mortgage servicing rules: small servicers...a small servicer is a servicer that: services, together...

© Alston & Bird LLP 2019

Mortgage Servicing Rules: Small ServicersOctober 14, 2019

© Alston & Bird LLP 2019 2

Nanci Weissgold, Partner

[email protected]

202-239-3189

Anoush Garakani, Senior Associate

[email protected]

202-239-3091

mailto:[email protected]

mailto:[email protected]


Mortgage Servicing Standards: Main Areas

Regulation X RESPA (12 CFR 1024) Servicing Transfer Notices Error Resolution & Information

Requests Escrow Accounts Force-Placed Insurance Early Intervention Continuity of Contact Loss Mitigation Procedures Policies and Procedures

Regulation Z TILA (12 CFR 1026) ARM Disclosures Prompt Crediting & No Pyramiding Payoff Statements Periodic Billing Statements


TILA Applicability

Applies with respect to: Prompt Payment Crediting: closed-end consumer credit transaction secured by a

consumer's principal residence Payoff Statements: closed- and open-end consumer credit transaction secured by a

consumer’s residence ARM Disclosures: closed-end consumer credit transaction secured by consumer’s

principal residence where APR may increase after consummation (except ARMs with term of 1 year or less) Periodic Billing: closed-end consumer credit transaction secured by a consumer’s

residence, excluding certain fixed-rate loans with coupon books, reverse mortgages, timeshares, certain charged-off loans, and certain loans with a consumer in bankruptcy


RESPA Applicability

Applies to a “federally related mortgage loan” (closed-end loans secured by 1-4 unit family residential real property) with the following exceptions of note:Open-end loans generally exempt from new servicing standards (but not

escrow requirements) Reverse mortgage loans are not subject to P&P Requirements, Early

Intervention, Continuity of Contact and Loss Mitigation Exclusion for temporary financing and business purpose loans Early Intervention, Continuity of Contact, and Loss Mitigation apply only

to loans on a borrower’s principal residence


Small Servicer Exemption

Who is a “small servicer”? A small servicer is a servicer that: Services, together with any affiliates, 5,000 or fewer mortgage loans, for all of which

the servicer (or an affiliate) is the creditor or assignee; Is a Housing Finance Agency; or Is a nonprofit entity that services 5,000 or fewer mortgage loans, including any

mortgage loans serviced on behalf of associated nonprofit entities, for all of which the servicer or an associated nonprofit entity is the creditor.


Small Servicer Exemption

For determining small servicer status, the term “mortgage loan” includes closed-end consumer credit transactions secured by a dwelling. Open-end loans, reverse mortgage loans, timeshare plans or loans serviced by a seller financer can be excluded from the calculation

Any mortgage loan the creditor or its affiliates obtain as part of a merger or acquisition, or as part of the acquisition of all of the assets or liabilities of a branch office of a creditor counts as a loan for which the creditor (or an affiliate) is the creditor or assignee

The 2016 Mortgage Servicing rules excludes certain seller financed transactions and mortgage loans voluntarily serviced for a non-affiliate, even if the non-affiliate is not a creditor or assignee, from being counted toward the 5,000 limit

Where a loan is subserviced, the master servicer does not lose its small servicer status if it retains a subservicer. The subservicer can gain the benefit of the small servicer exemption only if both the master servicer and the subservicer are small servicers

The small servicer exemption is determined each calendar year based on the loans serviced as of January 1 of that calendar year


Small Servicers Exemption

Small Servicers are exempt from the following provisions of the Mortgage Servicing Rules: The periodic statement provisions; The prohibition on purchasing force-placed insurance where a servicer could continue the borrower’s existing hazard

insurance coverage by advancing funds to escrow under certain circumstances (when the cost of force-placed insurance is less than the cost of advancing for hazard insurance);

The general servicing policies, procedures, and requirements provisions; The early intervention provisions; The continuity of contact provisions; and Some of the loss mitigation provisions

Small Servicer must comply with certain provisions of the Mortgage Servicing Rules: ARM disclosure provisions; Prompt crediting of payments, no late fee pyramiding, and payoff statement provisions; Servicing transfer notice provisions; Most of the force-placed insurance provisions; Error resolution and information request provisions, including provisions relating to written requests from a person

indicating they may be an SII; and Some of the loss mitigation provisions


TILA


ARM Disclosures

Small servicers are not exempt Apply to closed-end consumer credit transactions secured by a consumer’s

principal dwelling where the APR may increase after consummation (except ARMs with a term of 1 year or less) Do not apply to the following (if structured as a fixed-rate transactions and not as

an ARM based on an index or formula): Shared-equity or shared-appreciation mortgages; Price-level adjusted or other indexed mortgages that have a fixed rate of interest but provide

for periodic adjustments to payments and the loan balance to reflect changes in an index measuring prices or inflation; Graduated-payment mortgages or step-rate transactions; Renewable balloon-payment instruments; and Preferred-rate loans


ARM Disclosures (cont.)

