Bankruptcy - What is a CFPB Mortgage Servicer and How Does it Work?

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1 Impact of the CFPB Mortgage Servicing Rules on Your Bankruptcy Practice Thomas E. Hoffman John Rao National Consumer Law Center 2013

2 CFPB Mortgage Servicing Rules Dodd-Frank Act of 2010 amended RESPA and TILA to include servicing requirements CFPB issued new mortgage servicing regulations in Feb Regulations will become effective January 10, 2014 Servicing requirements are applicable when a borrower is in bankruptcy

3 CFPB Mortgage Servicing Rules CFPB states the Rules are: aimed at tackling two underlying servicing problems: lack of transparency and lack of accountability two key objectives are to prevent consumers from being caught off guard and surprised by mortgage servicers and provide special protections for consumers who are struggling to make their payments CFPB website:

4 Small Servicer Exemption Servicers that qualify as small servicers are exempt from certain parts of the Servicing Rules Small Servicer is an entity that either: together with any affiliate, services 5,000 or fewer mortgage loans, and it (or an affiliate) are the creditor or assignee for all of them is a Housing Finance Agency, as defined in 24 CFR (Sec (e)(4)(ii))

5 Error Resolution and Information Requests New regime: separate qualifications and procedures for notice of error and request for information Servicer is required to respond to any written request for information with respect to the borrower s mortgage loan Error must fall within one of ten listed categories, plus catchall category for any other error related to the servicing of borrower s mortgage loan

6 Servicer Obligations 5 business days (20 days before Jan. 10, 2014) acknowledge error notice or information request, or take requested action 30 business days (60 days before Jan. 10, 2014) correct borrower s account, or after conducting a reasonable investigation, provide borrower written explanation as to why servicer believes account is correct, or provide borrower with requested information or explanation why information is unavailable.

7 Identity of Mortgage Loan Owner Dodd-Frank Act requires servicer to respond within 10 business days to request for identity, address, and other contact information about owner or assignee of loan Final rule treats as request for information but provides 10 day rather than 30 day response time limit Reg. X (d)(2) No extensions permitted to response time limit

8 Force-Placed Insurance Before charging for force-placed insurance, servicer must : reasonably believe borrower failed to comply with contract requirement to maintain insurance send two notices to borrower requesting proof of insurance first notice at least 45 days before charging borrower second notice no earlier than 30 days after first notice and at least 15 days before charging borrower Servicer must terminate force-placed insurance within 15 days after receiving proof of coverage and refund premiums for period when both policies in effect

9 Force-Placed Insurance Final rule requires servicer to pay the borrower s existing insurance policy, if there is an escrow account, except if servicer has reasonable basis to believe: that the borrower s insurance is being canceled for reasons other than nonpayment, or the property is vacant. FPI charges must be for services actually performed and have reasonable relationship to cost of providing the service

10 Early Intervention No later than 36th day of delinquency, servicer must make good faith effort to establish live contact with the borrower No later than 45th day of delinquency, servicer must provide borrower with written notice containing information about available loss mitigation options servicer is not required to give this notice more than once during any 180-day period

11 Continuity of Contact Servicer must have policies and procedures reasonably designed to ensure that: a single person or a team of personnel is assigned to borrower no later than 45 th day of delinquency assigned personnel are available by telephone to respond to the borrower s inquiries and assist with available loss mitigation options assigned personnel provide the borrower with accurate information about available loss mitigation options, including actions needed to complete an application, time deadlines, status of borrower s application, and foreclosure referrals

12 Loss Mitigation Procedures If loss mitigation application received more than 45 days before foreclosure sale, servicer must within 5 business days provide written notice to borrower, either: acknowledging that application is complete, or describing documents and information needed If complete loss mitigation application received more than 37 days before sale, servicer must within 30 days: Evaluate borrower for all loss mitigation options and provide borrower with written notice of decision If denial of loan mod., written notice shall include specific reasons for the servicer s decision for each option available to the borrower, and information about appeal rights

13 Dual-Tracking Provisions Servicers must not make first notice or filing required for foreclosure process until mortgage loan is more than 120 days delinquent If borrower submits complete application during 120-day period or before servicer has made first notice or filing, a servicer shall not make first notice or filing to initiate the foreclosure process This provision ( (f)(1)) preempts state foreclosure timelines to the extent they allow an earlier commencement of foreclosure

