Banks should identify areas of examiner focus when planning for the year ahead to strategically align their resources. Items like the quarterly Consumer Financial Protection Bureau (CFPB) Supervisory Highlights, Advanced Notice of Proposed Rulemakings, enforcement actions and various regulator bulletins are beacons shining on the future regulatory landscape. In addition to the finalized rules effective this year, including mortgage servicing as discussed below, a few compliance action items might include:
- Testing and reconfiguring, if necessary, the bank’s website to meet the Web Content Accessibility Guidelines (WCAG 2.0) to minimize scrutiny under the Americans with Disabilities Act
- Analyzing the response process for credit report disputes
- Assessing the strength of the monitoring process for third parties involved in any part of the lending process
This update will focus on the 2016 Final Mortgage Servicing Rule.
In 2013, the CFPB issued guidance for servicers’ treatment of successors in interest, which largely mirrors the finalized mortgage servicing rule, effective in part in October 2017 and in whole in April 2018. Small servicers should pay particular attention to potential successors in interest and determination of delinquency periods. Successors in interest generally will be treated one and the same as borrowers during a loss mitigation situation.
Small servicers exempt from most mortgage servicing rules should note requirements for handling a written information request from a potential successor in interest. In contrast to how a traditional borrower’s information request is handled, the servicer should respond to a successor in interest with requests for identifying documentation from the individual and proof of ownership interest in the subject property.
In preparing for this change, a financial institution should:
- Train front-line, customer service and servicing personnel on successors in interest to help identify these individuals and direct them to the appropriate department
- Determine what documentation is needed to confirm ownership interest
- Revise process and procedures accordingly
- Draft form letters referencing the documentation addressed in the revised rule
In addition, it’s imperative to ensure the proper identification and documentation has been provided to reduce the risk of disclosing nonpublic private information.
Also included in the revised mortgage servicing rules is an expanded clarification and definition of delinquency, which helps determine when a financial institution can commence foreclosure proceedings on a mortgage. When the mortgage servicing rules were first implemented in 2014, there was confusion as to whether a subsequent payment of a previous delinquent payment would restart the 120-day waiting period to commence the foreclosure process. The effect of restarting the clock every time a full periodic payment is made, i.e., one payment every couple of months, would make it difficult for a financial institution to foreclose on a habitually delinquent borrower. The official interpretations to the mortgage servicing rules and CFPB guidance materials point to the treatment of subsequent payments as the underlying factor of the delinquency time period. The delinquency period will start over or be reduced upon receiving a full periodic payment if the bank applies it to the first outstanding periodic payment that was due.
In addition, if a borrower makes a portion of a periodic payment and bank policy is to treat the payment as timely—even though it may be short $25 or $100—this payment would not be counted as delinquent because of the bank’s treatment of the payment. Financial institutions should proceed with caution and not jump to revise their process for crediting payments. The crediting of payments and breakdown of each dollar’s application is largely determined by the promissory note and other legal obligations entered into between the financial institution and borrower.
One positive clarification made in the CFPB’s Factsheet on Delinquency and the 2016 Mortgage Servicing Rule is how a breach other than delinquency to the promissory note, such as failure to pay property taxes, abandonment, etc., is treated within the servicing rules. If a note is accelerated for a breach other than delinquency, the accelerated amount due becomes the periodic payment used in the calculation of the period of delinquency under the mortgage servicing rules. Once the accelerated amount becomes due and unpaid, the delinquency period begins, and the property can be foreclosed upon after 120 days if the accelerated amount is not paid in full.
Although the CFPB’s published final rules for mortgage servicing and others continue to elicit questions like “Then what?”; “What about in this situation?”; and “Where’s the exit?” CFPB should be commended for providing guidance materials to supplement the lacking regulatory text.
Contact your BKD advisor if you have questions.