On January 17, 2013, the Consumer Financial Protection Bureau (CFPB) issued two final servicing rules that amend and add new provisions to the Truth in Lending Act and the Real Estate Settlement Procedures Act (Rules), as mandated by provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA). The Rules, among other things, address nine major areas of mortgage servicing. Certain small mortgage servicers, specifically those that service 5,000 or fewer mortgage loans and service only loans that they or an affiliate originated or own, are exempt from a number of the Rules’ requirements. According to the CFPB, the exemptions to the Rules cover substantially all of the community banks and credit unions that are involved in servicing mortgages. The Rules will take effect on January 10, 2014, giving servicers a year to comply.

Summary of key provisions:

• Periodic billing statements – Servicers must provide periodic billing statements to borrowers for each billing cycle. The statements must meet certain form and content requirements including, among other things, provisions for payments currently due and previously made, fees imposed, servicer contact information, and, where applicable, information regarding delinquencies. In addition, fixed-rate loans are excluded from the requirement if certain conditions are met. Small servicers are exempt from this requirement. 
• Interest-rate adjustment notices for ARMs – Servicers must provide borrowers with a notice of an initial interest rate adjustment between 210 to 240 days prior to such adjustment. Additionally, servicers must provide a notice of an adjustment in the interest rate between 60 and 120 days before payment at a new level is due, if a rate adjustment causes a payment change. Note that the interest rate adjustment notice must only be provided if there is a corresponding change to the borrower’s payment. 
• Prompt payment crediting and payoff statements – Servicers must, under most circumstances, credit periodic payments (which consist of principal, interest, and, if applicable, escrow payments) received from borrowers as of the day of receipt of such payment. Additionally, no later than seven business days after receipt of a written request from a borrower, servicers must provide an accurate payoff statement to the borrower. 
• Force-placed insurance – Subject to certain qualifications, servicers are prohibited from obtaining force-placed insurance for a borrower unless the servicer has a reasonable basis to believe the borrower has failed to maintain hazard insurance and has provided required notices (a 45-day initial notice and a second reminder notice). 
• Error resolutions and information requests – Servicers must comply with error resolutions procedures, in which servicers acknowledge a written error complaint within five days of receiving notice of the error from a borrower. Servicers are required to correct the error, or otherwise investigate the error to conclude that no error actually occurred, and provide the borrower with written notice of the resolution generally within 30 to 45 days. Note that the Rules do not alleviate the obligation of servicers to remedy oral complaints of borrowers. Similarly, servicers must acknowledge written requests for information by borrowers and provide such information to borrowers as appropriate; all within the same timeframes as listed above.
• General servicing policies, procedures, and requirements – Servicers must establish internal policies and procedures reasonably designed to achieve the objectives specified in the Rules, taking into account the size, scope, and nature of the servicer’s operations. Importantly, there will not be a private right of action to enforce these provisions.
• Early intervention with delinquent borrowers – By the 36^th day of a borrower’s delinquency, servicers must make good-faith efforts to establish live contact with a delinquent borrower and, if appropriate, promptly inform the delinquent borrower of loss mitigation efforts that are available. By the 45^th day of delinquency, servicers must provide the borrower with, among other things, written notice of loss mitigation options. Small servicers are exempt from this requirement.
• Continuity of contact with delinquent borrowers – Servicers must maintain reasonable policies and procedures with respect to providing delinquent borrowers with access to personnel to assist them with loss mitigation options. Importantly, there will not be a private right of action to enforce these provisions.
• Loss mitigation procedures – The Rules prohibit “dual tracking,” a procedure in which the servicer works with the borrower on loss mitigation options and at the same time goes forward with foreclosing on the property. Instead, the servicer must wait 120 days from the first delinquency before making the first notice or filing required for foreclosure, and furthermore if the borrower has applied for loss mitigation options the servicer may only foreclose if (1) the servicer informs the borrower that the borrower is not eligible for loss mitigation; (2) the borrower rejects all loss mitigation offers; or (3) a borrower fails to comply with a loss mitigation option. The Rules have numerous other loss mitigation requirements that servicers must follow, but most importantly, borrowers do in fact have a private right of action against servicers for failure to comply with the Rules’ loss mitigation procedures.

Pepper Points

The CFPB’s issuance of the Rules provides servicers a detailed framework with regard to mortgage servicing compliance under the DFA. The Rules’ requirements may force certain servicers to consider the viability of remaining in the servicing industry, especially those servicers that do not meet the “small servicer” definition. On the other hand, those servicers that do meet the definition of “small servicer” will be relieved to learn that they are exempt from many of its provisions.

The Rules are only one piece of the puzzle, as the CFPB has released six additional rules that affect all aspects of mortgage banking. Pepper Hamilton has established a working group of experienced financial services attorneys who will closely follow the implementation of the new rules and provide insightful analysis to help our clients navigate the changing landscape of mortgage banking. Pepper also has conducted a webinar, “A New World for Mortgage Banking – What You Need to Know About the CFPB’s Final Mortgage Servicing Rules,” on this topic.