Most of the provisions of the final 2016 Mortgage Servicing Rules took effect on October 19, 2017, with the remaining provisions effective April 19, 2018.
In Part 1 of this series, we focused on the Definition of Delinquency, Requests for Information, Force‐Placed Insurance, Prompt Payment and Crediting, and the Small Servicer Determination. Part 2 of 3 covers Early Intervention, Loss Mitigation, and Periodic statements primarily affecting large servicers. The final article, Part 3 in the series, will cover Successors in Interest.
Except for the bankruptcy portions of the periodic statement provisions which are effective April 19, 2018, the following were effective October 19, 2017. You should take a moment to review your policies and procedures and look at the current servicing practices to ensure that the documentation follows the regulatory requirements. Following each section of the servicing changes, there is a quick compliance checklist.
Early Intervention (Large Servicer)
Early Intervention provisions are required for large servicers and are not applicable to HELOCs/open‐end lines of credit, reverse mortgage transactions, loans made by servicers which are qualified lenders under the Farm Credit Act, and loans that are secured by property other than the borrower’s primary residence.
The early intervention rule requires that a lender establish live contact with a borrower by the 36th day of delinquency and inform the borrower of any available loss mitigations options. In cases where live contact cannot be made, the bank must retain adequate documentation of their good faith efforts to make contact.
Besides the 36th‐day live contact rule, banks must provide the borrower with written notice about loss mitigation options, even if loss mitigation options were discussed with the borrower orally by the 45th day of delinquency. Specific items must be included in the written loss mitigation notice and model language can be found in appendix MS‐4 of RESPA. During periods of prolonged delinquencies, the written notice is only required to be sent once every 180 days. Effective with the servicing amendment, clarification was made that the early intervention notices are required during prolonged delinquencies. The borrower should receive this notice every 180 days if they are 45 days or more delinquent.
Effective October 19, 2017, the CFPB sought to clarify the live contact and written notice requirements. Servicers are not required to make live contact attempts if any borrower on the loan is in bankruptcy. Servicers covered by the Fair Debt Collection Practices Act (FDCPA) do not need to make live contact attempts for borrowers who have invoked the FDCPA’s cease‐communication provision.
Early intervention notices are not required if a loss mitigation option is not available and either of the two following conditions is met: 1) the borrower on the loan is in bankruptcy, or 2) you are acting as a debt collector under the FDCPA and the borrower has invoked the FDCPA’s cease‐communication protection. If a loss mitigation is available, you are still required to send the written notice. The written notice must comply with the modified written notice requirements so that the bank does not attempt to collect the debt. In addition, for borrowers who have invoked the FDCPA’s ceasecommunication right, the notice must include a statement that the bank may or will pursue foreclosure.
You are also exempt from the requirement if the borrower is both 1) in Bankruptcy and 2) the bank is acting as a debt collector under the FDCPA and the borrower has invoked the FDCPA’s cease‐communication protection.
Compliance Checklist:
- The bank should ensure that its files contain documented evidence of more than one attempt to make live contact with borrowers, including call logs and copies of any written communication encouraging the borrower to contact the bank. Documentation should be consistent with the bank’s Early Intervention procedures.
- Is the timing of the notices correct and were the correct notices provided to borrowers in bankruptcy and those who have invoked the cease‐communication provision under FDCPA?
- Has adequate documentation of the notices been maintained?
Loss Mitigation (Large Servicers)
At times, it is important to understand why certain rules were put into place. Although the loss mitigation requirements can be burdensome, communication between servicers and borrowers was difficult during the mortgage crisis. Borrowers did not understand the status of their application for loss mitigation or were unaware that additional information was necessary. Granted, there was a large volume of delinquent loans, but there were borrowers who lost their homes while a loss mitigation process was under review or had never been reviewed.
To prevent this type of situation from occurring, 12 CFR 1024.41 was amended to require additional communications between banks and borrowers, as well as preventing foreclosure action during the loss mitigation process.
What are we Required to Do in Loss Mitigation?
