The Consumer Financial Protection Bureau (CFPB) has taken several steps to address innovation and compliance in mortgage servicing. Mortgage servicing combines a complex set of regulations with large data-processing demands and a high level of consumer impact, and the industry has seen corresponding regulatory and supervisory activity, as well as consumer complaints. The Bureau's recent activity has focused on the loss mitigation and mortgage servicing transfer rules, both of which take on heightened importance during the exigencies caused by the COVID-19 pandemic.
Loss Mitigation NAL
The CFPB granted a No Action Letter (NAL) request from Brace Software, Inc. (Brace). The company has developed an online loss mitigation application platform using a dynamic version of the Fannie Mae/Freddie Mac Form 710/Borrower Solicitation Package. The company received regulatory relief under the Bureau's NAL Policy regarding the following requirements:
Regulation X – 5-day Notice: The company explained that Regulation X and the Official Commentary do not clearly explain when the 5-day notice requirement would be triggered for a loss mitigation application platform. A borrower could begin a loss mitigation application on the portal and then wait several days or weeks before completing and submitting it (or not submit the application at all). The company requested that the 5-day notice requirement be triggered when the borrower clicks "submit," despite the fact that the operator of the platform may be able to see that the borrower has started an application.
FDCPA – Cease Communication Notice: The company explained that the Fair Debt Collection Procedures Act (FDCPA) does not clearly address notices to cease communication sent via a loss mitigation portal and sought a NAL safe harbor for receiving cease communication notices through the platform, rather than in writing.
By granting the NAL application, the Bureau states that it will not make supervisory findings or bring a supervisory or enforcement action against the Applicant under (A) Regulation X, 12 C.F.R. § 1024.41(b)(2); (B) FDCPA Section 805(c), 15 U.S.C. § 1692c(c)); or (C) the CFPB's authority to prevent unfair, deceptive, or abusive acts or practices, predicated on the information and description of uses of the loss mitigation platform. The CFPB published the Brace application as a No-Action Letter Template, and states that it intends to grant NAL applications based on the template, as appropriate.
CFPB Mortgage Servicing Transfer Guidance
In April, the CFPB issued regulatory guidance regarding mortgage servicing transfers, Bulletin 2020-02 - Compliance Bulletin and Policy Guidance: Handling of Information and Documents During Mortgage Servicing Transfers (Policy Guidance). Mortgage servicing transfers are, as noted in the CFPB's guidance, complicated processes that present compliance risks to institutions as well as a risk of harm to consumers. The Bureau's Policy Guidance does not alter existing mortgage servicing rules under Regulation X, but is intended to set out information and practices for improving compliance in mortgage servicing transfers gleaned from the CFPB's supervisory activities.
While the CFPB states that work on the Policy Guidance began before the start of the COVID-19 public health crisis, the Bureau offers a level of flexibility for mortgage servicing transfers requested or required by federal regulators and security issuers. The Policy Guidance indicates that the CFPB will take the current challenges and servicers' good faith efforts into account, and will "focus supervisory feedback for institutions, if needed, on identifying issues, correcting deficiencies, and ensuring appropriate remediation to consumers.
The Policy Guidance identifies critical considerations at each stage of the transfer. Divided broadly into pre-transfer activities and post-transfer checks and monitoring, the Bureau recommends that servicers adopt the practices below, among others:
- Planning and Pre-Transfer Testing: The Bureau identifies processes that help ensure that information and records are transferred fully and completely, creating a seamless experience for the consumer. These steps include planning and preparation well in advance of the transfer to identify and correct data integrity issues. Importantly, transferor servicers should identify any loans in default, active foreclosure, or bankruptcy, as well as identify and collect documentation regarding loss mitigation activity.
- Post-Transfer Monitoring: The Bureau recommends that servicers conduct a post-transfer review to identify any gaps or errors in the transfer of servicing data and loan records, that is, monitoring consumer complaints and loss mitigation performance metrics, such as borrower engagement rate, approvals of trial modifications, repayment plans, non-home retention options, and completed workouts for at least four to six months post-transfer. This would also include monitoring for delinquencies, foreclosures, and bankruptcies to detect trends, including for month-to-month increases after transfer.
The Bureau's Policy Guidance highlights information and records that may pose a compliance risk if not transferred – specifically, among others, loss mitigation-related documents including incomplete applications and executed modification agreements are critical for compliance. Within a list of the common records and documents to be included in a servicing transfer, the Bureau sets out loss mitigation records that servicers should ensure are transferred, including:
- The current status of discussions with a borrower on a loss mitigation option;
- Any agreements made with a borrower on a loss mitigation option;
- Any analysis by a servicer with respect to potential recovery from a non-performing mortgage loan; and
- Copies of complete and incomplete loss mitigation application(s) and information and documents submitted in conjunction with the application.