A. ABA Supports the CFPB s Ongoing Efforts to Clarify the Rules

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1 Robert R. Davis Executive Vice President Mortgage Markets, Financial Management & Public Policy (202) Ms. Monica Jackson Office of the Executive Secretary Consumer Financial Protection Bureau 1700 G Street N.W. Washington, D.C Re: Docket No. CFPB ; RIN 3170-AA37 Amendments to the 2013 Mortgage Rules Under the Equal Credit Opportunity Act (Regulation B), Real Estate Settlement Procedures Act (Regulation X), and the Truth in Lending Act (Regulation Z) Dear Ms. Jackson: The American Bankers Association ( ABA ) 1 is pleased to comment on the Consumer Financial Protection Bureau s ( CFPB or the Bureau ) July 2, 2013 request for comment on proposed amendments to the CFPB s mortgage servicing rules. 2 The proposed revisions address the loss mitigation, error resolution, and information request provisions of the CFPB s mortgage servicing regulations and corresponding commentary. The proposal also addresses the small creditor exemption from the requirement to establish an escrow account for higher-priced mortgage loans. In the same proposal, CFPB also requested comment on (1) the determination of debt and income for purposes of originating qualified mortgages; (2) application of the loan originator compensation rules to bank tellers and similar staff; and (3) the prohibition on creditor-financed credit insurance. ABA s comments on these issues are addressed in a separate comment letter. I. ABA Position A. ABA Supports the CFPB s Ongoing Efforts to Clarify the Rules ABA appreciates the CFPB s efforts to clarify its mortgage servicing regulations and staff commentary. Our members have identified many interpretive and operational questions regarding the CFPB s servicing rules, including several issues regarding the loss mitigation provisions that are the subject of this rulemaking. We appreciate the CFPB s efforts to provide guidance on these matters. It is important that the Bureau provide needed clarity as banks work to revise their policies, processes, and information technology capabilities to comply with the 1 The American Bankers Association represents banks of all sizes and charters and is the voice for the nation s $14 trillion banking industry and its two million employees. The majority of ABA s members are banks with less than $185 million in assets. Learn more at aba.com Fed. Reg (July 2, 2013).

2 Page 2 new servicing rules. Our specific comments address loss mitigation applications, short-term forbearance, and the 120-day rule. While we fully support the CFPB s work to clarify the servicing rules, we are concerned that the proposal s expedited comment period 3 did not provide sufficient time for bankers to thoroughly analyze all aspects of the proposal and its potential impact on their loss mitigation efforts, foreclosure procedures and capital allocations, as well as the proposal s relationship to State property and consumer protection laws. Banks are focused on managing their implementation efforts for all of the new mortgage origination and servicing rules scheduled to take effect in January For small and mid-size banks, this left little time and resources for reviewing and commenting on this second set of proposed amendments and clarifications to the servicing rules. As a result, silence on certain aspects of this proposal does not imply that banks support those provisions or that they determined that those provisions will have no impact. B. Need for Extension of the Effective Date Despite the additional guidance that the proposed amendments may provide, we remain concerned that full compliance by the January 2014 effective date is unrealistic. The CFPB s rules establish a brand-new, cradle-to-grave regulatory framework for mortgage lending. The drafting and implementation of these new rules involve monumental change in a short timeframe for bankers and regulators alike. For the reasons explained below, we request that CFPB delay the effective date of the new rules by 12 months. We believe that a temporary delay is a common-sense approach that will give banks a meaningful opportunity to fully implement the new rules, as well as the ongoing revisions to the rules, before the new legal and regulatory liabilities for non-compliance take effect. Rulemakings Are Ongoing. The effective date of the servicing rules and other mortgage-related regulations is less than six months away, yet the CFPB s rules and commentary continue to 3 The proposal was published in the Federal Register on July 2, 2013, which provided a 20-day comment period that included the July 4 th holiday. However, CFPB provided a link to the proposal on its website on June 24, 2013.

