The Consumer Financial Protection Bureau (CFPB) has adopted its final servicing rule, which was designed to add to, strengthen and clarify consumer protections outlined in Regulation X (the Real Estate Settlement Procedures Act) and Regulation Z (the Truth in Lending Act). Here are some of the highlights and a few thoughts about how servicers can get ready to implement the rule. However, please note that readers should refer to the CFPB final rule published Oct. 19, 2016, for more complete information.
Most of the final rule becomes effective on Oct. 19, 2017, but provisions dealing with successors in interest and periodic statements for borrowers in bankruptcy have an 18-month implementation period and become effective on April 19, 2018. Twelve- and 18-month implementation periods are a welcomed change from the shorter implementation time frames proposed. However, time will still go by quickly, and there is much to get done within that time frame. Servicers must begin now to develop new policies and procedures to implement the rule; work with their technology providers and other third-party providers, such as print vendors, to help ensure the implementation is timely and effective; and test any changes to technology and internal and external processes.
Successors in interest
One of the most significant amendments to the existing servicing rule is the CFPB’s decision to treat confirmed successors in interest (SIIs) as borrowers under Regulation X and consumers under Regulation Z. The final rule entitles certain confirmed SIIs to servicing disclosures, including, but not limited to, periodic statements, Early Intervention (EI) notices, escrow statements and adjustable-rate mortgage notices – provided another borrower or confirmed SII is not receiving them. But, even if another party has received the notices, a confirmed SII may receive duplicative information through an information request, error resolution request or pay-off request. Thus, servicers must develop policies and procedures to guide them in those cases when confirmed SIIs make requests for duplicative information, including broad requests to be a second recipient of notices or splitting notices among various confirmed SIIs.
Along with the receipt of specific disclosures, confirmed successors are also entitled to the timelines and protections provided by certain Regulation X and Z provisions, most notably the loss mitigation provisions. Servicers must evaluate a confirmed successor for loss mitigation, even if he or she does not assume the loan. However, owners of such loans still have discretion to determine what loss mitigation options are available to a confirmed SII. In many cases, a confirmed SII who does not assume the loan cannot accept a change to the contract that would otherwise be available through a loan modification.
Even before an SII is confirmed, certain protections apply. For example, if a loss mitigation application is received from an unconfirmed successor, the servicer either can begin the evaluation process at that time or must preserve the application and related documents that are received until the SII is confirmed, at which time, it must evaluate the application. This requires that servicers have a process in place to track the status of SIIs and retain and track any documentation received prior to confirmation.
Also, servicers are responsible for communicating with potential successors and helping them get confirmed. The final rule details what communications must transpire between servicers and potential successors and what documents a servicer can and cannot request to confirm a potential successor’s identity and property ownership. Servicing compliance experts must thoroughly understand and educate servicing staff about documents that are necessary to confirm property transfers or co-ownership rights for situations of death and divorce. Note that those requirements may differ by state.
Although a servicer’s obligation to communicate with potential successors is based on the servicer’s actual knowledge of a potential successor, some nuances remain. For example, if a servicer locates a proof of insurance coverage page identifying an insured person who is not the borrower, does this constitute knowledge of a potential successor and trigger future communications by the servicer with that person?
From a technology and operations perspective, servicers must be able to identify and retain contact information about all potential successors and notify them when an SII’s identity and property interest are confirmed or rejected. Servicers must also have a process in place to determine which notices, if any, will be sent to a confirmed SII or continue to be sent to the borrower. If the original borrower is still a party to the loan, servicers will likely continue sending notices to the debtor. However, servicers should be prepared for confirmed SIIs who are not receiving notices to ask for duplicates through the information request process.
For now, servicers should decide how they will process these requests and what information should and should not be sent to a successor. Given that some information, including location and financial information, should not be transmitted to another party, servicers must have a process in place to adjust the mailing address and other personal information. Also, more than one SII could submit a loss mitigation application, and each one would be subject to loss mitigation evaluations. Technology functionality that can track and maintain SII information on the servicing platform will help servicers manage these varied and complex requirements.
Loss mitigation continues to be a significant focus for the CFPB, as evidenced by the changes made by the final servicing rule. The final rule abandons the so-called “one bite at the apple” and includes provisions that will allow borrowers who have previously taken advantage of loss mitigation options to do so again if their loans have been current at any time since the last complete loss mitigation application was submitted. Servicers must unravel any processes that may limit additional reviews.
In addition, the final rule requires servicers to send a notice when a loss mitigation application becomes complete. In many cases, servicers today are already complying with this requirement and, thus, may not need to make significant operational changes. If they are not, it is imperative that processes be put in place internally or through technology that will trigger this step.
When it comes to dual tracking, the final rule clarifies that servicers are barred from foreclosing or completing key legal steps prior to foreclosure if the borrower submits a timely and complete loss mitigation application, albeit after the first notice or filing for foreclosure has occurred. A significant takeaway here is that servicers may be forced to dismiss a foreclosure case if the courts do not grant a postponement of the foreclosure.
The CFPB adopted several industry recommendations. For example, the final rule grants a servicer additional time to complete the loss mitigation evaluation, rather than forcing it to deny loss mitigation options, when the servicer is waiting for necessary third-party information (such as a third-party approval) or documents.
The CFPB has also clarified that a junior lienholder is permitted to join the foreclosure action of a superior lienholder, even if the borrower is not 120 days delinquent on the subordinate loan. In addition, the CFPB clarifies how servicers are to select a reasonable date by which a borrower should return documents and information to complete an application.
