Although its new mortgage servicing rules are not effective until January 10, 2014, the CFPB seems to already be using those rules as guideposts in its examinations of servicers. In its Summer 2013 Supervisory Highlights, which highlights supervision work completed between November 2012 and June 2013, the CFPB focuses on deficiencies in mortgage servicing at both banks and nonbanks. Other areas of focus are deficiencies in compliance management systems and provision of adverse action notices required by the ECOA.
Servicing. The report criticizes various practices relating to servicing transfers, payment processing and loss mitigation, including the following:
- Transfers-Failure to provide transfer of servicing notices required by RESPA and inadequate review and handling of documents such as loan modification applications, trial modification agreements and other loss mitigation documents. By way of examples, the CFPB refers to one servicer that only conducted due diligence on transferred servicing data but did not review individual documents transferred by the prior servicer and another servicer that received unorganized or unlabeled documents which resulted in it not effectively using existing relevant information. Corrective action expected by the CFPB included linking imaged documents received in a transfer to the loan account in the servicer’s systems, reviewing documents to determine if they can be used in loss mitigation efforts, and storing and organizing documents appropriately.
- Payment processing-Inadequate notice of address change for sending payments, no advance notice of change in tax payment date, late payment of property taxes, delays and problems in cancelling private mortgage insurance, and failure to document default-related fees or charging default-related fees that were to be paid by investors.
- Loss Mitigation-Inconsistencies in borrower solicitation and communication, underwriting, and fee or interest waivers, long review periods, missing denial notices, incomplete and disorganized servicing files, incomplete written policies and procedures, and lack of quality assurance on underwriting decisions. The CFPB states that when its examiners identify these practices it expects corrective action, such as a review of loss mitigation decisions and related fees or charges to borrowers to determine if reimbursement is appropriate, periodic testing to monitor areas of concern, and provision of progress reports to the CFPB on corrective actions.
Compliance Management Systems (CMS). The CFPB notes that nearly every examination or targeted review it conducts includes an assessment of an entity’s CMS.
- Nonbanks. The CMS deficiencies observed generally related to the entity’s total lack of CMS structure. The CFPB found instances of nonbanks that did not have a separate compliance function and instead embedded compliance in the business lines. It also found consumer complaints being handled by the business line that received the complaint without any centralized tracking of issues across the entity.
- Banks. The most common CMS weakness observed was deficient systems for periodic monitoring and independent compliance audits.
The Supervisory Highlights includes a discussion of the “four interdependent control components” of an effective CMS which, in the CFPB’s press release on the report, is described as “guidance.”
Adverse Action Notices. The CFPB found that entities were not complying with ECOA provision, content or timing requirements such as the requirements to provide or make available a statement of specific reasons for the action taken and to provide the notice within 30 days of receipt of a completed application. The CFPB notes the need for servicers to have systems for determining whether a borrower who applies for a change in credit terms is entitled to an adverse action notice and that it might be “helpful” for institutions to arrange for independent, internal loan file reviews to ensure that the documentation supports the action taken and all timing requirements have been met.
As we work with clients on implementing the new mortgage servicing rules and conducting assessments/gap analyses of their compliance management systems, we are proactively navigating the issues found in this latest Supervisory Highlights as we have known for some time that those issues are areas of focus for the CFPB. Now that everyone is on notice, we suggest that our industry friends prioritize these items.