Sorting Through MSR Implementation Details
Bound by law in two different ways: the expectation to comply with the new mortgage servicing rules and investor demands, mortgage servicers still are navigating through the regulatory changes.
The new servicing rules designed by the Consumer Financial Protection Bureau are way too complex for servicers trying to comply with the 2014 deadline, because as expected, said Antonio Chimienti, SVP compliance, Bayview Loan Servicing LLC, during his presentation at the SourceMedia Servicing conference in Dallas, when it comes to implementation the devil is in the details.
It is a challenge because it requires mortgage servicing process changes that “will be very costly for servicers,” he said.
Given the size of the task ahead the cost of process changes is as difficult to predict as the timeframe servicers will need to full implementation.
Major topics covered by the servicing rules include existing regulation such as TILA requirements about periodic billing, payment crediting and payoffs, and RESPA requirements about error resolution and information requests, or general servicing policies and procedures.
The Dodd-Frank Act amended RESPA “to clarify certain obligations” related to qualified written requests, escrow accounts and force-placed insurance, and gave the CFPB authority to carry out customer protections and also clarified TILA with respect to periodic statements, crediting of payments and payoffs, said Nanci Weissgold, partner, K&L Gates. And it is not over yet, she added, since the CFPB and state attorneys general may also enforce new RESPA and TILA requirements.
Noncompliance penalties are significant, she said. Statutory damages under RESPA are one example. It requires up to $2,000 for an individual action or $2,000 per member of a class action, which may not exceed the lesser of $1 million or 1% of the net worth of a servicer “upon showing a pattern of noncompliance.”
No wonder RESPA requirements related to force-placed insurance, loss mitigation or early intervention and continuity of contact for delinquent borrowers referred to as SPOC are among the most sensitive issues in the market today.
For example, the final rules prohibit a servicer from charging a borrower for force-placed insurance, “unless it has a reasonable basis to believe the borrower has failed to maintain hazard insurance and has provided the required notices,” Chimienti said.
More specifically, the rule requires an initial notice sent to the borrower at least 45 days before charging for a new insurance, a second notice is expected no earlier than 30 days after the first notice and at least 15 days before charging for new coverage, and after the force-placed insurance is in place servicers must send to borrowers an annual notice 45 days before renewal. If the borrower provides proof of coverage the servicer has 15 days to cancel the enforced coverage and refund the borrower for any premiums paid.
Speaking about details, he said, while new SPOC requirements exempt smaller-size servicers who service less than 5,000 loans, it is interesting how for other servicers it requires they maintain “reasonable policies and procedures for providing delinquent borrowers with access to personnel to assist them with loss mitigation options where applicable.”
Servicers must assign personnel as required by the early intervention rule no later than 45 days after the delinquency, by phone. One person or a team of people can help the borrower fill out the loss mitigation application.
But neither the private right of action is not contemplated for violations of this section,” he said, nor the duration of the SPOC requirement, or for how long personnel is assigned to a SPOC borrower.
“One major difference under the final rules with respect to the SPOC requirements is that the assignment of the SPOC is compulsory rather than only required when a loss mitigation package is requested by the borrower,” Chimienti warned. “This may require the appointment of the SPOC earlier in the default process when compared to other SPOC requirements.”
The same as the early intervention requirement, he said, the compulsory nature of the requirement to allocate SPOC personnel to 45 days delinquent borrowers “may require increased staffing” that are costly to servicers.
Loss mitigation rule changes include the requirement the servicer review and respond to the borrower in writing to state its determination to offer a workout solution or loan modification. It may seem like a simple due diligence process, he said, but it entails a thorough review of both the CFPB requirements and reviews of investor’s guidelines, “which should take priority before the law.”
Another detail that may be overlooked is that workout appeals include only modifications, he said. Plus, specific restrictions apply to so-called dual tracking when due to lack of internal communication lenders pursue foreclosure and a loan modification at the same. It is a red flag issue servicers are aware of, he said, but still need to ensure they work closely with counsel to convey dual tracking information and avoid compliance risks.
Here again, investor guidelines and CFPB or other applicable law is not all servicers have to worry about, he said, because the borrower also has a private right of action that can result in a separate lawsuit.