Servicers will soon be subject to new guidelines as well, as the Consumer Financial Protection Bureau finalized rules in January of 2013 designed to establish a national servicing standard.
At the center of the changes are new rules amending the Truth in Lending Act, and the Real Estate Settlement Procedures Act, regarding residential mortgage loan servicing.
Since its passage in 2010, the Dodd-Frank Act has slowly added hundreds of laws and regulations to every corner of the financial industry, focusing mainly on banking and investing practices, as well as the origination side of the mortgage industry.
Typically associated with originating loans, RESPA and TILA will also have a significant impact on servicers in the following years.
Servicers will need to redesign their traditional billing statements in order to improve how mortgage terms are communicated to borrowers, and allow themselves more time to clearly define any key changes to loan terms for at-risk borrowers with adjustable-rate mortgages, or those who are on the verge of default.
Servicers may have to redesign servicing statements and notices.
As an answer to the regulations outlined in the Dodd-Frank Act, the CFPB drafted a new set of guidelines for servicers in August 2012, and finalized the rules in January 2013.
These new guidelines are designed to drastically increase the level of loan transparency to allow easier access to valuable information and eliminate instances of “surprise” loan changes that could negatively impact the borrower. In order to meet these standards and reap the benefits, the CFPB is requiring a heavy redesign of all loan servicing notices and periodic statements.
As a first step, the CFPB is dictating an updated document format which servicers must implement for all future mortgage statements. The new format requirements mirror many of the changes made to credit card statements, requiring more detailed payment information for both the payment due and past payment activity.
Servicers will also be required to disclose additional information, especially as it pertains to rate changes, balloon payments or potential default actions.
Specifically, one of the regulation changes requires a lead-time of 210 to 240 days for servicers to present their borrowers with an official notice of rate changes prior to when the first adjusted payment is due. If the new interest rate is not known as of the date of the disclosure, an estimate is required to be disclosed. In addition, servicers must clearly outline exactly how the new interest rate and payment are calculated.
Although the guidelines will not officially take effect until January 2014, the CFPB is encouraging servicers to embrace early adoption by providing delinquent borrowers with key information about available options well before their home enters foreclosure. As a result, servicers will need to adjust timing to begin communicating with borrowers at risk of default much earlier in the process than before.
There are additional aspects of the CFPB’s proposed standards that will affect servicers, specifically in detailing processes, that must be implemented moving forward to manage payments, information management, loss mitigation and customer service. More information can be found online at http://www.consumerfinance.gov/blog/new-rules-fewer-runarounds-for-mortgage-borrowers.
In preparation for the new changes, servicers would benefit greatly from working with servicing platform providers to ensure their database supports all of the necessary fields to generate documents that will be fully compliant under the new guidelines.
Additionally, servicers should work with their technology partners to verify that the new billing documents will be implemented in sufficient time and can be generated both easily and automatically from the servicing software.
Many of the industry’s leading servicing technology providers are rolling out updates to ensure compliance with the new standards well in advance of the January 2014 deadline. By acting now, servicers can avoid the panic of a late-December rush, and make the upcoming transition as smooth as possible.
Susan Graham is president and COO of Dallas-based Financial Industry Computer Systems Inc. For more information, visit www.FICS.com.