- When a loss mitigation package is received by the servicer, the servicer must acknowledge receipt of the package in writing within five days (excluding Saturdays, Sundays and legal holidays). The acknowledgment must contain a statement as to whether the package is complete or incomplete. If it is determined that the package is incomplete, the notice must state the additional documents needed to complete the application and a reasonable date that the documents must be submitted. Note that a reasonable date is generally 30 days after the date you provide the notice acknowledging receipt of the application. However, in no event should it be less than seven days. Further, a statement must be made advising the borrower that they should consider contacting servicers of any other mortgage loans secured by the same property to discuss available loss mitigation options.
- Servicers must apply the loss mitigation procedures again for borrowers who become current on payments after a prior application and request for loss mitigation.
What are we permitted to do?
- A servicer may offer a short‐term repayment plan based on incomplete applications, providing that the servicer advises the borrowers of other available options and the opportunity to submit a complete application.
- The requirement of reasonable diligence to complete an application may be suspended during short‐term forbearance and repayment plans; however, efforts must resume immediately if the borrower defaults or requests assistance.
- A servicer may stop collecting documents and information once it determines a borrower is not eligible for the loss mitigation options available.
- A servicer of a subordinate lien may join a foreclosure action of a superior lienholder even if the loan is not 120 days delinquent.
What are we prevented from doing?
- Servicers are prevented from foreclosure judgments and/or sales while complete loss mitigation applications are pending. In addition, servicers are prohibited from making the first notice or filing for foreclosure if a borrower is performing under a short‐term repayment plan offered after the borrower submits an incomplete loss mitigation application.
- A loss mitigation request cannot be denied based solely on the lack of third‐party information. The servicer must send a written notice to the borrower and complete the evaluation promptly after receipt of the information.
Compliance Checklist:
- Review the acknowledgement of loss mitigation packages for required content and timing.
- Ensure that no borrower has been overlooked due to prior loss mitigation requests.
- Review foreclosed loans and loans with foreclosures pending to ensure that the filing dates do not conflict with requests for loss mitigation.
- Review denied loss mitigation packages for communications of incomplete applications and denial reasons.
Periodic Statements
While small servicers are exempt from the periodic statement provisions under 1026.41(e)(4), many small servicers provide borrowers with statements. TCA has received several questions from small servicers as to whether they are required to comply with the new statement requirements. The American Bankers Association published a Q & A during May 2014 stating, “CFPB has advised that any servicer that is eligible for the Small Servicer exemption may send periodic statements … such voluntary communications are not required to comply with the periodic statement rules because Small Servicers are exempt from the periodic statement requirement.” However, the reality is that not all Regulatory Agencies are of the same opinion. While we cannot speak for examiners, from TCA’s perspective if you are going to provide a periodic statement it should be compliant with the regulation.
Effective October 19, 2017, periodic statement requirements were amended pertaining to Charge Offs, Acceleration and Loss Mitigation Programs as follows:
When a loan is charged off in accordance with the bank’s loan‐loss provisions, the servicer is not required to provide periodic statements or coupon books if the servicer will not charge additional fees or interest and, within 30 days of the charge‐off or the most recent periodic statement, provides a periodic statement clearly and conspicuously labeled “Suspension of Statements & Notice of Charge Off – Retain This Copy for Your Records.” The content must include all applicable items as listed in 1026.41(e)(6)(i)(B). If a servicer fails at any time to treat the loan as “charged off” or charges any additional fees or interest, the servicer is obligated to resume sending periodic statements; however, a servicer may not retroactively assess fees or interest.
If a mortgage has been accelerated, but the servicer will accept a lesser amount to reinstate the loan, the statement must show only the lesser amount the servicer will accept to reinstate the loan and, if applicable, that the amount due is only for a specific period of time.
For borrowers falling under temporary loss mitigation programs, statements must show payments according to the loan contract, and for those borrowers under permanent loss mitigation programs, the statement should reflect the payments required under the permanent loss mitigation program.
The remaining changes effective April 19, 2018 affect those borrowers in bankruptcy. The contents of the statement will vary based on the type of bankruptcy.
Chapter 7 or 11 Bankruptcy or Discharge of Personal Liability
- Amount Due does not have to be shown more prominently than other disclosures on the page.
