Summary

The CFPB issued two mortgage servicing rules aimed at homeowners facing foreclosure and providing borrowers with tools and information for dealing with mortgage servicers.

On January 17, 2013, the Consumer Financial Protection Bureau ("CFPB") issued two mortgage servicing rules aimed at homeowners facing foreclosure and providing borrowers with tools and information for dealing with mortgage servicers. The rules amend Regulation Z, which implements the Truth in Lending Act (TILA), and Regulation X, which implements the Real Estate Settlement Procedures Act (RESPA). Both rules implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that pertain to mortgage servicing. The final rules provide the following:

• Restrictions on the practice of "dual tracking" whereby servicers initiate foreclosure while simultaneously assessing borrower efforts to avoid foreclosure through loan modification or other alternatives. The rules prohibit a servicer from initiating foreclosure unless the borrower's account is more than 120 days delinquent. Moreover, a servicer may not initiate foreclosure even if a borrower is more than 120 delinquent if the borrower has submitted an application for loan modification or another alternative to foreclosure that is pending review unless (1) the borrower is informed that he or she is not eligible for any loss mitigation; (2) the borrower rejects all loss mitigation offers; or (3) the borrower fails to comply with terms of loss mitigation.
• Servicers must notify borrowers of foreclosure alternatives, including "loss mitigation options" to keep their homes, and provide instructions for how to obtain more information. Servicers must consider all foreclosure alternatives available from the mortgage owners or investors to help borrowers keep their homes. Servicers may not steer borrowers toward options that are the most financially favorable to the servicer.
• If a servicer receives a borrower's application for loan modification at least 37 days before a scheduled foreclosure sale, the servicer must timely consider that application and respond. If the servicer offers the borrower an alternative to foreclosure, the borrower must have time to accept the offer before the servicer can seek foreclosure judgment or conduct a foreclosure sale. If the borrower and servicer arrive at a loss mitigation agreement, the servicer may not foreclose on the property unless the borrower fails to perform the agreement.
• Servicers must ensure that delinquent borrowers have access to personnel responsible for helping them.

The new servicing rules also require the following borrower information:

• Servicers must provide monthly mortgage statements disclosing the amount and due date of the next payment, and itemize payments by principal, interest, fees, and escrow, and recent transaction activity.
• For most adjustable-rate mortgages, servicers must warn the borrower well before the first payment is due after the interest rate adjusts for the first time and provide advance notice when the interest rate adjustment will result in a different payment amount.
• Servicers must provide advance notice and pricing information before charging consumers for "forced-place insurance." If a servicer force-places insurance but later finds the insurance was not needed, coverage must be terminated and premiums refunded for any periods of overlapping coverage.

The CFPB rules also require servicers to establish policies and procedures to achieve the following objectives with respect to handling consumer accounts:

• Payments on a consumer's account must be promptly credited the date the payment is received. Likewise, once full payment is reached in a "suspense account" in which the servicer places partial payments, the servicer must credit the full amount to the borrower's account.
• Servicers must provide a prompt response to requests for payoff balances of mortgage loans, generally within seven business days of receiving a borrower's written request.
• When a consumer provides written notice of certain errors or requests information about mortgage loans, the servicer must acknowledge receipt of notice and timely respond by (1) correcting the error or providing the information requested; (2) conducting a reasonable investigation and informing the consumer why the error did not occur; or (3) informing the consumer that the requested information is unavailable.
• Servicers must maintain accurate and accessible documents and borrower information. Their policies and practices must ensure they are able to provide timely and accurate information to borrowers, investors, and the courts.

The CFPB provided for certain exemptions for small servicers — those servicing 5,000 or fewer mortgage loans either owned or originated, such as community banks and credit unions servicing mortgages for their members.

The servicing rules take effect on January 10, 2014 and can be found on the CFPB's website at: www.consumerfinance.gov/regulations. Saul Ewing's Financial Services Practice attorneys are available to help financial institutions understand supervisory expectations and penalties, and transition your policies and procedures to comply over the course of the year.