NAFCU Compliance Blog

Mortgage Servicing Gone Rogue

By Stephanie Lyon, Regulatory Compliance Counsel

As some of you may have heard, the CFPB recently sued one of the country's largest nonbank mortgage loan servicers—Ocwen Financial Corporation and its subsidiaries (Ocwen)—for numerous mortgage servicing violations. The 93 page complaint is very informative and provides insight into what practices make the CFPB tick. While Ocwen is not a financial institution, it does have to follow some of the same mortgage servicing rule as credit unions. So breaking down the alleged violations is helpful when reviewing your credit union's policies and procedures to make sure it is not engaging in the same practices that got Ocwen into hot waters with the bureau. The alleged deficiencies include the following:

1. Used incorrect information to service loans

Regulation X requires mortgage servicers to maintain policies and procedures to provide timely and accurate information. See, 12 C.F.R. § 1024.38. Allegedly, Ocwen loaded incorrect information into its loan servicing system and also managed to change correct information because of system errors and deficient programming. Ocwen's own Head of Servicing described Ocwen’s technology as "[a]n absolute train wreck." The CFPB claims that even though Ocwen was aware of these deficiencies, it used the faulty information to service borrowers’ loans. Some of the issues caused by using the erroneous information was failing to cancel borrowers’ private mortgage insurance (PMI) in a timely manner which caused borrowers to overpay about $1.2 million for PMI premiums. Ocwen did eventually refund this money, but only after the CFPB called it to its attention.

2. Illegally foreclosed on homeowners

Section 1024.41 of Regulation X has requirements for loss mitigation procedures. Under the rule, if a mortgage servicer offers loss mitigation options and receives a completed application more than 37 days before foreclosure, it must evaluate the borrower for all loss mitigation options and notify the borrower of its determination. See, 12 C.F.R. § 1024.41(c). Ocwen allegedly failed to provide required foreclosure protections and wrongfully initiated foreclosure proceedings and sales on at least 1,000 borrowers. More specifically, the bureau claims that Ocwen initiated the foreclosure process before completing a review of borrowers’ loss mitigation applications and foreclosed on those who were fulfilling their obligations under a loss mitigation agreement.

3. Failed to resolve errors

Regulation X has error resolution procedures that generally require the servicer to investigate and correct servicing errors within 7 days of receiving a notice of error. See, 12 C.F.R. § 1024.35(a)-(e). Ocwen received numerous error notices on inappropriately credited payments and allegedly failed to correct these billing and payment crediting errors. The CFPB claims that Ocwen's policies and procedures required that borrowers complained at least five times in nine days before Ocwen automatically escalates their complaint to be resolved.

4. Incorrectly managed escrow accounts

There are several requirements associated with escrow accounts, such as providing an annual escrow account statement; conducting an analysis to resolve escrow surpluses or shortages and notifying borrowers of shortage or deficiencies in the account. See, 12 C.F.R. § 1024.17(f)-(g). Even though Ocwen manages escrow accounts for the majority of the loans it services, the servicer allegedly failed to conduct escrow analyses and sent some borrowers’ escrow statements late or not at all. Ocwen also allegedly failed to resolve escrow shortages by misapplying borrowers' payments resulting in some borrowers paying inaccurate amounts towards their escrow accounts.

Servicers that administer escrow accounts must also make timely insurance and tax payments on behalf of the borrower. In addition to the other escrow managing deficiencies, Ocwen allegedly failed to make timely insurance payments to pay for borrowers’ home insurance premiums which led to the lapse of homeowners’ insurance coverage for more than 10,000 borrowers. Because of this error, some of these borrowers had to pay for force-placed insurance.

5. Failed to assist heirs seeking foreclosure alternatives

Current mortgage servicing rules require the servicer to "promptly identify and facilitate communication with the successor in interest of the deceased borrower with respect to the property secured by the deceased borrower's mortgage loan." 12 C.F.R. § 1024.38(b)(1)(vi). Once these successors in interest are identified, the servicer is supposed to evaluate loss mitigation options for those who may be eligible. Ocwen allegedly mishandled accounts for successors-in-interest by failing to properly recognize individuals as heirs, denying assistance to help avoid foreclosure and in some instances, foreclosing on individuals who may have been eligible to save these homes through a loan modification or other loss mitigation option.

6. Deceptively signed up and charged borrowers for add-on products

The CFPB also claims that Ocwen took some other lenders' playbook and enrolled some consumers in add-on products through deceptive solicitations or without the consumer's consent. Ocwen then billed and collected payments for these ad-on products that the borrowers had not requested.

CFPB's complaint against Ocwen is a great example of when a mortgage servicer does not have proper internal controls, policies and procedures or a culture of compliance.

