Final Servicing Rules Issued

In August, the Consumer Financial Protection Bureau proposed two rules designed to create uniform standards that work for both big and small servicers regardless of their locations or type of business charter. The rules are required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

One set of rules proposed amendments to Regulation X, which implements the Real Estate Settlement Procedures Act of 1974, while the other proposed amendments to Regulation Z, which implements the Truth in Lending Act.

On Wednesday, the CFPB released final servicing rules.

The notice indicated that poor servicing practices prior to the financial crises and inadequate infrastructure left servicers unable to handle the onslaught of distressed loans that followed. The new rules are designed to ensure that borrowers get a fair process to avoid foreclosure.

“Borrowers shouldn’t have to worry about mortgage servicers cutting corners or losing applications for relief,” the regulator stated. “They should be told about their options and given time to apply and be considered for loan modifications and other alternatives. Most of all, they shouldn’t be surprised by the start of a foreclosure proceeding until they have had time to explore all available options.

“If they act diligently to seek alternatives, they should not face a foreclosure sale before their applications have been evaluated.”

CFPB Director Richard Cordray said in prepared remarks for a servicing field hearing that more than half of the 47,000 mortgage-related complaints received in the second-half 2012 were from distressed borrowers.

Mortgage Bankers Association President and Chief Executive Officer David H. Stevens issued a statement lauding the CFPB for finalizing the rules and noted that the CFPB made productive changes to a number of the provisions. But Stevens cautioned that the trade group hasn’t yet reviewed the full rule.

“As with any rule of this size, the devil is truly in the details, and for servicers, that means how the rules are implemented and operationalized,” Stevens stated.

The MBA CEO warned that while the definition of a small servicer has been improved, it might still be too narrow and inconsistent with the new rules around dual tracking and existing timelines mandated by Fannie Mae, Freddie Mac, the Federal Housing Administration and the states.

Borrowers who miss two payments need to be advised in writing about foreclosure alternatives.

Servicers additionally need to ensure that borrowers can easily reach servicing personnel who can help them, consider all foreclosure alternatives available from mortgage investors and hold off on foreclosure sales until all other alternatives have been considered if a modification application is received 37 days prior to the sale. Servicers can’t push borrowers into a particular alternative solely because it is most profitable for the servicer.

Regular monthly statements must include the amount and due date of the next payment; a breakdown of payments by principal, interest, fees, and escrow; and recent transaction activity. Disclosures are required before a rate can adjust.

When a borrower allows an insurance policy to lapse, advance notice of force-placed insurance and pricing information needs to be provided before the customer can be charged for the premium. When the borrower does purchase coverage, servicers have 15 days to terminate the force-placed policy and refund the premium.

Payments need to be credited to an account on the day they are received, and partial payments need to be credited once a full payment has accumulated. Requests for payoffs need to be responded to within seven business days. Servicers have 30 days to investigate errors brought to their attention by borrowers, correct the error or provide an explanation why there was no error.

The CFPB plans is issue plain language implementation guides and materials that help servicers understand supervisory expectations.