Initial notice required at least 210, but no more than 240, days before the first payment at the adjusted level is due If the first payment at the adjusted level is due within the first 210 days after consummation, may be

provided at consummation Subsequent notices required when an interest rate adjustment results in a

corresponding change in the borrower’s minimum payment obligation Timing for subsequent notices varies depending on the circumstances:

At least 25, but no more than 120, days before first adjusted payment is due ARM with regularly scheduled interest rate adjustments occurring every 60 days, or more frequently ARMs originated prior to January 10, 2015 in which the loan contract requires the adjusted interest rate and payment to be

calculated based on an index figure available as of a date that is less than 45 days prior to the adjustment date As soon as practicable, but not less than 25 days before the first payment at the adjusted level is due

When the first adjustment occurs within 60 days of consummation and the notice provided at consummation contained an estimated adjusted interest rate

Otherwise, at least 60, but no more than 120, days before the first payment at the adjusted level is due Required for a payment change that results from a conversion of an ARM to a fixed-rate transaction Not required for interest rate changes occurring in the context of a loan modification for loss mitigation


ARM Disclosures (cont.)

Notices must reflect the credit terms to which the parties are legally bound when the disclosures are provided, and must be made clearly and conspicuously, in writing, and in a form that the consumer may keep. May be provided electronically, subject to compliance with the consumer consent and other

applicable provisions of the federal E-SIGN Act The disclosures required to appear in the notices must be grouped together, segregated from

everything else, and may not contain any additional information, other than: (i) an acknowledgment of receipt; (ii) the date of the transaction; and (iii) the consumer’s name, address, and account number Initial rate adjustment notice must be provided as a separate document from all other written

materials Rule contains model and sample forms


Prompt Payment Crediting: General

Small servicers are not exemptDefinition: A periodic payment consists of the amount necessary to cover

principal, interest, and escrow (if applicable) for a given billing cycle Requirements: A creditor must credit a periodic payment to the borrower’s account as of the day of

receipt except: When a delay in crediting does not result in any charge to the borrower, or in the reporting of

negative information to a consumer reporting agency For non-conforming payments (i.e., those that do not conform to servicer’s instructions) a creditor

may wait up to 5 days after receipt to credit the payment


Prompt Payment Crediting: Partial Payments

Definition: A partial payment is any payment that is less than a periodic payment. Receipt of Partial Payment: To the extent that you are not prohibited by law or legal obligation between the

parties a servicer may: Credit the partial payment upon receipt Return the partial payment to the borrower Hold the payment in a suspense or unapplied funds account

To the extent a servicer retains a partial payment in a suspense or unapplied funds account, the servicer must: Disclose on the borrower’s periodic statement the total amount of funds the servicer is holding in

the suspense or unapplied funds account – if you are required to send periodic statements (small servicers exempt)


No Pyramiding of Late Fees

Small servicers are not exempt In connection with a closed-end consumer credit transaction secured by a

consumer’s principal dwelling, a servicer shall not impose any late fee or delinquency charge if: Such a fee or charge is attributable solely to failure of the consumer to pay a late fee

or delinquency charge on an earlier payment; and The payment is otherwise a periodic payment received on the due date, or within any

applicable courtesy period


Payoff Statements

Small servicers are not exempt “Payoff statement” means an accurate statement of the total outstanding balance that

would be required to pay the obligation in full as of a specified date If a borrower or any person acting on behalf of a borrower makes a written request for a

payoff statement, a creditor, assignee, or servicer must provide the statement within a “reasonable time,” but in no case more than 7 business days, after receiving the request When a payoff statement cannot be provided within 7 business days because the loan is

in bankruptcy or foreclosure, the loan is a reverse mortgage or shared appreciation mortgage, or because of natural disasters or other similar circumstances, the payoff statement must be provided within a “reasonable time” A creditor or assignee that does not currently own the mortgage loan or the MSRs is not

subject to this requirement State law may impose shorter deadlines


Periodic Billing Statements

Scope: Generally, servicers must provide borrowers with a statement each billing cycle. Applies to all closed-end consumer credit transactions secured by a dwelling Excludes:

Open-end lines of credit and Home-Equity Lines of Credit (“HELOCs”) Reverse Mortgages Timeshare loans Certain fixed-rate loans with coupon books (provided other requirements are met) Bankruptcy (depending on the chapter and other requirements; modified requirements for certain BK consumers) Certain charged-off loans Small Servicers

Timing: Periodic statements must be sent each billing cycle. They must be delivered by mail within a “reasonably prompt” time after the payment due date or the end of any courtesy period provided for the previous billing cycle. “Reasonably Prompt” generally means delivering, emailing, or placing the periodic statement in the

mail within 4 business days of the close of the courtesy period of the previous billing cycle Borrowers may choose to receive statements electronically, but may opt-out


Periodic Billing Statements (cont.)

Form Must be “clear and conspicuous,” in writing, and in a form that the consumer may keep

Content Amount due Explanation of amount due Past payment breakdown Transaction activity (since the last statement) Partial payment Information (Only if funds are held in a suspense account) Contact information (a toll-free number and email address) Account information Delinquency information (only if the borrower is more than 45 days delinquent)

Model forms may be used and amended for information that may not be applicable


Periodic Billing Statements: Coupon Book Alternative

Coupon Book: A coupon book is a book with a page for each billing cycle during a set period. They may be used, on a fixed-rate transaction, in lieu of a periodic billing statements as long as certain requirements are met

Content of Individual Coupon: The payment due date The amount of any late payment fee and the date on which you will charge a late fee if you don’t receive the payment The amount due

Content of Coupon Book: The outstanding principal balance at the beginning of the time period covered by the coupon book The current interest rate in effect The existence of any prepayment penalty The website to access either the Bureau’s or HUD’s list of homeownership counselors Contact information for the servicer and information on how the consumer can obtain certain additional information otherwise disclosed

on a periodic billing statement

Additional Information: Upon request the servicer must provide the borrower with an explanation of: the amount due, a past payments breakdown, and transaction activity

