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Clarity on Upcoming TILA & RESPA Servicing Rules

When the initial Mortgage Servicing rules were issued in 2013 as part of the Dodd-Frank Act, there were several provisions that lacked clear guidance on how servicers should deal with borrowers in bankruptcy, loss mitigation, force-placed insurance and successors in interest. In August 2016, the Consumer Financial Protection Bureau (“CFPB”) issued regulations amending the Mortgage Servicing Rules in the Real Estate Settlement Procedures Act (“RESPA”) and the Truth in Lending Act (“TILA”). These new rules also add additional protections for consumers through new requirements. Rules concerning activities associated with successors in interest and periodic statements for borrowers in bankruptcy are effective April 19, 2018. The remaining rules are set to take effect October 19, 2017. Here’s what you need to know about the ten upcoming regulatory rules. 

Rules Effective on October 19, 2017

1. Definition of Delinquency
Delinquency is the period of time during which the borrower and the borrower’s mortgage loan obligation are unpaid. The delinquency period begins on the date that a periodic payment sufficient to cover principal, interest, and escrow (if applicable) becomes due, and is unpaid until the time that no periodic payment is due and unpaid. This period covers all the time the payment is due, even if the servicer will not assess a late charge because the periodic payment falls within a grace period. 

The definition of delinquency applies to all sections of RESPA subpart C, which includes deadlines for continuity of contact, loss mitigation procedures and referral to foreclosure, and TILA’s provisions concerning periodic statements.  

2. Early Intervention
Early contact with a borrower who becomes delinquent increases the likelihood the servicer can offer assistance to help the borrower become current on their loan. Under the new rules, the servicer must establish or make good faith efforts of live contact with a delinquent borrower no later than the thirty-sixth day of the borrower’s delinquency, using the revised delinquency definition. An additional attempt shall be made no later than thirty-six days after each payment is due so long as the borrower is delinquent. Upon contact, the servicer must inform the borrower of available loss mitigation options.

Written notice that informs the borrower of loss mitigation options will also be required by the forty-fifth day of delinquency, even if live contact is made with the borrower. The servicer is not required to send written notice more than once during any 180-day period. RESPA includes several model clauses that can be used in the written notice to the borrower. At a minimum, the notice must contain the following information:

  • Statement encouraging the borrower to contact the servicer
  • Telephone number of the personnel assigned to the borrower
  • Servicing mailing address
  • If applicable, a brief description of examples of loss mitigation options
  • If applicable, either application instructions or a statement on how to obtain additional information on loss mitigation options
  • Website to access a CFPB list or Department of Housing and Urban Development (“HUD”) list of homeownership counselors or counseling organizations, along with the HUD toll-free number to access such information
  • Additional information that the servicer determines to be helpful, or required by applicable law

The early invention requirements for borrowers in bankruptcy or who invoke the cease communication provision of the Fair Debt Collection Practices Act (“FDCPA”) will change under the new servicing rules. Previously, the servicer was exempt from both the live contact and the written notification requirements. The exemption from the live contact requirement will remain. If the borrower does not qualify for any loss mitigation options, written notice is not required. However, if loss mitigation options are available, one modified written notice is required while the borrower is in bankruptcy proceedings. The modified written notice cannot contain a request for payment. The servicer is required to resume live contact and written notification once the bankruptcy case is dismissed or closed, or the borrower reaffirms personal liability for the debt.

For borrowers who requested a cease communication under FDCPA but are not in bankruptcy, the servicer will be exempt from the live contact requirement. Similar to borrowers in bankruptcy, written notification is not required if there are no loss mitigation options available. However, if loss mitigation options are available, the servicer must send them the written notification with the information noted above, plus an additional statement that the servicer may or intends to invoke a specified remedy of foreclosure. Model language in the regulation appendix can be used. 

Additionally, the notice cannot be sent out more than once during a 180-day period. If the borrower is still forty-five days or more delinquent at the end of any 180-day period, the written notification must be sent no later than 190 days after the day the previous notice was sent. If the borrower is less than forty-five days delinquent at the end of the 180 day period, the next written notice must be sent no later than 45 days after the payment due date for which the borrower remains delinquent or 190 days after the date the prior written notice was sent, whichever is later. None of the written notices may contain a request for payment.

Due to the complexity and various requirements of live contact and written notification, along with handling borrowers in bankruptcy proceedings or who invoke cease communication provisions under FDCPA; it is critical that the servicer update policies and procedures to ensure employees are fully aware about what information should and can be provided to the borrower. If the servicer does not have a collections system, it is advised to establish a process where live contact and written notification activities can be easily recorded and tracked to ensure compliance with the timelines set out in the regulation.

3. Request for Information
The new rules provide clarification on requests for information when Fannie Mae or Freddie Mac is the trustee, investor or guarantor. The CFPB’s goal is to balance the borrower’s ability to obtain information, while reducing the servicer’s burden to obtain trust identifying information for loans. 

