The Consumer Financial Protection Bureau (CFPB) recently issued new rules amending Regulation Z, the Truth in Lending Act (TILA), and Regulation X, the Real Estate Settlement Procedures Act (RESPA), which revise mortgage servicing standards to provide greater protection to homeowners facing foreclosure, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. In implementing the new servicing standards the CFPB is requiring more from mortgage servicers, in particular more contact and accessibility, more transparency, and more procedures and policies to protect struggling homeowners. In addition to these revisions to TILA and RESPA, the CFPB also amended Regulation B, the Equal Credit Opportunity Act (ECOA), by requiring creditors to provide free copies of appraisals and other written valuations to applicants in connection with their applications for mortgages which would constitute first liens on dwellings. All amendments are effective beginning January 2014.
The CFPB wants more contact between mortgage servicers and struggling borrowers. Borrowers should be made aware of their options when facing foreclosure and given an opportunity to weigh these options. If they are actively seeking an alternative to foreclosure, they should not unexpectedly be forced into foreclosure. To combat these issues requiring additional contact, the new rules provide the following protections.
No Dual-Tracking – Mortgage servicers may no longer proceed with a foreclosure action if a borrower has filed an application for a modification or other alternative. As a result, foreclosure procedures may not be initiated until an account is more than 120 days delinquent and may not be initiated while a loan modification is pending.
Notice of Options – Once a borrower has missed two consecutive payments the mortgage servicer must inform the borrower of its foreclosure options or alternatives through written correspondence. Servicers may only require one application for all potential loss mitigation options.
Access to Representatives – Borrowers are entitled to easy and consistent contact with their mortgage servicers. This involves mortgage servicers providing borrowers, who have missed two consecutive payments, with information on their loss mitigation options, status of any loss mitigation application, and information missing from an application, while also ensuring that documents get to the proper place. The application must be confirmed and quickly reviewed upon receipt.
Review Process Prior to Foreclosure – A borrower seeking an alternative to foreclosure must be given an opportunity to have its application fairly reviewed for any potential loss mitigation options and the mortgage servicers may not foreclose until the application has been thoroughly reviewed and the borrower is informed that it is not eligible for a foreclosure alternative, the borrower rejects all of its options, or the borrower fails to comply with an executed loss mitigation agreement. If a borrower’s application is denied, the mortgage servicer must provide the borrower with specifics as to why the application was denied and give the borrower an option to appeal to other servicer representatives not involved in the borrower’s foreclosure proceedings.
The CFPB wants greater transparency from mortgage servicers, especially when it comes to where a borrower’s money is going and for what the borrower is being charged.
Monthly Statements – Mortgage servicers are required to provide borrowers with accurate and explicit monthly statements containing the amount due, due date for next payment, breakdown of payments, recent activity, summary of mortgage terms, and any delinquency information.
Warning of ARM Interest Rate Adjustment – Prior to the first change in the interest rate on an adjustable-rate mortgage, the servicer must provide the borrower with notice of such change and also of any adjustments that result in a change in payments.
Force-Placed Insurance Prohibition – Mortgage servicers must now provide borrowers with notice and cost information prior to charging the borrower for any force-placed insurance, which is insurance obtained by the servicer and charged to the borrower where the borrower fails to maintain sufficient insurance to cover the property. The servicer must also have a reasonable basis for purchasing the insurance. Should the borrower provide sufficient evidence of adequate property insurance, the servicer must terminate the insurance and refund any premiums charged to the borrower.
More Procedures and Policies
Prompt Responses, Crediting of Accounts, and Correction of Errors – When a borrower requests the balance of its account in writing, the mortgage servicer must provide a response within seven days of receiving the request. A borrower’s account must be credited the same day the servicer receives payment. If the borrower makes a partial payment put in a “suspense account,” the servicer must credit the account once the amount equals a full payment. Any errors reported by a borrower or general requests of information submitted in writing must be acknowledged by the servicer within five days of receipt. Within 30 to 45 days, the servicer must correct the error and notify the borrower, conduct an investigation and notify the borrower of the lack of an error, or notify the borrower that any requested information is not available.
Accurate and Accessible Information – Borrowers’ information must be easily accessible and servicers must maintain the borrowers’ information for at least one year after a loan is repaid or transferred.
Note that many of these new rules do not apply to servicers that service fewer than 5,000 mortgage loans and solely service loans that they or an affiliate originated because the CFPB recognizes that smaller servicers handle servicing differently. These rules are effective January 10, 2014. The new rules contain numerous time limits and the CFPB has provided sample forms for notice requirements here
The CFPB also recently amended ECOA to require that creditors provide mortgage loan applicants with free copies of all appraisals or written valuations where the application is for a loan to be secured by a first lien on a dwelling. The new rules to ECOA have several time requirements as to when creditors must provide applicants with copies, but these time requirements may be waived by the applicant. Previously, creditors were only required to provide notice of an applicant’s right to an appraisal or a copy of the appraisal report, but the new rules require that creditors provide the notice and a copy of the appraisal. Additionally, creditors may not charge applicants for copies of appraisals or other written valuations, but may charge reasonable fees for the cost of the appraisals or other written valuations. These rules are effective January 18, 2014, and can be found here.
At the same time as amending ECOA regarding appraisals, the CFPB teamed up with the Federal Reserve Board, FDIC, FHFA, NCUA, and OCC to amend appraisal requirements under TILA by adding protections for consumers applying for higher-priced subprime mortgages. The new rules provide that the lender must provide the applicant with notice at application regarding the appraisal, must use a certified or licensed appraiser, the appraiser must see the inside of the home, and the lender must give the applicant a copy of the appraisal three days before closing. The new TILA rules also require second written appraisals on certain “flipped” properties and certain qualified mortgages and reverse mortgages are exempt from the new rules. These rules are effective January 18, 2014, and can be found here.
The main take away from the new rules implemented by the CFPB affecting TILA, RESPA, and ECOA, is that the CFPB is looking for mortgage servicers to provide more to help homeowners facing foreclosure and to provide them with stronger protections. While these rules put additional responsibilities on mortgage servicers, the CFPB is willing to help servicers with implementation and compliance.