[author: Michael S. Waldron]

The Consumer Financial Protection Bureau took the much-anticipated next step in its high-profile initiative to transform mortgage servicing last Friday when it issued proposed mortgage servicing regulations. The proposals consist of a 250-page Real Estate Settlement Procedures Act (Regulation X) rule and a 178-page Truth in Lending Act (Regulation Z) rule. Comments on the proposals are due by October 9, 2012, and final rules and an implementation schedule are expected to be issued by January 2013.

In addition to the proposals, the CFPB also released a report titled “Summary of Proposed Mortgage Servicing Rules.” The report summarizes the study used by the CFPB to inform its development and testing of the model disclosures that were published with the proposed rules. 

The proposed servicing regulations generally follow the script contained in the CFPB's Exam Guidelines and April 2012 Fact Sheet as well as the recently announced settlements in high profile servicing-related enforcement actions.

While the CFPB touts its drafting efforts as a reflection of “two basic, common-sense standards – no surprises and no runarounds” and industry trade groups are supportive of establishing uniform, national servicing standards that clarify the obligations of servicers, there is a great deal of work to be done during the comment period to ensure that the final rules truly reflect the industry’s concerns and the operational realities of mortgage servicing.

Ballard Spahr’s Mortgage Banking Group will provide ongoing analysis of the CFPB’s efforts to reset the way mortgage servicing is conducted. The proposed rules will be the focus of a series of upcoming webinars beginning on September 6 titled "The Evolution of Mortgage Servicing: How the CFPB's Proposed Servicing Rules Will Impact the Industry." We will also analyze any developments in our Mortgage Banking Update and blog posts at cfpbmonitor.com.

Highlights of the proposals are:

Scope of Coverage

When adopted in final form, the CFPB’s rules will apply to all mortgage servicers, whether depository institutions or non-depository institutions, and to all segments of the mortgage market, regardless of the ownership of the loan. The proposed rules generally apply to closed-end mortgage loans, with certain exceptions. Under the proposed amendments to RESPA, open-end lines of credit are excluded. But under the TILA amendments, the prompt crediting of payments and payoff statement provisions apply both to open-end and closed-end mortgage loans. In addition, reverse mortgages and timeshares are excluded from the periodic statement requirement, and certain construction loans are excluded from the ARM disclosure requirements. In partial response to industry concerns, the proposed rules do create certain limited exceptions/modified requirements for small servicers, which are defined as those that service 1,000 or fewer mortgage loans and service only mortgage loans that they originated or own.

Summary

The proposed rules cover nine major topics, all of which have been part of the CFPB’s script on mortgage servicing reform. They incorporate elements of the April 2011 Consent Orders and the March 2012 National Mortgage Settlement and the information gathered by the CFPB from the ongoing oversight related to those enforcement actions by other regulators. To read a more in-depth explanation of the proposed rules, click here.

Effective Date

The CFPB is seeking comment on when its final rule should be effective, noting that while it “seeks to make it effective as soon as possible” it “understands that the final rules will require servicers to make revisions to their software and to retrain their staff.”

More to Come

While the proposed rules follow the CFPB’s script on revising the mortgage servicing industry, the CFPB’s efforts should not be viewed as complete. Of important note, the CFPB clearly states that it is continuing to consider whether to incorporate other settlement standards into rules or guidance, either alone or in conjunction with other federal regulatory agencies. Ballard Spahr will continue to monitor the CFPB and provide timely analysis that empowers industry members to navigate the mortgage servicing regulatory and enforcement landscape.