- The following may be omitted:
- Late Payment Fee
- Length of Delinquency
- Notification of Possible Risks if Delinquency is Not Cured
- First Notice of Filing for Any Foreclosure Process Information
- The following must be added to the Statement
- Bankruptcy Notice Statements
Chapter 12 or 13 Bankruptcy
- Amount Due does not have to be shown more prominently than other disclosures on the page. Amount Due information may be limited to the date and amount of the post‐petition payments due and any post‐petition fees and charges imposed by the servicer.
- Explanation of Amount Due may be limited to:
- The monthly post‐petition payment amount, including a breakdown showing how much, if any, will be applied to principal, interest and escrow;
- The total sum of any post‐petition fees or charges imposed since the last statement; and o Any post‐petition payment amount past due.
- Transaction Activity information must include all payments you received since the last statement, including all post‐petition and pre‐petition payments and payments of post‐petition fees and charges, and all post‐petition fees and charges the servicer has imposed since the last statement. The brief description of the activity need not identify the source of the payments.
- The following may be omitted:
- Late Payment Fee
- Length of Delinquency
- Notification of Possible Risk if Delinquency is Not Cured
- Account History
- Loss Mitigation Program Information
- First Notice of Filing for Any Foreclosure Process Information
- Total Payment Amount Needed to Bring the Account Current
- Homeownership Counselor Information
- The following must be added to the Statement:
- Bankruptcy Notice Statements
- Pre‐petition Arrearage Disclosures*
- Additional Disclosures as required under 1026.41(f)(3)(vi)
*Pre‐petition Arrearage Disclosures include the total of all pre‐petition payments received since the last statement, the total of all pre‐petition payments received since the beginning of the consumer’s bankruptcy case, and the current balance of the consumer’s pre‐petition arrearage. These disclosures must be grouped in close proximity to each other and located on the first page of the statement or, alternatively, on a separate page enclosed with the periodic statement or in a separate letter. Special provisions apply if a borrower’s pre‐petition arrearage is subject to dispute or has not yet been determined. (See Comment 41(f)(3)(v)‐1 for requirements.)
Examples of the modified statements may be found in Appendix H‐30(E) and H‐30(F).
Although we refer to these as the modifications to periodic statements, if you are providing coupon books, you are not off the hook. Coupon books must include the same bankruptcy notice, additional disclosures to borrowers in Chapter 12 and 13 bankruptcies, and bankruptcy‐specific modifications to the delinquency and other account information. If providing a coupon book, you must also make available, upon borrower’s request, pre‐petition arrearage information.
There is an exemption to the statement requirement for borrowers in bankruptcy. The bank is exempt from providing periodic statements or coupon books to a borrower in bankruptcy if, in addition to any borrower on the mortgage loan being a debtor in bankruptcy or who has discharged personal liability for the mortgage loan through bankruptcy pursuant to Chapters 7, 11, 12 or 13, one of the following conditions are also met:
- A borrower or borrower’s counsel “opts out” by sending you a written request that you cease providing a periodic statement or coupon book.
- Borrower’s most recently filed bankruptcy plan provides that the borrower will surrender the dwelling securing the mortgage loan, provides for the avoidance of the lien securing the mortgage or otherwise does not provide for, as applicable, the payment of pre‐bankruptcy arrearage or the maintenance of payments due under the mortgage loan.
- A court enters an order providing for the avoidance of the lien securing the mortgage loan, lifting the automatic stay regarding the dwelling or requires you to cease providing a statement.
- A borrower files with the court a statement of intention to surrender the dwelling securing the mortgage loan, and a borrower has not made any partial or periodic payment on the mortgage loan after the commencement of the bankruptcy case.
Compliance Checklist:
- Review a sample of existing statements for loans that were accelerated to ensure data is accurate.
- On charged‐off loans for which the bank has opted to stop sending statements, ensure that the required final statement with appropriate content was sent to the borrower.
- Verify that the core system is able to produce compliant statements for borrowers in bankruptcy as of April 19, 2018
- Verify that the accurate statements for borrowers in bankruptcy trigger the maintaining additional data on the core to produce these statements. How is this data gathered, checked for accuracy and being entered into the system?
- Review sample statements for borrowers in bankruptcy produced by your core system and compare the language contained in the statement to the model forms in Appendix H.
Questions about Mortgage Servicing Rules? TCA can help! Please contact us with any questions regarding the new mortgage servicing rules.