Delinquency Information: Servicer must provide the consumer with the delinquency information provided on a normal periodic billing statement for any billing cycle during which the consumer is more than 45 days delinquent


RESPA


Servicing Transfer Notices

Small servicers are not exempt Each transferor and transferee servicer must provide the borrower a notice of transfer for any assignment, sale, or transfer of the servicing of

the mortgage loan Notice must contain the information described in 12 CFR 1024.33(b)(4) Certain transfers excluded:

Transfer between affiliates; Transfer resulting from mergers or acquisitions of servicers or subservicers; Transfer that occurs between master servicers without changing the subservicer

Notice must generally be provided: By the transferor servicer, not less than 15 days before the effective date of transfer By the transferee servicer, not more than 15 days after the effective date of transfer Transferor and transferee servicers may provide a single notice, but not less than 15 days before the effective date of transfer Limited exceptions permit additional time for the provision of the notice of transfer (e.g., transfer preceded by termination of the servicing contract for cause)

Preemption of State Laws: “[S]ervicer shall be considered to have complied with the provisions of any State law or regulation requiring notice to a borrower at the time of application for

a loan or transfer of servicing of a loan if the lender or servicer complies with the requirements of this section” “Any State law requiring notice to the borrower at the time of application or at the time of transfer of servicing of the loan is preempted, and there shall be no

additional borrower disclosure requirements” “Provisions of State law, such as those requiring additional notices to insurance companies or taxing authorities, are not preempted by section 6 of RESPA or

this section, and this additional information may be added to a notice provided under this section, if permitted under State law”


Servicing Transfer Notices

During 60-day period beginning on effective date of transfer, if the transferor servicer (rather than the transferee servicer that should properly receive payment) receives payment on or before the applicable due date (including grace period), a payment may not be treated as late Beginning on effective date of transfer, for payments incorrectly received by

transferor, the transferor must promptly either: Transfer payment to transferee servicer for application to borrower’s account; or Return payment to person that made the payment and notify them of the proper

recipient


Error Resolution & Information Requests

Small Servicers are not exempt from the rules on error resolution or information requests Error resolution (§ 1024.35) and Information Request requirements (§ 1024.36) are

structured similarly They each: Define the scope of written communications to which a servicer must respond Set out timelines and notice requirements for responding to qualifying borrower

communications Carve out certain requests (e.g., duplicative, overbroad or untimely) Allow the servicer to establish one or more addresses which borrowers must use to submit

notices of errors and requests for information Limit the fees a servicer may charge for responding to a notice of error or request for

information Subsume Qualified Written Request (QWR) requirements


Error Resolution: Notice of Error

Notice of Error Generally, a servicer must comply with the Error Resolution requirements for any written

notice from the borrower that assets an error and includes: The borrower’s name; Information sufficient to identify the borrower’s mortgage loan account; and The error the borrower believes has occurred (but not necessarily the reasons for his/her belief)

A notice on a payment coupon or other payment form supplied by the servicer need not be treated by the servicer as a notice of error A QWR that asserts an error relating to the servicing of a mortgage loan is a notice of

error A servicer should not rely solely on the borrower's description of a submission to

determine whether the submission constitutes a notice of error, an information request, or both


Error Resolution: 11 Covered Errors

Failure to accept payments that conforms to the servicer’s written requirements to follow in making payments.

Failure to apply an accepted payment to principal, interest, escrow, or other charges under the terms of the mortgage loan and applicable law

Failure to credit a payment to a borrower’s mortgage loan account as of date of receipt in violation of TILA

Failure to pay taxes, insurance premiums, or other charges, including charges that the borrower and servicer have voluntarily agreed that the servicer should collect in a timely manner or to refund an escrow account balance.

Imposition of a fee or charge that the servicer lacks a reasonable basis to impose upon a borrower

Failure to provide an accurate payoff balance amount upon a borrower’s request in those circumstances in which TILA Section 129G applies

Failure to provide accurate information to a borrower regarding loss mitigation options and foreclosures, as required by the early intervention requirements

Failure to transfer accurately and timely information relating to the servicing of a borrower’s mortgage loan account to a transferee servicer

Making the first foreclosure notice or filing in violation of § 1024.41(f) or (j)

Moving for foreclosure judgment or order of sale, or conducting a foreclosure sale in violation of § 1024.41(g) or (j)

Any other error relating to the servicing of a borrower’s mortgage loan: This last “catch-all” is broad but not all consuming Does not include matters relating to originating or underwriting, subsequent sale or securitization, or a sale, assignment or transfer of servicing rights (but

failure to transfer accurate and timely information to a borrower’s loan account is an error)


Error Resolution: Timing & Response Requirements

The timing requirements generally follow requirements for handling a QWR: Provide written acknowledgement of receipt within 5 business days (unless the servicer

corrects error(s) within that timeframe) Respond to notice of error within 30 business days (shorter time frames for certain types of

error; 15-day extension is possible) by: Correcting the error (and providing written notification with the effective date of correction and contact

information), or Conducting a reasonable investigation and determining that no error occurred (and providing written

notification of the basis for the conclusion and the borrower’s right to request documents the servicer relied on, and contact information)

If a servicer is subject to the FDCPA, it must comply with the error resolution provisions even where the borrower has exercised its “cease communication” right under the FDCPA But, a servicer is not required to comply with the error resolution provisions if, in exercising

the “cease communication” right, the borrower specifically identifies a previously submitted notice of error


