Written by Shereefat Balogun, Regulatory Compliance Counsel
As many of you know, the CFPB recently issued its final amendments to the mortgage servicing rules contained in Regulation X and Z. Now we all know that compliance folks work hard, and we’re use to reading through voluminous pages of regulatory text. However, ending our short summer with 900+ pages of mortgage servicing rules (or any rule!) is a bummer. In an effort to make this more manageable and “pleasant”, we’re breaking this up a bit. The changes can be grouped in broad topics including: Successors in Interest; Requests for Information; Force-Placed Insurance; Early Intervention; Loss Mitigation; Prompt Payment Crediting; Periodic Statements; and Small Servicer Exemption. We have already covered the changes relating to “Successors in Interest” and “Force-Placed Insurance”. This post will focus on the changes made to the loss mitigation requirements.
Before getting into the specifics of the loss mitigation requirements, we've broken up the final rule to make it easier to digest:
- Here’s a link to the Final Rule. This final regulation includes the preamble with rulemaking background, and a section-by section analysis with the provisions of the final rule and public comments.
- There’s a 9-page summary of the major changes which gives a high-level discussion of the major provisions of the rule. View the overview here.
- The actual amended rule with model forms and commentary (and 100+ pages), can be found here.
Moving on to the changes made to the loss mitigation requirement. The final rule makes several significant changes to loss mitigation requirements under the mortgage servicing rules, including:
- Requires servicers to notify borrowers when their loss mitigation applications are complete (§ 1024.41(c)(3)). Under the final rule, a servicer will be required to provide written notice that a borrower’s loss mitigation application is complete within 5 days (excluding legal public holidays, Saturdays, and Sundays) of receiving a complete application. The notice must set forth certain information including: (i) a statement that the loss mitigation application is complete; (ii) the date the servicer received the completed application; (iii) a statement that the servicer will evaluate the application within 30 days; (iv) a statement that the borrower is entitled to certain foreclosure protections while the application is pending; (v) a statement that the servicer may require and request additional information, and the consequences if the borrower fails to respond to that request; and (vi) that the borrower may be entitled to additional protections under State or Federal Law.
- Permits servicers to provide short-term loss mitigation options based on evaluation of incomplete applications (§ 1024.41(c)(2)(iii)). Under the existing rule, a servicer may offer a short-term payment forbearance program to a borrower based upon an evaluation of an incomplete loss mitigation application. The final rule now adds the ability for a servicer to offer a short-term repayment plan. The final rule requires that, if accepted by the borrower, the servicer must provide a written notice stating the specific terms and duration of the plan, that other loss mitigation options may be available, and that the borrower may submit a complete application to be evaluated for those options. Note that the servicer still cannot file for foreclosure if the borrower is performing under the plan.
- Requires servicers to exercise reasonable diligence in obtaining third party information, and prohibits servicers from denying a borrower solely because of the missing information unless efforts have been made for a significant period of time (§ 1024.41(c)(4)). Under the current rule, servicers must use reasonable diligence in obtaining documents or information from third parties, if such information is needed to determine which loss mitigation options it will offer to the borrower. Moreover, the current rule prohibits servicers from denying an application solely because the servicer lacks the necessary third party information. The final rule reiterates this point, but provides an exception to this general prohibition. Under the new rule, a servicer may deny an application if a servicer has exercised reasonable diligence to obtain the required information “for a significant period of time.” See comment 41(c)(2)(ii) for a discussion of what might be considered a “significant period of time.”
- Modifies an existing exception to the 120-day prohibition on foreclosure filing to allow a servicer to join the action of a superior lienholder (§ 1024.41(f)). The current exception merely allowed the servicer to join as a subordinate lienholder.
- Reinforces and clarifies prohibition on “dual tracking” (Commentary to § 1026.41(g)). The current rule prohibits servicers from moving for judgment or order of sale while simultaneously working with borrowers on loss mitigation options. The commentary to the final amended rule clarifies that, if a servicer has already initiated a foreclosure action and subsequently receives a timely complete application, the suit should avoid a foreclosure judgment or order of sale, unless the borrower’ application is properly denied, withdrawn, or the borrower fails to perform on a loss mitigation agreement. It is important to note that, according to the commentary, the responsibility falls on the servicer to ensure that the foreclosure does not move forward while an application is pending. This is especially key where the servicer has hired outside counsel to handle the foreclosure. The commentary makes clear that “a servicer is not relieved of its obligations because foreclosure counsel’s actions or inaction caused a violation.”
- Requires servicers to offer borrowers with loss mitigation options throughout the life of the loan (§ 1026.41(i)). The current rule requires servicers to consider loss prevention programs and avoid foreclosure one time during the life of the loan. Thus, if a delinquent borrower became current and subsequently defaulted again, a servicer was not required to consider the borrower for loss mitigation options. However, this “one bite at the apple” provision is no longer sufficient. The final amended rule requires a servicer to evaluate a borrower for loss mitigation whenever the borrower becomes delinquent and is otherwise eligible for a loss mitigation program, unless the borrower was delinquent at all times since submitting the prior application. For example, if the borrower has previously submitted a complete application and fully performed under the plan and becomes current on payments, but then becomes delinquent again, the servicer must evaluate the borrower for loss mitigation options.
- Clarifies obligations of servicers when a servicing transfer occurs (§ 1026.41(k)). The final amended rule makes clear that when a service transfer occurs while a loss mitigation application is pending, the new servicer (the transferee servicer) must comply with the loss mitigation requirements within the same timeframes that applied to the transferor servicer; however the rule does provide extensions to the timeframes in certain limited circumstances.
Rule’s Effective Date: Generally, the amendments to the final rule will become effective one year after publication in the Federal Register, with some exceptions including amendments to the rule that address successors in interest, the provisions of periodic statements to borrowers in bankruptcy, and the amendments that address when servicers may stop collecting information from borrowers for a particular loss mitigation option. These amendments will not become effective until 18 months after publication in the Federal Register.
In preparing for the new compliance requirements, credit unions may want to consider reviewing their policies and procedures to make sure they reflect the new servicing requirements, including policies that address communications with outside foreclosure counsel.
As always, if you have any questions relating to this article or any other issues concerning the amended mortgage servicing rules, please contact NAFCU’s regulatory compliance team. We’re here for you!
DoD Military Lending Act Interpretive Guidance out Today!
A few weeks ago, NAFCU issued a statement indicating that the DOD is expected to publish interpretive guidance on the MLA rules soon. Well, the guidance was published today in the Federal Register. NAFCU's Regulatory Compliance team is studying the guidance and will update the association’s MLA Compliance Guide in advance of the effective date (October 3, 2016). In the meantime, you can find NAFCU’s extensive collection of MLA compliance resources here.