The Maryland Commissioner of Financial Regulation recently issued a revised proposed regulation impacting servicing transfers. The Commissioner previously issued proposed regulations on this topic in January 2015. This revised proposal would have a broad and significant impact on the mortgage servicing industry. An outline of the proposed regulation is provided below, along with our general observations.

General Servicing Transfer Requirements

• For any transfer of servicing rights covering 7,500 or more loans, the transferee servicer would be required to report certain information to the Commissioner at least 30 days prior to the transfer date. This requirement would apply regardless of whether the transfer includes Maryland loans, but it would exclude loans transferred before the first payment is due.
• Specifically, for each such transfer, the transferee servicer would be required to report whether the transfer involves a subservicing agreement or an agreement for the sale of mortgage servicing rights; the names of the parties to the transfer agreement; the total number of loans transferred; the total unpaid principal balance for the loans transferred; the total number of additional staff that has been, or will be, hired in order to service the transferred loans; and whether the pool includes Maryland loans. 
• The proposed regulation includes an appeal mechanism for the 30–day prior notice requirement; however, the only example provided of a qualifying "extenuating circumstance" is a transfer required by a court or regulator. 
• We note that the 2015 proposal set the threshold at 5,000 loans and would have required at least 60 days advance notice.

Servicing Transfers Including Maryland Loans

• If the transfer triggers the reporting requirements above (7,500 or more loans), and the pool includes Maryland loans, the transferee servicer must provide the following additional information, also at least 30 days prior to the transfer date:
  • The total number of Maryland loans in the transferred pool;
  • A breakdown of the Maryland loans by investor type;
  • The number of Maryland loans that are delinquent, in categories of 30–plus, 90–plus, and 360–plus days delinquent;
  • The number of Maryland loans with a permanent modification;
  • The number of Maryland loans for which the borrower has completed a trial loan modification and the transferor servicer has not supplied an executed copy of a permanent loan modification to the borrower;
  • The number of Maryland loans with a loan modification that is in a trial period;
  • The number of Maryland loans where the borrower has submitted a complete loss mitigation application and the transferor servicer has not made a decision regarding eligibility for a loss mitigation option;
  • The number of Maryland loans that have incomplete loss mitigation applications; and
  • The number of Maryland loans that include an escrow for taxes, insurance, or other charges.
• After submitting the required information detailed above, at any time up to five days prior to the transfer date, the Commissioner would be permitted to request additional information regarding the transfer, which would then have to be provided prior to the transfer date. According to the proposed regulation, such information could include, but would not be limited to, the names and loan numbers for Maryland borrowers whose loans are included in any of the categories above; and an informational plan describing how the transferee servicer will manage risk related to the transfer.
• In addition, for covered pools that include Maryland loans, the transferee servicer would be required to appoint a contact person to administer complaints related to the servicing of Maryland loans in that pool.
• The proposal also includes a year-end reporting requirement that would apply if a transferee servicer acquired servicing for a total of 15,000 or more loans during the preceding calendar year. Thus, even if no single transfer exceeds the 7,500 loan threshold, the transferee servicer would be required to report the above information for Maryland loans in light of its activity over the entire calendar year. The specific timing for submitting such a report is not stated in the proposed rule.
• We note that under the 2015 proposed rule, this year-end threshold was set at 5,000 for the entire calendar year.

Policies and Procedures

The proposed rule also includes policy and procedure requirements that apply generally to Maryland licensees involved in a servicing transfer either as transferee or transferor. The proposed rule requires generally that such licensees have policies and procedures in place to ensure compliance with applicable state and federal law regarding mortgage servicing. The proposal then goes on to cite examples of such appropriate policies and procedures, most notably including:

• Ensuring that discussions with borrowers and any loss mitigation requests, applications, or documentation are provided to the transferee;
• Creating a customer service plan for responding to borrower inquiries and for identifying whether a loan is subject to a pending loss mitigation application, offer of loss mitigation, or an approved loss mitigation agreement;
• Creating a customer service plan for responding to and processing loss mitigation requests or inquiries from successors in interest; and
• Remediating actual harm to borrowers resulting from a servicing transfer.

Obligations on Transferor Servicers

The proposed rule would further require that transferor servicers take certain actions prior to the transfer date. Notable examples of these measures for the transferor include:

• Providing a description to the transferee servicer of loss mitigation options that are unique to the transferor servicer and that are applicable to one or more transferred loans, including the criteria for determining eligibility;
• Describing specific regulatory requirements that are applicable to some or all of the transferred loans; and
• Describing specific requirements related to a settlement agreement applicable to some or all of the transferred loans.

Obligations on Transferee Servicers

Transferee servicers would also be subject to certain requirements, to be completed on or after the transfer date. Among such requirements are the following:

• Provide general information about the transfer process to borrowers, including a notice of a borrower's complaint resolution rights under applicable state and federal law;
• Respond, within the time frames established by applicable state and federal law, to any pending written complaint or notice of error sent to the transferor servicer;
• Confirm the amount and status of scheduled payments, including any fees incurred before the transfer date, with information and documents provided by the transferor from its system of record; and
• Prior to confirming the amount and status of scheduled payments (as described above), the transferee would be prohibited from charging a late fee or any other fee in connection with the servicing of the loan; beginning or continuing collection activities; or providing information about delinquency to a credit reporting agency.

Analysis

As currently drafted, these proposed rules will have a significant impact on the mortgage servicing industry. First, although the regulations would directly apply only to Maryland-licensed servicers, any non-licensed servicers transferring to or from a licensee would be affected by these requirements. 

The reporting requirements for transferee servicers, especially with respect to Maryland loans, are extensive. The Commissioner's focus on certain categories of loan information, namely information for loans in various stages of loss mitigation upon transfer, signal an attempt to facilitate the identification of regulatory violations in this area, and a corresponding focus for possible enforcement activity. 

With respect to the policy and procedure requirements, and the specific obligations on transferor and transferee servicers, in many respects the proposed regulations go beyond those currently imposed by the CFPB. In addition, many of the proposed requirements are less than clear, and could present compliance issues on application. For example, it is not clear to what degree a transferor would have to describe to the transferee the specific regulatory or settlement agreement requirements applicable to some or all of the transferred loans. 

Another concerning aspect of the proposal is the prohibition from beginning or continuing "collection activities" until the transferee has confirmed the amount and status of scheduled payments, including any fees incurred before the transfer date. The scope of "collection activities" subject to this temporary hold is not defined, and could be quite broad in light of other interpretations of debt collection laws. For example, courts have held that the RESPA servicing transfer notice issued by a transferee servicer is the "initial communication in connection with the collection of a debt" under the federal Fair Debt Collection Practices Act. Strictly applied, this proposed requirement could effectively prohibit a joint (transferor and transferee), pre-transfer notice. 

Attorneys at Ballard Spahr will continue to follow this important regulatory development, and provide updates accordingly. Please note that comments on the proposed rules may be submitted to the DLLR through March 6, 2017.

The full text of the proposed regulation can be found here.