Error Resolution: Additional Procedural Provisions

A servicer must: Correct any additional errors a servicer finds during its investigation and provide

written notification to borrower Provide at no cost and within 15 business days of borrower’s request, copies of the

document relied on in making a “no error” determination (unless they are “confidential, proprietary, or privileged information”) Not charge a fee or require a borrower to make a payment as a condition of

responding to notice of error Not furnish adverse information regarding any payment subject to valid notice of

error to a CRA for 60 days after receipt of error notice (unless duplicative, overbroad, or untimely)


Information Requests

A servicer must: Respond to any written information request regarding a borrower’s mortgage loan (other than payoff

balance) that includes the borrower’s name, sufficient information to identify the account and states the information the borrower is requesting by: providing the borrower with the requested information; or conducting a reasonable search for the requested information (and notify borrower why information is unavailable) NOTE ON SIIs: With respect to any written request from a person that indicates that the person may be an SII and

that includes the name of the transferor borrower from whom the person received an ownership interest and information that enables the servicer to identify the mortgage loan account, a servicer must respond by providing the potential SII with a written description of the documents the servicer reasonably requires to confirm the person's identity and ownership interest in the property and contact information, including a telephone number, for further assistance. With respect to such written request, the servicer must treat the potential SII as a borrower for purposes of the requirements of § 1024.36(c) – (g).

Acknowledge receipt of a request for information within 5 business days of receiving such request (unless the servicer provides the borrower with the information requested within that time frame)

Respond to information requests: within 10 business days of a request for the identity of, and contact information for, the owner or assignee for all other information requests, within 30 business days (15 day extension is possible)


Information Requests: Fees

A servicer shall not charge a fee or require a borrower to make any payment that may be owed on a borrower’s account as a condition of investigating and responding to a valid information request Fee for providing beneficiary notice is specifically permitted, as allowed

under applicable state law


Error Resolution & Information Requests: Exceptions

A servicer is not required to comply with error resolution provisions if the servicer reasonably determines that the request is: Duplicative; Overbroad; or Untimely

Additionally, a servicer is not required to investigate or respond to a request for information if the servicer reasonably determines that the information requested is: Confidential, proprietary, privileged information Irrelevant Unduly burdensome

If an exception applies, servicer must notify borrower in writing of its determination and the basis upon which the service relied within 5 business days of its determination


Error Resolution & Information Requests

Designated Address A servicer can choose to designate an address for borrowers to use to submit error

notices and information requests The borrower must be provided with written notice that states that the borrower

must use the specified address to assert an error or request information The written notice must be clear and conspicuous and in a form the borrower can keep. The

written notice can be combined with a different disclosure (such as a notice of transfer, periodic statement, or coupon book)

Additionally, the designated address must be included: (1) in all periodic statements or coupon books; (2) on any Web site maintained by the servicer in connection with the servicing of the loan; and (3) in early intervention and loss mitigation-related notices that contain contact information for assistance.


Escrow Accounts: Limits on Payments to Escrow

Small servicers are not exempt A lender or servicer shall not require a borrow to deposit into any escrow account,

created in connection with a federally related mortgage loan, more than the following amounts: Charges at settlement or upon creation of an escrow account

At time escrow account created, servicer may charge the borrower “an amount sufficient to pay the charges respecting the mortgaged property, such as taxes and insurance, which are attributable to the period from the date such payment(s) were last paid until the initial payment due date”

Charges during the life of the escrow account Through the life of an escrow account, the servicer may charge the borrower “a monthly sum equal to one-twelfth

(1/12) of the total annual escrow payments which the servicer reasonable anticipates paying from the account” In addition, servicer may add “an amount to maintain a cushion no greater than one-sixth (1/6) of the estimated

total annual payments from the account” If shortage or deficiency is identified through escrow analysis, servicer may require borrower to pay additional

deposits to make up the shortage or eliminate the deficiency, subject to certain limitations Servicer must examine loan documents to determine the applicable cushion for each escrow account (but may not

exceed the above limits)


Escrow Accounts: Escrow Analysis

Escrow Analysis at Creation of Escrow Account Before establishing an escrow account, servicer must conduct an escrow account analysis to determine the amount the borrower must

deposit into the escrow account, and the amount of the borrower's periodic payments into the escrow account Servicer must estimate the disbursement amounts in accordance with 12 CFR 1024.17(c)(7) Servicer must use a date on or before the deadline to avoid a penalty as the disbursement date for the escrow item and comply with any

other requirements of 12 CFR 1024.17(k) Upon completing the initial escrow account analysis, servicer must prepare and deliver an initial escrow account statement to the

borrower, either: At settlement or within 45 calendar days of settlement (may be incorporated into the HUD-1 or HUD-1A settlement statement or provided as separate

document); or For escrow accounts established after settlement (and not condition of loan), servicer must submit initial escrow account statement to borrower within

45 calendar days of date escrow account is established

Subsequent Escrow Account Analyses For each escrow account, the servicer must conduct an escrow account analysis at the completion of the escrow account computation

year to determine the borrower's monthly escrow account payments for the next computation year, subject to the limits on payments to escrow

Servicer must estimate the disbursement amounts, unless servicer knows the charge for an escrow item in the next computation year, in which case the servicer must use that amount in estimating disbursement amounts

Servicer must use a date on or before the deadline to avoid a penalty as the disbursement date for the escrow item and comply with any other requirements of 12 CFR 1024.17(k) regarding timely payments

Upon completing an escrow account analysis, servicer must prepare and submit an annual escrow account statement to the borrower