3 Page 3 evolve. Since January 2013, the CFPB has issued a combined total of 21 proposed and final rules associated with the mortgage reform rulemaking process. 4 CFPB should ensure that its regulations are truly final within a timeframe that provides banks with sufficient opportunity to thoroughly analyze and fully comply with the rules prior to their effective date. Our request for a delay is further supported by the fact that the January effective date also applies to several requirements that are not part of Dodd-Frank, such as the servicing rule s loss mitigation provisions and 120-day foreclosure prohibition, both of which the CFPB proposes to amend or clarify as part of this proposal. 5 ABA believes that a temporary delay is warranted given the significant operational and legal implications of the rules that are not required by Dodd-Frank and the fact that adjustments to these discretionary rulemakings are ongoing. Mortgage Implementation Survey. Compliance with many aspects of the servicing rules is contingent upon the development, customization, and implementation of information technology projects, including software, programming, and interfaces. In June 2013, ABA surveyed senior mortgage executives of member banks to learn more about their overall mortgage implementation efforts and the progress that their vendors have made in delivering technology projects related to implementation of the new mortgage rules. 6 Below is a summary of key data points from our survey. Vendor Preparedness. Multiple aspects of the servicing rules will require banks to implement new software and computer systems; overhaul policies, procedures, and processes; 4 Below is a list of key proposed and final rules that are part of the CFPB s mortgage implementation initiative. 1/22/13 Final rule: Escrow 1/30/13 Final rule: Ability-to-Repay and Qualified Mortgages 1/30/13 Proposed rule: Qualified Mortgages (non-profit creditors, small creditor portfolio loans) 1/31/13 Final Rule: HOEPA 1/31/13 Final Rule: Appraisal (disclosure and delivery requirements) 2/14/13 Final Rule: Servicing (TILA) 2/14/13 Final Rule: Servicing (RESPA) 2/15/13 Final Rule: Loan Originator Compensation 2/31/13 Final Rule: Appraisals for Higher-Priced Mortgage Loans (Interagency rulemaking) 4/18/13 Proposed Amendments: Escrow (rural and underserved) 5/2/13 Proposed Amendments: Servicing (preemption, small creditor exemption) 5/2/13 Proposed Amendments: Qualified Mortgages (GSE exception, QM DTI) 5/23/13 Final Rule: Amendments to Escrow (rural and underserved) 5/31/13 Delay in effective date of prohibition on financing of credit insurance premiums on certain loans 6/12/13 Final Rule: Amendments to Qualified Mortgage (non-profit creditors, small creditor portfolio loans, balloons) 7/2/13 Proposed Amendments: Servicing (loss mitigation, error resolution, and information requests) 7/2/13 Proposed Amendments: Escrow (rural and underserved) 7/2/13 Proposed Amendments: Loan Originator Compensation (bank tellers and similar staff) 7/2/13 Proposed Amendments: Qualified Mortgages (determination of DTI) 7/10/13 Final Rule: Servicing (preemption, small servicer exception, preamble guidance on ARM disclosures) 7/10/13 Final Rule: Amendments to Qualified Mortgage (GSE exception, DTI) TBD Final Rule: Servicing (loss mitigation, error resolution, and information requests) TBD Final Rule: Escrow (rural and underserved) TBD Final Rule: Loan Originator Compensation (bank tellers and similar staff) TBD Final Rule: Qualified Mortgages (determination of DTI) 5 To mandate these additional requirements, the CFPB asserted discretionary regulatory authority pursuant to sections 6(j), 6(k), and 19(a) of RESPA. 6 The Member Survey on Implementation of the New Mortgage Rules ( Mortgage Implementation Survey ) had the participation of 187 banks. Approximately 72 percent of participating institutions had assets of less than $1 billion in assets.

