timeliness and scope of remediation of the violation by the servicer.

Servicers engaged in significant transfers may be required to prepare and submit to CFPB written plans detailing how they will manage associated consumer risks.  While the information included in the plan would vary as a general rule it would contain information on the size of the transfer, the name of the servicing platforms and their compatibility, detailed descriptions on arrangements for complying with new rules on transfers and the testing planned to ensure accurate transmission of information, the training plan and materials for staff involved in the transfer and a customer service plan that provides for responding to loss mitigation inquiries and for identifying loans subject to pending loss mitigation activity.

In analyzing the new compliance Bulletin, Michael S. Waldron, of the Consumer Financial Services Group at Ballard Spahr said, "It is important to also note that the CFPB uses the New Guidance as a platform to reinforce three broader and consistently provided messages to the servicing industry.  The first is that the CFPB expects all mortgage servicers to maintain a robust Compliance Management System ("CMS").  The CFPB notes that a robust CMS ensures that violations of consumer protection laws do not occur and includes mechanisms to remedy any such violations that do occur.  The second is that the CFPB is continuing to closely monitor the mortgage servicing market and may engage in further rulemaking in this area.  The third is that the CFPB's concern regarding mortgage servicing transfers remains heightened due to the continuing high volume of servicing transfers."