14 Dual-Tracking Provisions If borrower submits complete application after first notice or filing but more than 37 days before a foreclosure sale, servicer may proceed with foreclosure process, but shall not move for foreclosure judgment or order of sale, or conduct sale, until decision given or borrower rejects offer or fails to perform Prohibition includes making a dispositive motion, such as motion for default judgment, judgment on pleadings, or summary judgment, which may directly result in a foreclosure judgment or order of sale

15 Application in Bankruptcy CFPB declined requests to create blanket bankruptcy exemptions, noting that a borrower could have filed for bankruptcy but still be eligible for loss mitigation As to early intervention, Comment 39(c) 1 clarifies that a servicer is not required to communicate with a borrower in a manner inconsistent with applicable bankruptcy law or a court order in a bankruptcy case, and that the requirements may be adapted As to continuity of contact, Comment 40(a) 2 explains that servicer may assign personnel with specialized knowledge in bankruptcy law to assist the borrower

16 RESPA Remedies Actual Damages, Costs and Attorney s Fees Must plead actual damages to avoid 12(b)(6) dismissal Includes emotional distress damages Statutory Damages Up to $2,000 per violation if pattern or practice of noncompliance Capped in class actions at $1 mil. or 1% of servicer net worth, whichever is less

17 Servicers Duties under TILA Promptly Credit Payments Provide Periodic Mortgage Statements Provide Payment Change Notices Provide Payoff Statements Provide Transfer of Ownership Notices

18 Prompt Crediting of Payments Servicer must credit periodic payment upon receipt, unless: no charge to consumer, and no negative credit reporting; or borrower doesn t follow instructions about how to pay No small servicer or bankruptcy exemption [w]hile the Bureau understands the requirement that the pre-petition and post-petition accounts must be kept separate during a bankruptcy, the Bureau believes that if sufficient funds accrue in either account to make a periodic payment due, those funds should be applied.

19 Periodic Statements Servicer must send statement for each billing cycle with the following categories of information: amount due for the billing period explanation of amount due including fees imposed past payment breakdown transaction activity partial payment information contact and account information, and delinquency information, if applicable Disclosure required of payments servicer decides to hold in suspense account rather than apply to account

20 Periodic Statements Exemptions from coverage: fixed rate mortgages if substantially similar information provided on coupon book But if borrower is more than 45 days delinquent, servicer must provide delinquency information separately in writing, including an account history for the delinquency period mortgage loans that are serviced by small servicers (servicers that service 5,000 or fewer mortgage loans of which servicer or affiliate is creditor or assignee) and state housing finance agencies reverse mortgages and timeshare plans open-end home loans such as HELOCs

21 Periodic Statements No bankruptcy exemption CFPB found that complexities of bankruptcy scenario necessitate that periodic statement information be provided rule allows servicers to make changes to statement, so as to reflect payment obligations of the debtor in bankruptcy No default exemption regulation is silent on when requirement terminates servicers may argue statements required only when payment is due for a billing cycle but regulation contemplates that statement provided even if borrower more than 45 days delinquent

22 Payment Change Notices For ARMs, notice must be provided between 210 and 240 days before first payment is due after first rate adjustment Notice also must be sent between 60 and 120 days before payment at new amount is due when payment change is caused by a rate adjustment CFPB found no conflict with 21 day payment change notice requirement in Bankr. Rule (b) sending TILA notice earlier than required under bankruptcy law enhances consumer protection by providing these consumers with additional time to adjust to an increase in their mortgage payments.

23 Payoff Statements Payoff statements must be sent within 7 business days after written request received Reg. X (a) - servicers need not treat request for payoff balances as RESPA request for information RESPA ban on servicer fees for response to information requests does not apply Rule applies to all loans secured by a consumer s dwelling, including open-end loans (HELOCs) and reverse mortgages

24 TILA Remedies Actual Damages, Costs and Attorney s Fees Statutory Damages: twice the finance charge, up to $4,000 for closed-end mortgage violations, effective July 30, 2009 Statutory damages are not available for violations involving the periodic statement requirement TILA 1640 refers to creditor, which is typically the loan originator