4 Page 4 train staff; and test these changes for quality assurance. 7 absent a final vendor product. Many of these steps cannot occur 53% of respondents stated that their vendor(s) have not provided information on when they will provide all completed software and programming updates to the bank; 7% of banks anticipate receiving vendor products in September-October 2013; and 17% anticipate receiving their products during the November-December 2013 timeframe. For institutions that will receive vendor products over time (as opposed to all at once), 47% stated that their vendor has not provided information on when it will deliver the first installment of the project; 15% anticipate receiving the first installment during September-October 2013; and 6% anticipate receiving the first installment during the November-December 2013 timeframe. Integration. Even after the vendors finally release their deliverables, banks must adjust and test the vendor product. Our survey inquired about the amount of time that banks anticipate that it will take to fully integrate a vendor s products once they are made available to the institution. 41% of respondents expect to take 2-3 months; 22% expect to take 4-6 months; and 9% expect to take more than 6 months. The actual amount of time for financial institutions to comply is further shortened by the information technology freeze that some institutions have in place to manage existing year-end tax and reporting requirements. It may not be possible to test or revise the new mortgage servicing compliance systems during this lock down period. As a practical matter, some of our members report that the compliance deadline will be November or December, 2013 due to the annual information technology freeze. 26% of respondents reported that their institutions have a year-end blackout period on information technology changes that will impact implementation of the mortgage rules. Of those institutions with a blackout period, 56% said that the blackout would last 2-4 weeks; 32% said it would last less than 2 weeks; 12% said the blackout would last 5-8 weeks. ABA believes that the results of our survey further demonstrate the need for a delay. In fact, we believe that a limited delay of the effective date of the rules is the only option that will best assure an orderly transition to the new mortgage regulatory structure. II. Servicer Actions Prohibited During Pre-Foreclosure Review The January 2013 final rule prohibits a servicer from making the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process unless a borrower s mortgage loan is more than 120 days delinquent (the 120-day rule ). Many banks have submitted 7 See ABA s October 9, 2012 servicing comment letter to the CFPB for an in-depth discussion of this process.

5 Page 5 inquiries to ABA regarding what constitutes a first notice or filing for purposes of the CFPB s rule. To address this ambiguity, CFPB proposes to amend the commentary to the rule to clarify that a document that would be used as evidence of compliance with foreclosure practices required pursuant to State law would be considered the first notice or filing, and a servicer would be prohibited from filing such a document until a borrower is more than 120 days delinquent (the pre-foreclosure review period ). Under this approach, if State law mandates that a servicer notify a delinquent borrower of the availability of mediation and such notice is a necessary prerequisite under State law to commence the foreclosure process, that notice would be considered the first notice or filing and could not be provided until after the borrower is 120 days delinquent. Similarly, if State law requires that the first step in the formal foreclosure process is for a servicer to mail a notice of default to the borrower, such a notice must be sent after the borrower is 120 days delinquent. Foreclosure is not a desirable outcome for lenders or borrowers. But in some circumstances, a borrower will not be able to meet his or her obligation to repay a mortgage loan. In this situation, a lender will have no choice other than to foreclose. ABA appreciates the CFPB s objective of assuring that borrowers have an opportunity to be evaluated for loss mitigation options that the lender provides (if any) and to reduce borrower confusion about when foreclosure may begin. However, we are concerned that the CFPB s proposed definition of first notice or filing would work at cross-purposes with State laws that require a host of pre-foreclosure protective measures for delinquent borrowers. In addition, the proposal would extend the foreclosure timeline, which will result in accounting and capital implications for banks. We are also concerned that it will be difficult for banks to monitor and manage to the evidence of compliance with State law standard that CFPB has proposed. These impacts are particularly troubling given that the 120-day rule and the first notice or filing standard were not expressly set out for public comment in the CFPB s September 17, 2012 servicing proposal. Accordingly, we recommend that the CFPB not adopt its proposed interpretation of first notice or filing. Rather, we suggest that this term be defined as the first notice in state to begin foreclosure the complaint in a judicial state or the notice of default or first publication in a non-judicial state. A. Relationship to State Law In recent years, several states enacted additional pre-foreclosure protective measures for delinquent borrowers. These new foreclosure and consumer protection laws encourage delinquent borrowers and lenders to work together to avoid foreclosure. Laws in Massachusetts, New York, and Maryland are three examples. Other states have adopted similar requirements. Massachusetts Requires that lenders provide a cure letter that permits the borrower 150 days to cure delinquency. In certain circumstances, the cure period may be reduced to 90 days. 8 8 M.G.L. c. 244, 35A.