Escrow Accounts: Transfer of Servicing

If new servicer changes either the monthly payment amount or the accounting method used by the transferor (old) servicer, then the new servicer must provide the borrower with an initial escrow account statement within 60 days of the date of servicing transfer Where a new servicer provides an initial escrow account statement upon the transfer of

servicing, the new servicer must use the effective date of the transfer of servicing to establish the new escrow account computation year Where the new servicer retains the monthly payments and accounting method used by

the transferor servicer, then the new servicer may: continue to use the escrow account computation year established by the transferor servicer; or establish a different computation year using a short-year statement

At the completion of the escrow account computation year or any short year, the new servicer must perform an escrow analysis and provide the borrower with an annual escrow account statement


Escrow Accounts: Surpluses, Shortages, and Deficiencies For each account, servicer must conduct escrow analysis to determine

whether shortage, surplus, or deficiency exist “Surplus” means an amount by which the current escrow account balance

exceeds the target balance for the account “Shortage” means an amount by which a current escrow account balance

falls short of the target balance at the time of escrow analysis “Deficiency” is the amount of a negative balance in an escrow account; if

servicer advances funds for a borrower, then servicer must perform an escrow account analysis before seeking repayment of the deficiency


Escrow Accounts: Surpluses

If surplus is greater than or equal to $50, the servicer must, within 30 days from the date of the escrow account analysis, refund the surplus to the borrower If the surplus is less than $50, servicer may refund amount to the borrower,

or credit such amount against the next year's escrow payments These provisions only apply if the borrower is current at the time of the

escrow account analysis A borrower is current if the servicer receives the borrower's payments within 30 days

of the payment due date If the borrower is not current, then servicer may retain the surplus in the

escrow account pursuant to the terms of the loan documents


Escrow Accounts: Shortages

If an escrow account analysis discloses a shortage of less than one month's escrow account payment, then the servicer has three possible courses of action: Allow a shortage to exist and do nothing to change it; Require the borrower to repay the shortage amount within 30 days; or Require the borrower to repay the shortage amount in equal monthly payments over at least

a 12-month period If an escrow account analysis discloses a shortage that is greater than or equal to

one month's escrow account payment, then the servicer has two possible courses of action: Allow a shortage to exist and do nothing to change it; or Require the borrower to repay the shortage in equal monthly payments over at least a 12-

month period The servicer must notify the borrower at least once during the escrow account

computation year if there is a shortage in the escrow account


Escrow Accounts: Deficiencies

If the escrow account analysis confirms a deficiency, then the servicer may require the borrower to pay additional monthly deposits to the account to eliminate the deficiency If the deficiency is less than one month's escrow account payment, then the servicer may:

Allow the deficiency to exist and do nothing to change it; Require the borrower to repay the deficiency within 30 days; or Require the borrower to repay the deficiency in 2 or more equal monthly payments

If the deficiency is greater than or equal to 1 month's escrow payment, the servicer may: Allow the deficiency to exist and do nothing to change it; or Require the borrower to repay the deficiency in two or more equal monthly payments

These provisions only apply if the borrower is current at the time of the escrow account analysis If borrower is not current, then servicer may recover the deficiency pursuant to the terms of the

federally related mortgage loan documents The servicer must notify the borrower at least once during the escrow account computation year

if there is a deficiency in the escrow account


Escrow Accounts: Timely Payment of Taxes

If the loan documents require the borrower to make payments to an escrow account, the servicer must pay the disbursements in a timely manner (i.e., on or before the deadline to avoid a penalty), as long as the borrower's payment is not more than 30 days overdue

Servicer must advance funds to make disbursements in a timely manner as long as the borrower's payment is not more than 30 days overdue After advancing funds, servicer may seek repayment from the borrower for the deficiency

For payment of property taxes, if a taxing jurisdiction offers a servicer a choice between annual and installment disbursements, the servicer must also: If the taxing jurisdiction neither offers a discount for disbursements on a lump sum annual basis nor imposes any

additional charge or fee for installment disbursements, the servicer must make disbursements on an installment basis; or If the taxing jurisdiction offers a discount for disbursements on a lump sum annual basis or imposes any additional charge

or fee for installment disbursements, the servicer may, at the servicer's discretion (but is not required by RESPA to), make lump sum annual disbursements in order to take advantage of the discount for the borrower or avoid the additional charge or fee for installments, as long as such method of disbursement complies with the above requirements Note that the Bureau encourages the servicer to follow the preference of the borrower, if such preference is known to the servicer

A servicer and borrower may mutually agree, on an individual case basis, to a different disbursement basis (installment or annual) or disbursement date for property taxes from that required above, so long as the agreement meets the requirements to disburse escrow payments in a timely manner and to advance funds to make disbursements in a timely manner if borrower’s payment 30 days or less overdue


Forced-Placed Insurance

Small servicers are generally not exempt from the force-placed insurance provisions However, there is a limited exemption which permits a small servicer to purchase force-placed

insurance for a borrower with an escrow account whose mortgage loan obligation is more than 30 days overdue, if the cost of the force-placed insurance to the borrower is less than the amount the small servicer would need to disburse from the borrower’s escrow account to pay the borrower’s hazard insurance premium

“Forced-placed insurance” is hazard insurance obtained by a servicer on behalf of the owner or assignee Includes:

Flood insurance not mandated by the Flood Disaster Protection Act (FDPA) (i.e., not in Special Flood Hazard Area (SFHA))

CFPB states that servicer must track SFHA status prior to renewal of flood insurance. If the property is no long in a SFHA, 12 CFR 1024.37 applies

Exclusions: Flood insurance required by the FDPA Hazard insurance the borrower obtains and that the servicer renews using escrow funds (including funds advanced

to escrow by the servicer) or by advancing servicer funds if the borrower consents


Forced-Placed Insurance (cont.)