For requests for information when a loan is held in a trust where an appointed trustee receives payments on behalf of the trust, the servicer must provide the name of the trust and the contact information when: 1) Fannie Mae or Freddie Mac is not the owner of the trust; or 2) the borrower expressly requests the name of the trust or pool and Fannie Mae or Freddie Mac is the owner. If the request for information does not expressly request the name or number of the trust or pool and Fannie Mae or Freddie Mac is the owner or the trustee of the securitization trust, the servicer must provide the name and contact information for Fannie Mae or Freddie Mac but not the name of the trust.

4. Force-placed Insurance
The Initial and Reminder Notices for force-placed insurance will be amended to address situations where there may be insufficient coverage. This change will eliminate confusion for the borrower whose coverage may not be expiring, but is insufficient under the mortgage contract. The CFPB will also allow the servicer to include the borrower’s mortgage loan account in any required force-placed notices. Previously, the rules stated that no other information could be added other than what is required by law. Although additional information could be sent on separate pieces of paper, the CFPB received several inquiries about if the notice could be changed to help facilitate communication between the servicer and the borrower.

5. Loss Mitigation
The section that underwent the largest number of changes concerns loss mitigation requirements. Servicers will be required to review a borrower for loss mitigation options more than once if he or she becomes current on a loan but subsequently becomes delinquent and submits another loss mitigation package. Previously, the servicer was required to comply with the rule for a single loss mitigation application over the life of a loan. 

Upon receipt of a complete loss mitigation package, the servicer must send the borrower a written notice within five business days containing the following information:

  • Indication that the servicer received the application
  • Date of completion
  • Statement that the servicer expects to complete the application within thirty days from date of receipt of complete application
  • Explanation that the borrower is entitled certain specific foreclosure protections and may be entitled to additional protections under state and federal law
  • Clarification that the servicer might need additional information later, which may delay the process, and that any foreclosure protections may end if additional information is not received

Once the loss mitigation process starts, the servicer cannot stop collecting documents based on the borrower’s stated preference for a specific loss mitigation option. Collection of documents may be stopped based on the borrower’s stated preference if it is in connection with requirements set out by the owner or assignee of the mortgage or if the borrower is determined to be ineligible for a loss mitigation program. A comment was also added to provide clarity to loss mitigation review timeline. If a loss mitigation application is received and no foreclosure sale is set, the servicer must treat that application as having been received forty-five days or more before a foreclosure sale. 

For when an incomplete application is received, revised comments to the rules provide the servicer greater flexibility to determine a reasonable date to submit missing documents, while allowing the borrower enough time to submit the additional information. Thirty days after the servicer provides written notice of the incomplete application is generally considered a reasonable amount of time for the borrower to provide the additional information. 

The servicer can offer several short-term loss mitigation options such as payment forbearance or short-term repayment plans in response to an incomplete application. Unless the borrower specifically rejects the short-term program, the servicer must provide a notice stating the requirements - including payment terms and duration - that it was offered based on an incomplete application, and that the borrower still has the option to submit a complete application, even if the short-term program is ultimately rejected. The regulation still requires that the servicer not make first notice or filing for a judicial or non-judicial foreclosure or move for a foreclosure judgement or sale while the borrower is performing the short-term agreement. 

For circumstances in which a borrower submits what is believed to be a complete application, but later it is a determined that additional information is needed, the amended rules try to balance protections offered to the servicer and to the borrower. The servicer must allow the borrower enough time to submit missing information and/or documents. Once the borrower submits the requested information, the date of completion is determined as the date that the application is considered ready for review under the requirements. The determination of this date is important because the regulation provides several protections for the borrower based on the date of a complete application, such as suspension of certain foreclosure activities, response to a loan modification offer, and appeal of a loan modification decision.

Not all information needed by the servicer to determine appropriate loss mitigation options may be in the borrower’s control. A new provision was added to RESPA to address this situation. The servicer cannot deny a complete loss mitigation application if information is required from a third party. A loss mitigation application is considered complete if the servicer receives all information required from a borrower. The servicer must exercise due diligence to obtain the missing information or documents from a third party. If the servicer does not receive the documents from a third party after a significant amount of time following the thirty-day evaluation of the loss mitigation option time period and is unable to make a decision, it can deny the application. The servicer must provide a written notice informing the borrower that: It has not received documents or information from a third party; the specific documents or information that the servicer needed and requested; and that it will complete an evaluation once it receives all the documents. Information on the name of the third-party and the date of contact is not required.  

The amended rules modify the existing exception to the 120-day prohibition on foreclosure filing to allow servicers to join the foreclosure action of a superior lien holder. It was previously limited to subordinate lienholders only. Additional foreclosure protections under the amended rules include clarification that if a servicer already made the first notice or filing and a borrower timely submits a loss mitigation package, no further foreclosure activity is to take place.

A new requirement was added to address servicing transfers when there is a pending loss mitigation application. The transferee servicer must comply with the loss mitigation requirements that were applicable to the transferor servicer based on the date that the transferor servicer received the application with two exceptions. The transferee will have 10 days from the date of transfer to the transferee to send out the acknowledgement notice to the borrower. This period is to allow the transferee servicer time to on-board the file to their servicing platform. The transferee will also have 30 days from the date of transfer to evaluate the loss mitigation package or begin the process of obtaining information that is not within the borrower’s control.

