The Consumer Financial Protection Bureau (“CFPB”) has issued guidance to mortgage servicers concerning servicing transfers of residential mortgage loans.
The new guidance is not specific to the COVID-19 pandemic. Rather, the CFPB noted that this new guidance is intended to address deficiencies in the transfer process that it has been observing for years. Specifically, the CFPB stated that “supervisory examinations conducted since 2014” showed violations of Regulation X’s service transfer requirements (12 CFR 1024.38(a), (b)(4)), “inadequacies” in servicers’ policies and procedures for transferring loan information and documents in a timely and accurate manner, and failures during transfers to pay taxes and insurance and to complete loss mitigation applications. The stated goal of the guidance is to better ensure “seamless and accurate” transfers to prevent consumer harm. Below is a brief summary of the CFPB’s new guidance, along with potential litigation risks that arise from servicing transfers that servicers should be aware of in revising and updating their policies and procedures.
CFPB Guidance
Regulation X requires transferor servicers to maintain policies and procedures that are reasonably designed to timely transfer all information and documents to ensure the accuracy of that information and ensure that the transferee servicer can comply with applicable law and its other obligations. Similarly, it requires transferee services to maintain policies and procedures that are reasonably designed to ensure that the servicer can identify necessary documents or information that may not have been transferred by a transferor servicer and obtain such documents from the transferor servicer. The rules do not specify or identify any particular policies or procedures that would satisfy the “reasonabl[e] design” requirements.
In its April 2020 bulletin, however, the CFPB offered pre-transfer and post-transfer “examples of servicer practices that [it] may consider as contributing to policies and procedures that are reasonably designed to achieve the objectives of these transfer requirements.” In other words, the bulletin does not impose, but rather suggests, policies and practices that servicers can adopt to ensure compliance with Regulation X and to otherwise ensure seamless servicing transfers.
For example, for the pre-transfer process, the CFPB suggests “for each transfer of mortgage servicing that occurs, developing a servicing transfer plan that includes a communications plan, testing plan (for system conversion), a timeline with key milestones and an escalation plan for potential problems.” In addition, the CFPB suggests “identifying any loans in default, active foreclosure and bankruptcy. Where applicable, include documentation regarding loss mitigation activity for each loan, including status and notes pertaining to the loss mitigation action, copies of agreements entered into with a borrower on a loss mitigation option, and any analysis by a servicer with respect to potential recovery from a non-performing mortgage loan.” Following a transfer, the CFPB suggests, among other things, “[c]onducting a post-transfer review or de-brief to determine effectiveness of the transfer plan and whether any gaps have arisen that require resolution.”
The CFPB particularly highlighted the need for adequate policies and procedures to ensure the transfer of loss mitigation applications. It singled out one servicer that had not engaged in “adequate post-transfer validation with its transferee,” which resulted in an executed loan modification agreement not being sent to the transferee servicer (and therefore not being implemented until the consumer complained and the situation was investigated). The CFPB noted that transferees also “must have policies and procedures reasonably designed to ensure, in connection with a servicing transfer, that the transferee receives copies of any loss mitigation applications and agreements, finds out about the status of any prior discussions with borrowers, and retrieves missing loss mitigation documents and information from the transferor servicer before asking the borrower for such information.” It also reminded servicers that the obligations under 12 CFR 1024.41(k) apply to transferee servicers for a complete application submitted to the transferor servicer.
Finally, the CFPB provided an attached Appendix A that sets forth “examples of information and documents grouped by subject area which [it] intends to use to assess compliance with Regulation X.” The appendix is “provided as a guide and focuses on common data elements essential to the servicing of mortgage loans. Servicers may use the appendix to assess the baseline appropriateness of their transfer-related policies and procedures.”
Litigation Risks
Although the CFPB guidance is geared towards regulatory compliance, servicers should also keep in mind that lawsuits occasionally arise as a result of perceived or actual errors made during the servicing transfer process. Common examples of such lawsuits are where a transferee servicer requests that a borrower re-submit a loss mitigation application where the borrower claims that he or she had already completed the process with the transferor servicer, or accounting errors where a borrower claims to have made payment to a transferor servicer that is not credited by the transferee servicer.
As for the servicing transfer policies and procedures under 12 CFR 1024.38, courts have consistently held that a consumer does not have a private right of action to sue a servicer thereunder. See, e.g., Covino v. Wells Fargo Bank, 2018 U.S. Dist. LEXIS 165176, at *13-14, 2018 WL 4616071 (D.N.J. Sep. 26, 2018) (“[T]here is no private right of action to enforce § 1024.38. The CFPB explicitly crafted the regulation not to provide for private enforcement.” (citation and quotation omitted)). Therefore, a consumer cannot sue a servicer over its policies and procedures relating to servicing transfers, although servicers are still subject to enforcement actions for the same.
However, deficiencies in servicing transfer policies and procedures can lead to litigation under other laws, including 12 CFR 1024.41 (through 12 U.S.C. 2605(f)), or under other federal and state laws (for example, state consumer protection laws). Moreover, where a perceived violation of law occurred at or around the time of a servicing transfer, consumers often sue both the transferor and transferee servicer regardless of who can fairly be blamed for any issues with the transfer. Thus, it behooves servicers to have sufficient procedures in place for servicing transfers to reduce the risk of litigation as well as enforcement actions.
In addition, although the CFPB’s bulletin only provides guidance and at most suggestions (not requirements), the more aligned that a servicer’s policies and procedures are with the CFPB’s guidance, the more likely a servicer will be insulated from litigation risk if a consumer attempts to sue over a mishap during a servicing transfer.