Prohibition: Servicer may not assess force-placed insurance premiums or fees unless it has a “reasonable basis” to believe the borrower has failed to maintain hazard insurance in accordance with the mortgage 2 notices are required before the servicer can assess force-placed insurance premium or

fee: Deliver or mail first written notice at least 45 days before assessing charge/fee Reminder notice in writing at least 30 days after the first notice

Servicer may not assess charge/fee until 15 days have occurred since delivering/mailing the reminder notice and no evidence of continuous hazard insurance (e.g., declarations page, certificate of insurance, policy) has been received Use of model disclosures deemed compliance Retroactive: Servicer can charge for force-placed insurance retroactively to the 1st day of

any period in which the borrower did not have hazard insurance in place, if not prohibited by law



Refunds/Cancellation: Within 15 days of receiving evidence demonstrating hazard insurance coverage was in place, the servicer must: Cancel the forced-placed insurance; and Refund forced-placed insurance premiums and related fees paid by the borrower for

any period of overlapping insurance coverage Bona Fide Charges: Except for charges subject to state regulation as the

business of insurance and charges authorized by the Flood Disaster Protection Act, all charges related to force-placed insurance assessed to a borrower by or through the servicer must be bond fide and reasonable. Definition: A “bona fide and reasonable” charge is a charge for a service you actually

perform that bears a reasonable relationship to your cost to provide the service, and is not otherwise prohibited by applicable law.



Escrow Accounts (§ 1024.17(k)(5)) Escrow Advances: Servicer may not purchase force-placed insurance unless

it is “unable to disburse funds” from borrower’s escrow account Definition of “Unable”: Servicer has a “reasonable basis” to assume it is unable to

disburse funds if (1) the hazard insurance has been cancelled (or not renewed) for reasons other than non-payment or (2) the borrower’s property is vacant Examples:

Borrower notifies servicer that insurance is cancelled and servicer has no notification of replacement insurance

Servicer receives cancellation or non-renewal notice form the borrower’s insurer Servicer does not receive a payment notice by the expiration date of the borrower’s hazard insurance

policy.



Escrows Accounts – § 1024.17(k)(5) (cont.) Prohibited: Insufficient funds in escrow is generally not a basis for being

unable to disburse funds Small servicers: However, limited exemption to allow small servicers to force-place insurance if the cost

to the borrower of the force-placed insurance is less expensive than the amount the small servicer would need to disburse from the borrower’s escrow account to ensure that the borrower’s hazard insurance premium charges were paid in a timely manner

Non-escrowed: No need to advance for non-escrowed borrowers


Early Intervention with Delinquent Borrowers

Small Servicers are exempt from all of the early intervention requirements

Live Contact A servicer shall establish or make good faith efforts to establish live contract with a delinquent borrower not later than the 36th

day of the borrower’s delinquency, and if appropriate, promptly inform the borrower of loss mitigation options Delinquency means a period of time during which a borrower and a borrower's mortgage loan obligation are delinquent. A

borrower and a borrower's mortgage loan obligation are delinquent beginning on the date a periodic payment sufficient to cover principal, interest, and, if applicable, escrow becomes due and unpaid, until such time as no periodic payment is due and unpaid However, a borrower is not considered delinquent if performing under a loss mitigation option, or if a prior default has

been cured. However, if the borrower defaults again, this is considered a new delinquency

Examples of “Reasonable Steps” to Establish Live Contact Sue Servicer is maintaining ongoing contact with Ben Borrower while he completes a loss mitigation application Chris Collector includes a script informing borrowers that loss mitigation options may be available in his collection calls Ivonna Incommunicado has been delinquent 6 or more consecutive times. Since Ivonna is unresponsive, Sue satisfies the

“reasonable steps” requirement by making a single telephone call or by including a statement requesting Ivonna to contact theservicer with regard to the delinquencies in the periodic statement or in an email


Early Intervention with Delinquent Borrowers (cont.)

Written Notice Required A servicer shall provide a delinquent borrower a written notice with specific content required not later than the 45th day of delinquency A servicer is not required to provide the written notice more than once during any 180-day period

If a borrower is 45 days or more delinquent at the end of any 180-day period after the servicer has provided the written notice, a servicer must provide the written notice again no later than 180 days after the provision of the prior written notice

If a borrower is at the end of any 180-day period after the servicer has provided the written notice, a servicer must provide the written notice again no latless than 45 days delinquent er than 45 days after the payment due date for which the borrower remains delinquent

Content of Written Notice A statement encouraging the borrower to contact the servicer; The telephone number for the personal assigned to the borrower in under the continuity of contact provisions and the servicer’s mailing address; If applicable, a statement providing a brief description of examples of loss mitigation options that may be available from the servicer; If applicable, application instructions or statement about obtaining loss mitigation information; and The Website for the Bureau’s or HUD’s list of homeownership counselors or counseling organization, and the HUD toll-free telephone number to access

homeownership counselors and organizations

Model Clauses Model clause MS-4(A), MS-4(B), and MS-4(C), in appendix MS-4 to Subpart C of Regulation X may be used to comply with the written notice’s content

requirements

Borrowers in Bankruptcy and FDCPA Loans Partial exemption from early intervention requirements for:

Borrowers who are debtors in bankruptcy (§ 1024.39(c)) Borrowers who have invoked a “cease communication” request under the FDCPA (§ 1024.39(d))


Continuity of Contact with Delinquent Borrowers

Small Servicers are exempt from all of the continuity of contact requirements Servicers shall maintain Policies & Procedures (“P&Ps”) designed to

accomplish the following: Assign personnel to delinquent borrowers by the time you send the written notice

required by the early intervention requirements, but no later than the 45th day of the borrower’s delinquency Make available, via telephone, personnel that can respond to borrowers inquires,

pursue loss mitigation options including advising them about the status of any loss mitigation application and applicable timelines Provide timely live response to borrowers who call and have to leave a message when

they cannot reach a live person.