Servicers are also permitted to offer certain short-term repayment plans (in addition to short-term forbearance plans) based on incomplete loss mitigation applications. They may also communicate the terms of such repayment and forbearance plans after the offer (rather than prior to the repayment offer, as was initially proposed).
The final rule describes how to handle loss mitigation applications that may be pending at the time of a servicing transfer. Of note, the CFPB offers transferee servicers additional time to complete certain loss mitigation notices and steps, while preserving or even expanding borrower protections during this time. In some cases, borrowers may be under the protections of the rule even if a complete loss mitigation application is received by the servicer 37 days or fewer before foreclosure. It is imperative that any process stops tied to the 38th day of delinquency be reviewed when associated with a loss mitigation application in flight during a servicing transfer.
Although servicers may want to implement certain provisions early, the CFPB does not provide for “early compliance.” Servicers should carefully read the final rule prior to adopting any change before the effective date to ensure that such change does not conflict with existing requirements.
Early intervention for delinquent loans
Under existing rules, servicers are required to make live contact (or a good-faith effort to make contact) with delinquent borrowers by the 36th calendar day of the delinquency and promptly advise them of loss mitigation options. Also, a written notice of loss mitigation options must be provided to borrowers by the 45th calendar day of the delinquency. The final rule clarifies how frequently these outreach attempts must occur during a borrower’s delinquency or bankruptcy.
Today, borrowers in bankruptcy or borrowers who have made valid cease communication requests pursuant to the Fair Debt Collection Practices Act (FDCPA) are exempt from receiving these communications. The final rule narrows these exemptions and adds considerable complexity.
Whether the servicer is exempt from the EI live contact and written notice requirements depends on whether the borrower is in bankruptcy; loss mitigation options are available; or the servicer is a debt collector that receives a written FDCPA cease communication.
There are some additional twists and turns associated with the EI requirements. For example, if no exemption applies, servicers must send the written notice to the borrower but are permitted to send it only once during the entire bankruptcy period. If the stay is lifted, servicers can move forward as if the bankruptcy did not occur.
However, in the case of a valid cease communication request, servicers are prohibited from sending the EI written notice more than once during any 180-day period. Also, servicers must determine when a borrower should receive the standard notice content, as well as when such notice must be modified to indicate that the servicer may – or intends to – invoke foreclosure. Fortunately, the CFPB unravels this complexity in a flowchart in the November 2016 RESPA and TILA Mortgage Servicing Rules Small
Entity Compliance Guide.
As a final note, servicers should be aware that, along with the final servicing rule, the CFPB offered an “interpretative rule” that provides servicers that are debt collectors with a safe harbor from FDCPA liability due to their compliance with applicable EI provisions (as well as a safe harbor to servicers communicating with SIIs pursuant to the final servicing rule).
Periodic statements for loans in bankruptcy
Starting April 19, 2018, servicers must begin providing borrowers in bankruptcy with specifically tailored periodic statements or coupon books, subject to certain exemptions.
This new requirement is complex, partly because of the need to track varied accounting associated with pre-petition, post-petition and contractual application of payments applicable to a loan in bankruptcy. Generating a compliant statement for a customer that provides all of the elements of the new rule will require both good planning and enabling technology.
To ensure that borrowers in bankruptcy do not perceive periodic statements as a collection action, the final rule requires certain bankruptcy disclosures to be included that explicitly note that the periodic statement is simply for information purposes and not an attempt to collect a debt.
Technology functionality will be needed to help servicers establish this level of transparency. It will also be needed to help ensure that servicers are representing the correct information for pre-petition balances, post-petition amounts due and the contractual application of payments in the “past payments” breakdown section of the Chapter 12/13 bankruptcy periodic statement. Although the population of bankruptcies in a servicer’s portfolio is typically a very small percentage of the overall pool of loans, this requirement is complex and may be time-consuming to implement.
Processing and procedural changes will also be needed to define how to handle a bankruptcy statement when certain information is not available, such as pre- or post-petition information prior to filing a proof of claim. Servicers may also want to implement stops on the issuance of periodic statements when the court has granted the servicer a lift from stay or a bankruptcy plan provides for surrender of the property, which are two exemptions from providing periodic statements under the final rule. Other scenarios exist that allow the servicer to stop sending statements.
The final rule also adopts certain non-bankruptcy provisions. They include an exemption from sending periodic statements for charged-off loans if certain conditions are satisfied and an explanation of how to present accelerated and reinstatement amounts on non-bankruptcy statements.
Time is of the essence
Most servicers would likely agree that the CFPB took much of the input of servicers into consideration before releasing the final servicing rule. It is certainly helpful to have a longer implementation timeline for some of the more difficult provisions, and by and large, there were no big surprises in the final rule.
Of course, the final rule includes other provisions not discussed in this article, such as a standard definition of delinquency and a correction to force-placed insurance notices. Most servicers and technology partners have been discussing and planning for this final rule for many months. Now that it has been released and published, however, time is of the essence for servicers to work with their technology partners and consultants to prepare for and implement the new provisions on time.
(Author’s note: This article is intended for general information purposes and is not intended to provide legal and/or any other professional advice to individuals or entities. Please consult with your legal and professional advisors before taking any action based on the information appearing in this article.)
Vicki Vidal is senior vice president of core servicing in the technology, data and analytics division at Black Knight Financial Services. She can be reached at firstname.lastname@example.org.