Bloomfield Hills, Michigan – In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) was enacted and amended RESPA (Reg. X) and TILA (Reg. Z) and granted authority to the Consumer Financial Protection Bureau (“CFPB”) to issue rules regarding servicing of residential mortgage loans. The most recent version of the rules were issued in August 2016 and became effective in 2018. The purpose of the rules are to standardize mortgage servicing requirements and to encourage loss mitigation amongst residential loan servicers.
Pursuant to the rules, any residential loan servicing entity that services mortgage loans is subject to the rules issued by the CFPB. Due to a concern surrounding limited resources at smaller financial institutions, the CFPB carved out exemptions to the rules for entities that it deems to be small servicers. In order to qualify as a small servicer, the servicing entity must, together with any affiliates, service 5,000 or fewer mortgage loans and the entity, or an affiliate, must be the creditor or assignee for all of the loans. The following example demonstrates how the rule is applied:
Consider: Entity services 3,000 loans. 2,900 loans are owned/originated by Entity; 100 loans are not owned by Entity. Entity does NOT qualify for the small servicer exemption.
An entity’s small servicer designation is determined on January 1st of each year. In the event an entity qualifies for the small servicer exemption but later loses the designation, the entity is allowed six months to comply with the rules or until the next reporting period. The following examples demonstrate how the rule is applied:
Consider: On November 1, 2018, Entity begins servicing 5,500 loans. Entity reports on January 1, 2019 that they are no longer a small servicer. Entity has until May 1, 2019 to comply with the rules.
Consider: On March 1, 2019, Entity begins servicing 5,500 loans. Entity reports on January 1, 2020 that they are no longer a small servicer. Entity must be in compliance with the rules on January 1, 2020.
While small servicers are exempt from many provisions of the rules, there are a few notable provisions that they are required to adhere to when servicing residential mortgage loans.
Successor in interest responsibilities
While small servicers are not required to adopt servicing policies related to treatment of successors in interest, they are required to provide a written response to correspondence or communication that indicates the sender is a successor in interest to the borrower. Assuming the potential successor in interest 1) indicates that they believe they may be a successor in interest, 2) states the name of the borrower from which they believe to have inherited their interest and 3) produce information that allows the servicer to identify the appropriate account, the servicer is required to:
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- Send a written acknowledgement of the request within five business days;
- Send a written letter within thirty days of the initial request stating the documents that are necessary for the servicer to confirm that the person seeking information is in fact a successor in interest. The letter must also provide a telephone number and any other contact information that the person making the inquiry may use to contact the servicer.
ARM disclosure provisions
A notice is required to be mailed by all servicers to the borrower prior to the initial interest rate adjustment for an adjustable rate loan. The initial notice must be sent between 210 days and 240 days prior to the date the first payment is due at the new rate. A notice is also required to be sent each time the interest rate is adjusted pursuant to the loan documents. Ongoing interest rate adjustment notices must be sent between 60 days and 120 days prior to the date the first payment is due at the new rate. The rules also require that specific information regarding the rate be contained within the notice.
Prompt crediting and payoff statement provisions
Periodic payments are required to be credited to the borrowers account “promptly” and to be marked as applied as of the day of receipt of payment. If a suspense account is used to hold partial payments, in the event the balance reaches the amount of a normal periodic payment, the account must be credited and treated as if a full periodic payment was received and complete the “prompt” crediting of the account. Further, servicers are required to provide a full and complete payoff balance to borrowers within seven business days of a written request for a payoff.
Loss mitigation rules
The first notice or filing required to initiate foreclosure of a borrower’s mortgage loan cannot be made until the loan is more than 120 days delinquent. A servicer may not begin a foreclosure proceeding by completing the first notice or filing if a borrower is in a performing loss mitigation agreement or plan. Finally, a servicer may not move for foreclosure judgment or order of sale, or conduct a foreclosure sale in the event borrower is in a performing loss mitigation agreement or plan.
Any entity that services residential mortgage loans must be aware of and in compliance with the mortgage servicing rules. In order to effectively service these loans, servicers and their counsel must diligently review accounts, especially those that are in default, to ensure that all rules and regulations are being followed and that borrowers are being afforded proper protections as contemplated by the mortgage servicing rules. Simon PLC stands ready to assist our clients in navigating these federal regulations. Please contact us for further information surrounding your servicing entity’s duties and requirements pursuant to the mortgage servicing rules.
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