Continuity of Contact with Delinquent Borrowers (cont.)Functions of Servicer Personnel Provide borrower with accurate information about:

Loss mitigation options from owner or assignee; Actions borrower must take to be evaluated for loss mitigation options, including actions to submit a

complete loss mitigation application and, if applicable, actions borrower must take to appeal decision; Status of any loss mitigation application submitted; Circumstances under which servicer may make a referral to foreclosure; and Applicable loss mitigation deadlines established by owner or assignee Retrieve, in timely manner:

A complete record of borrower’s payment history; and All written information the borrower has provided to servicer, and prior servicers, in connection with

loss mitigation application Provide documents and information to other staff required to evaluate a borrower for loss mitigation options Provide delinquent borrower with information about procedures for submitting notice of error or

information request


Loss Mitigation Procedures

General Principles: the loss mitigation provisions generally require servicers to: Work with borrower to complete timely applications for loss mitigation Evaluate complete and timely loss mitigations application within 30 days for all loss

mitigation options available to the borrower For complete and timely applications, inform borrowers of whether the servicer will

offer the borrower a loss mitigation option, and if the borrower is denied, the specific reasons for the denial Evaluate timely appeals submitted by borrowers Refrain from beginning or completing the foreclosure process in certain

circumstances, when a borrower is being evaluated for loss mitigation options.


Loss Mitigation Procedures § 1024.41

Section applies to closed-end first and second mortgages on principal residences Exemptions for: Reverse mortgage transactions “Qualified Lenders” (subject to Farm Credit Administration regulations)

Small servicers are generally exempt from loss mitigation requirements, except a small servicer may not: Make the first notice or filing required for foreclosure unless:

the borrower is in their 121st day of delinquency; The foreclosure is based on a borrower’s violation of a due-on-sale clause; or The servicer is joining the foreclosure action of a superior or subordinate lienholder

Make the first notice or filing required to foreclose or move for foreclosure judgment or order of sale, or conduct a foreclosure sale, if a borrower is performing pursuant to a loss mitigation agreement


Loss Mitigation Procedures: Dual Tracking Ban

A servicer (including a small servicer) is prohibited from making “first notice or filing” unless a borrower is more than 120 days delinquent “First notice or filing” includes: If judicial foreclosure, first document filed with the court (e.g., a complaint, petition,

order to docket, notice of hearing); If a non-judicial foreclosure, the first recorded or published document; If not otherwise covered by above, the first document that schedules the sale date

(CFPB clarified that state law pre-foreclosure notices are not “first notices” even if later attached to the complaint)

An exemption exists from foreclosure referral ban when: (1) the foreclosure is based on the borrowers’ violation of a due-on-sale clause, or (2) the servicer is joining a subordinate lienholder’s foreclosure


Loss Mitigation Procedures: Application

A loss mitigation application can be written or oral A “prequalification” is a loss mitigation application A loss mitigation application is complete if the borrower submits all information required

within the borrower’s control The servicer has flexibility to establish its own application requirements and to decide the type and

amount of information it will require Provide written notice to the borrower within 5 days of receiving the application,

acknowledging receipt of the application and stating that you have determined the application is either complete or incomplete “Facially Complete”: If in the course of evaluating the loss mitigation application

submitted by borrower, the servicer determines that additional information is required, the servicer must promptly request the additional information from the borrower Must treat as “complete” for purposes of “dual tracking” ban The 30 day evaluation period is not triggered until the application is actually complete


Loss Mitigation Procedures: Incomplete Applications

A servicer must exercise reasonable diligence in obtaining documents and information to complete a loss mitigation application

If incomplete, the acknowledgement notice must state the additional documents and information the borrower must submit to make it complete and a reasonable date by which the borrow should submit such documents and information

The “reasonable date” must be no later the earliest of: The date by which any document or information submitted by a borrower will be considered stale or invalid pursuant to

any requirements applicable to any loss mitigation option available to the borrower; The date that is the 120th day of the borrower’s delinquency; The date that is 90 days before a foreclosure sale; The date that is 38 days before a foreclosure sale

The rule generally prohibits a servicer from offering a loss mitigation option based upon an evaluation of an incomplete application. Exceptions include: If incomplete for a “significant period of time,” may evaluate for other loss mitigation options; Offering loss mitigation without reviewing incomplete application; Short term forbearance (6 months)


Loss Mitigation Procedures: Acknowledgement

If a servicer receives a loss mitigation application 45 days or more before a foreclosure sale, a servicer must: Promptly upon receipt of application, review the application to determine if

application is complete; and Send borrower an acknowledgment notice within 5 days (excluding public holidays

and weekends) after receiving the loss mitigation application that the servicer has determined that the loss mitigation application is either complete or incomplete.