6. Periodic Statements 
Periodic statements must reflect the accurate amount due for accelerated loans, loans in temporary loss mitigation programs, or loans that are permanently modified. The servicer is exempt from the periodic statement requirement for charged-off loans if it will not charge any additional fees or interest on the account and if it provides a periodic statement clearly labeled “Suspension of Statements & Notice of Charge Off – Retain This Copy for Your Records” that includes information on the effects of a charged-off loan.

7. Prompt Payment Crediting
Clarifications were made to the periodic payments rules for borrowers performing pursuant to a temporary loss mitigation plan or a permanent loan modification. Payments made pursuant to temporary loss mitigation programs will be credited as a partial payment according to the loan contract. Payments made according to a permanent loan modification must be credited in accordance with the permanent loan modification agreement. 

8. Small Servicer
The criteria to determine a small servicer was also amended. A servicer qualifies for the small servicer exemption if they service 5,000 or fewer loans for all of which they are the creditor or assignees. The new rule will exclude from the 5,000 loan limit certain seller-financed transactions and mortgage loans voluntarily serviced for a non-affiliate, even if the non-affiliate is not a creditor or assignee. This change should result in an increase in the number of servicers who can take advantage of the small servicer exemption.

Rules Effective on April 19, 2018

1. Successors in Interest
The current requirements in TILA and RESPA require that servicers maintain policies and procedures to ensure that upon notification of a death of a borrower, they can identify and communicate with the successor in interest of the deceased borrower regarding the property secured by a mortgage loan. 

However, the CFPB received numerous reports of servicers refusing to speak to successors in interest or demanding documents that did not exist or could not reasonably be obtained in order to prove their claim. Furthermore, several non-borrowers encountered difficulty in obtaining information from the servicer because several categories of successors in interest were omitted from the current rules.

The amended servicing rules expand the scope of successors in interest to include people who receive property either upon the death of a relative or joint tenant, as result of a divorce or legal separation, through certain trusts, or from a spouse or parent. The CFPB interprets “spouse” to include married same-sex couples.

When it comes to the application of certain exemptions or scope limitations, such as the small servicer exemption, the CFPB decided to apply the existing Mortgage Servicing Rules in order to promote clarity and consistency. For example, as small servicers are exempt from the RESPA continuity of contact requirements, they are also exempt from these requirements for successors in interest. 

Since the laws governing successors in interest vary by state to state, the CFPB does not provide a list of required documents, but offers examples of documents that are reasonable for the servicer to use to confirm successor in interest status. Servicers will be required to establish policies and procedures to ensure that their employees can identify and communicate to the potential successor in interest about the documents they will accept, and to confirm their status. Once a successor in interest is confirmed, that person will be considered a consumer under the definition of consumer in TILA and RESPA, regardless of whether there is an assumption of the mortgage loan.

2. Periodic Statements for Borrowers in Bankruptcy
The servicer is also required to send out modified periodic statements or coupon books to consumers who filed for bankruptcy. The periodic statement content will vary according to what type of bankruptcy the consumer filed with the court. The requirement that the amount due must be shown more prominently than other disclosure does not apply to periodic statements for borrowers in bankruptcy. The servicer is exempt from providing the periodic statement when the borrower is in bankruptcy and one of the following events occurs: 1) borrowers request in writing not to receive a periodic statement or coupon book; 2) the bankruptcy plan states that the borrower will surrender the dwelling securing the mortgage and provides for the avoidance of the lied or does not provide for a payment of pre-bankruptcy arrearages; 3) the court enters an order providing for the avoidance of the lien; or 4) the borrower files with the court a statement of intention to surrender the dwelling and has not made any partial or periodic payment after the bankruptcy case commenced.  

Conclusion
Many of the changes for the servicing rules concern highly stressful times in a borrower’s life – death of a family member, filing of bankruptcy or potential loss of a home due to delinquency. To provide the best service for your borrowers, it is important to establish a system to address these changes, review policies and procedures, adopt new technologies, and most importantly, communicate these changes to your staff. 

The 2016 Amended Mortgage Servicing Rules is not the end of regulatory changes for financial institutions over the next twelve months. With the seemingly never ending changes to laws and regulations, it is important to have the proper controls in place so that you are able to respond to requirements and address the risks that new changes impose on your organization. This will enable you to best be able to service your customers and members while maintaining compliance.

Wolf’s Regulatory Compliance team has reviewed the newest legislation and updated its audit programs to ensure your institution remains in compliance.

For further information about this topic or our services, please contact Stephen King, JD, AMLP, Member of the Firm at 617-428-5448 or sking@wolfandco.com, Erica Torres, CRCM, Principal at 617-261-8121 or etorres@wolfandco.com or Brian Shea, CRCM, CAMS, Regulatory Compliance Senior Manager at 617-261-8133 or bshea@wolfandco.com