CFPB Issues Mortgage Servicing Rules – Part Deux: Force-Placed Insurance

Written by Stephanie Lyon, Regulatory Compliance Counsel

My colleague Benjamin recently blogged about the mortgage servicing final rule and how it will expand the rights granted to verified successors in interest under Regulations X and Z. This second part reviews a few force-placed insurance (FPI) requirements and highlights three revisions to section 1024.37 and the model forms. The FPI notice requirements take me back to the time when my mortgage servicing department sent an FPI notice signed with my name and phone extension to over one hundred members who had nonconforming hazard insurance. The conversation went something like this:

Member: “Hello, my name is Joe Smith and I received a FPI notice that states I do not have hazard insurance. Well I am calling to inform you, I do in fact have hazard                     insurance.”

Stephanie: “Mr. Smith, could you give me your account number so that I can find your account and verify this information?”

Member: “I don’t know it and I don’t feel comfortable sharing my social security number.”

Stephanie: “Mr. Smith I was able to pull your account from your phone number, I see that the reason you received that letter was not because you don’t have insurance, but rather because you don’t have the right amount of hazard insurance as stated in the mortgage agreement.”

Member: “Why didn’t you just tell me that from the start!?”

Unfortunately, credit unions had very few options when disclosing the reasons why hazard insurance was being force-placed as the current model forms lack clarity. This led to a few headaches for credit union folks and a great deal of confusion for members.

Currently, Regulation X allows servicers to force-place insurance if the servicer has a reasonable belief that the borrower has failed to comply with the mortgage loan’s contract requirement to maintain hazard insurance. See, 12 C.F.R. § 1024.37(b). Prior to force-placing insurance, there are a couple of notices that a servicer must provide— an initial notice (45 days prior to force-placing) and a reminder notice (15 days prior). See, 12 C.F.R. § 1024.37(c)(1)(i)-(ii). Section 1024.37(c)(4) and (d)(4) prohibit servicers from including in the FPI notices any information other than that required by the rule. It was unclear if this prohibition extended to language clarifying why the credit union would force-place insurance and additional disclosures required by state law. In the final rule, CFPB clarified that no additional information can be added to FPI notices even if the information is required by state law because of the potential to ‘confuse members’ and ‘obscure the most important information.’ See, Final Rule, pp. 173 & 178-9.

While credit unions may not include additional information other than what is allowed under Regulation X, the final rule does address some issues that may provide for greater clarity. The first issue the final rule corrects is that it permits credit unions to include a third option when disclosing the reason why insurance has been force-placed. : (1) hazard insurance has expired or (2) will expire and the credit union has not received evidence that the borrower has hazard insurance past the expiration date. See, 12 C.F.R. § 1024.37(c)(2)(v). Neither option adequately explains the case in which a borrower has hazard insurance but the amount is below the requirements stipulated in the mortgage agreement.

Effective 12 months from the date of publication in the Federal Register, the final rule adds a third option to paragraph 37(c)(2)(v) and Model Form MS-3(A) that will enable servicers to provide borrowers with notices that are more accurately tailored and potentially avoid confusing borrowers that have nonconforming FPI insurance. See, Final Rule, pp. 804-808. The option will read: (3) the borrower’s hazard insurance provides insufficient coverage. See, Final Rule, pp. 176-178. This third option provides enough flexibility to cover cases in which the member purchased hazard insurance for nonconforming amounts or through a company that the lender or servicer does not allow. Additionally, if the credit union needs to include information not required or allowed by the final rule, it may do so on a separate document that can be included in the FPI correspondence. See, 12 C.F.R. § 1024.37(c)(4).

The second addition to the FPI notice is the ability to include the mortgage or account number of the borrower. See, Final Rule, pp. 789. While this is a minor addition, it allows servicers to inform the member of the mortgage they are referencing and makes the communication between the servicer and the borrower easier. The rationale behind including account numbers is that some credit unions rely on this information to correctly identify the loan in question when members call in regard to the FPI notice. Do note that the inclusion of the account number is not mandatory.

The third change to the FPI section of Regulation X is the modification of the Appendix to correct discrepancies between the model forms and the text of section 1024.37. Currently the model forms MS-3(A) through (D) omit the word “significantly” from the statement that “the insurance the servicer has purchased or purchases may cost more than hazard insurance purchased by the borrower.” The amendment will amend the phrase to read “…may cost significantly more…” in each of the model forms. The new model forms also include a requirement that certain text be formatted in bold type to emphasis that text in the forms. See, Final Rule, pp. 489-490. The format used in FPI notices will be important because a technical correction in the final rule will require that when some of the same information appears in both the initial and the final notice, the format of both notices must match. See, Final Rule, pp. 171.

Needless to say, my story would have been quite different if the Mortgage Servicing rule had amended a year ago. Hopefully, the final rule will allow a conversation to go from the example above to:

Member: “Hello, my name is Joe Smith and I received a FPI notice that states my hazard insurance provides insufficient coverage. An additional document that came with the notice stated that my hazard insurance coverage is $500 off what the mortgage agreement requires. I am sending you a copy of my new conforming hazard insurance with the loan number listed in the notice.”

Stephanie: “Mr. Smith, you are my favorite member.”