If incomplete, the acknowledgement notice must state the additional document and information the borrower must submit to make it complete


Loss Mitigation Procedures: Evaluation

If a servicer receives a complete loss mitigation application more than 37 days before a foreclosure sale, then, within 30 days of receiving the application, a servicer must: Evaluate the borrower for all loss mitigation options available to the borrower

(offered by an owner or assignee of borrower’s mortgage loan); and Provide the borrower with a written notice of which loss mitigation options, if any, it

will offer to the borrower “All loss mitigation options” include home retention and non-home retention

options (short sales/DILs) A servicer can evaluate borrowers based on owner/assignee’s loss mitigation

hierarchy


Loss Mitigation Procedures: Denials of Loan Mods

If a borrower’s complete application is denied for any trial or permanent loan modification, the servicer must state in its written notice the specific reason(s) for the servicer’s determination for each modification outcome. Must disclose the actual reason for denial. If denial arises because of investor requirement, identify owner/assignee and specify

the requirement If NPV triggered denial, must include inputs for NPV calculation If there is a loss mitigation hierarchy, must tell borrower that option below the

approved option have been denied

May include information in adverse action notice under ECOA or FCRA notice


Loss Mitigation Procedures: Appeal Process

If a servicer receives a complete application 90 days or more before a foreclosure sale (or before first noting or filing of foreclosure), servicer must permit borrower to appeal loan modification denial A borrower must be given 14 days from receiving denial notice to appeal. Appeals must be decided within 30 days by different personnel than those

responsible for the initial decision Must send borrower a notice explaining the determination No further appeal


Loss Mitigation Procedures: Borrower’s Decision

Deadlines for borrower to accept or reject the offer or appeal (if applicable): 14 days if the complete application is received 90 days or more from the foreclosure

sale. 7 days if the complete application is received less than 90 days but more than 37 days

before the foreclosure sale. If a borrower appeals the denial of a loan modification, the borrower gets at

least 14 days from receiving appeal notice from servicer. If borrower does not satisfy the servicer’s requirements for accepting a trial

modification, but submits the trial payment within deadline established above, servicer must provide a “reasonable period of time” to fulfill obligations


Policy & Procedures Requirements (§ 1024.38)

Small servicers are exempt A servicer must maintain policies and procedures (P&P) that are reasonably

designed to manage information and documents and achieve certain objectivesWhether P&P are reasonable will be judged in light of the size, nature, and

scope of the servicer’s operationA private right of action does not exist


Policy & Procedures Requirements:

P&P must be reasonably designed to ensure that the servicer can: Provide timely and accurate information to consumers, including successors in interest Properly evaluate loss mitigation applications Facilitate oversight of, and compliance by, service providers Facilitate transfer of information during servicing transfers Inform borrowers of the written error resolution and information request procedures

Requires a servicer to retain records that document actions taken with respect to a borrower’s loan until 1 year after date loan is discharged or servicing transferred

Servicer must maintain a “servicing file,” in a manner that allows the servicer to compile the following documents within 5 days: Schedule of transactions credited or debited to loan account, include escrow and suspense accounts; Copy of security instrument; Servicer notes reflecting communications with the borrower about the loan; If applicable, a report of the data fields relating to the borrower’s mortgage loan account created by servicer’s

electronic systems; and Copies of any information or document provided by borrower to servicer in accordance with notice of error or loss

mitigation procedure provisions


Successors in Interest

Definition: “Successors in interest” are certain persons who inherit or otherwise receive an ownership interest in property. Successors in interest can include persons who acquire their interest in the property upon death of a borrower or in a divorce, as well as transfers from a spouse or from a parent to a child A confirmed successor in interest is a “borrower,” for purposes of Regulation

X, and a “consumer,” for purposes of Regulation Z Thus, a servicer must comply with the application provisions of the

Regulation X and Z mortgage servicing rules with respect to a confirmed successor in interest


Successors in Interest: P&Ps

Servicers need to maintain P&Ps that are reasonably designed to ensure the servicer can: Promptly facilitate communication with any potential or confirmed successors in

interest regarding a property securing a mortgage loan Promptly determining what documents you reasonably require to confirm the

person’s identity and ownership interest in the property. Promptly notify the person, upon receipt of such documents, that you have

Confirmed the person’s status as a successor in interest, or Determined that additional documents are required Determined that the person is not a successor in interest.


Successors in Interest: P&Ps (cont.)

Small Servicers: There is no general exemption from the successor in interest requirements for small

servicers However, small servicers are exempt from the requirement to adopt servicing policies,

procedures, and requirements Small servicers are required to respond to certain written requests from potential

successors in interest as there is no small servicer exemption for information requests


Interaction of the Servicing Rules with UDAAP

The Dodd-Frank Act vested the CFPB with the power to prevent a covered person or service provider from committing or engaging in a UDAAP in connection with any transaction with a consumer for a consumer financial product or service, or the offering or a consumer financial product or service The Dodd-Frank Act further empowered the CFPB to prescribe rules

identifying unlawful UDAAPs, [which may include requirements for the purpose of preventing such acts or practices]


UDAAP

The obligation to avoid UDAAPs under the Dodd-Frank Act is in addition to any obligation that may arise under the mortgage servicing rules Intent is not required to violate UDAAP, only an action or inaction that

occurs. But if actions violate UDAAP and you intended to deceive people, then the penalties for violations can be more severeGenerally, when the Bureau identifies a violation of a substantive law

or regulation, within its jurisdiction, it also brings a corresponding UDAAP claim


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