5 "danger zones" where servicers need to tread carefully

One of the frequently heard comments at the recent MBA Servicing Solutions Conference was that servicers continue to have "targets" on their backs. Whether this sentiment is fair or not, it is true that the Consumer Financial Protection Bureau and other federal state regulators are scrutinizing certain servicing activities more closely in their examination processes. 

As professionals who advise servicers on compliance as well as monitor and test servicers' policies and procedures, here is our list of "danger zone" issues for servicers.

1. They're making a list…
Non-bank servicers as a group can expect more scrutiny from the CFPB. The Bureau recently revived dormant guidance that says gives it authority over non-banks as well as banks. The CFPB is also proposing a registry of non-bank servicers that use form contracts and plans to use this proposed registry in prioritizing its supervision and enforcement activities. The registry will make public every term or condition that a servicer uses in its form contracts that the CFPB thinks will "waive or limit consumer rights or protections." The CFPB has also proposed a registry of nonbank supervisees who are subject to state, federal or local agency orders or judgments. The registry would be public, and nonbank supervised entities would be required to certify their compliance annually.  

2.Loss mitigation: Try and try again…
The CFPB and mortgage agencies are on record warning servicers that they want every possible remedy offered to distressed borrowers before proceeding with foreclosure. In January, for instance, the CFPB and the Federal Housing Finance Association told servicers that they should extend COVID-19 loss mitigation programs, including streamlined forbearance, to all challenged borrowers, whether or not their distress is COVID-related.

At the end of January, the U.S. Department of Housing and Urban Development did the same, instructing Federal Housing Administration mortgagees to offer FHA COVID-19 loss mitigation options to all borrowers regardless of the reason for default. In March, HUD finalized rules that enable FHA to offer a 40-year standalone loan modification.  Similarly, the United States Department of Agriculture has proposed changes to its Mortgage Recovery Advance loss mitigation option that would make that option more like a payment deferral than a partial claim and would no longer be treated like a second lien. 

The message all of these actions are sending: exhaust every option before beginning foreclosure proceedings. Over time, the new options should make it easier for servicers to help borrowers and may reduce servicer costs and workloads. But in the meantime, new guidance is coming fast and from many different directions, creating short-term challenges of keeping up with all the new expectations.

As a result, we're seeing increased interest in monitoring and testing servicer policies and operational practices to ensure they are in sync with the new loss mitigation requirements.

3. Don't forget state homeowner assistance funds…
One of the new requirements is that servicers must notify borrowers about the availability of state homeowner assistance funds. These funds were authorized by the American Rescue Plan and were allocated to the states, U.S. territories, and Indian Tribes to be administered. As a result, each state, territory and tribe have its own fund with different procedures for borrowers and servicers to access the fund. Borrowers in the District of Columbia, for example, must be notified about that fund even during times when the application portal is closed. In servicing, a rule is a rule, even if it doesn't always make sense. 

4. Be ready to justify fees…
The CFPB has literally declared a war on junk fees. While this goes well beyond mortgage servicing, mortgage servicing is one of the primary battlefields. The Bureau has previously said that servicers are not entitled to charge pay-to-pay fees for payments unless this is specifically written into their mortgage agreements, which in many cases they are not.

In March, the CFPB published a special edition of its supervisory highlights in which it broadened its attack on fees, calling out "old and new ways" that mortgage servicers are attempting to collect unlawful fees from homeowners. Among the examples cited: excessive late fees; fees for unnecessary property inspections conducted on properties that the servicers knew were incorrect addresses; erroneous private mortgage insurance charges for borrowers without PMI; and failure to waive late fees for properties that went into forbearance under the CARES Act.

The CFPB isn't the only one watching fees. Recently, the FHA and Fannie Mae have been pushing back on attorney's fees for partial claims and foreclosures. 

Fannie Mae has also been focused on foreclosure timelines, but speeding up foreclosures is leading to an increase in foreclosure fees. They have increased state maximums twice in this past year to try and account for delayed foreclosures, but servicers are still struggling to meet that timeline.

FHA has started to refuse to pay out full amounts on fees if timeline milestones were not met and curtailing interest if servicers are not correctly filing for an extension.

5. Don't forget perennial targets, like forced place flood insurance…
Forced placed flood insurance has been on the Office of the Comptroller of the Currency's radar screen for some time, and our Servicer Oversight Group continues to see servicers and their core vendors are still challenged to get this right. The two most common issues are miscalculations in required coverage amounts and missed processing timelines.

What we're finding is that vendors aren't always using the most up-to-date policy information for their calculations. Properties with multiple structures also tend to be particularly susceptible coverage errors.

Although servicers and vendors have 45 days to purchase force-placed flood insurance, we're routinely seeing these decisions stretch out beyond that threshold, which can be a red flag for regulators, like the OCC.

With all of these issues coming under more intense scrutiny, it will be important for servicers to have a strong servicing quality control program in place and leverage their partners to make sure they are in compliance with these hot topic areas.