6 Page 6 New York Banks must provide a pre-foreclosure notice at least 90 days before commencing legal action against the borrower. The pre-foreclosure notice informs homeowners of steps they can take to avoid foreclosure, including working with the lender to identify foreclosure alternatives and consulting with a not-for-profit housing counselor. 9 Maryland A bank must provide a borrower with a Notice of Intent ( NOI ) 45 days prior to commencing a foreclosure action. The NOI must be accompanied by a loss mitigation application, information about loss mitigation programs, contact information for the servicer, information about housing counseling, and an application for mediation. 10 State laws such as these, as well as the CFPB s servicing rules, have the important objective of increasing borrower awareness about foreclosure options and assuring that servicers evaluate borrowers for the options that are available to them. However, if the CFPB adopts the amendments as proposed, State laws and CFPB regulations will actually work at cross purposes. The CFPB s January 2013 rules establish early intervention/live contact and written notice requirements that provide borrowers with information about loss mitigation and foreclosure. The CFPB proposal would require this process to begin anew in approximately 90 days for purposes of complying with these types of state laws. We believe that this would be confusing and frustrating to borrowers. We also point out that the proposal would significantly delay the foreclosure timeline. Further extending the time that lenders must wait to reach the collateral securing non-performing loans could have safety and soundness implications and could impact the availability of mortgage credit in some communities. These consequences would particularly impact community bank portfolio lenders. For example, in Massachusetts, foreclosure could not begin until a borrower is 270 days (9 months) delinquent; in New York, the loan would have to be in default for 210 days (7 months) before foreclosure commences; in Maryland, a bank could not initiate foreclosure until the loan is 165 days delinquent (approximately 5 ½ months). These dates do not take into account the impact of extended mediation processes, which can become protracted and further delay the commencement of foreclosure. 9 Real Property Actions and Proceedings Law IST=SEA182+&BROWSER=EXPLORER+&TOKEN= &TARGET=VIEW. 10 MD Code Ann., Real Prop

7 Page 7 B. Accounting and Capital Implications The proposal will also lengthen the period of time for which banks must hold heightened levels of capital against delinquent loans. This will further reduce the funds that banks could otherwise use to make loans in their communities. The proposal will increase the amount of time that many delinquent 1-4-family loans will, for call reporting purposes, be considered nonaccrual loans until the bank can perfect title. Loans are generally considered nonaccrual when, based on information and events, a bank determines it is probable that it will be unable to collect on all principal and interest amounts due according to the original contractual terms of the loan agreement. Loans are normally placed on nonaccrual status when payments are 90 days or more past due, or earlier if the timely collection interest and/or principal appears doubtful. Basel III requires a 150% risk weighting on all related nonaccrual loans, as opposed to 100% weighting for foreclosed properties (reported as Other Real Estate Owned). Since the CFPB's 120-day rule and proposed interpretation of "first notice or filing" would extend the period for a bank to perfect title, the proposed requirement will unnecessarily increase the level of capital that a bank must keep on hand. These additional capital demands could impact the availability of mortgage credit. C. Section 1022 Analysis Section 1022(b)(2)(A) of the Dodd-Frank Act requires that the CFPB consider the impact of proposed rules on financial institutions with $10 billion or less as well as the impact on consumers in rural areas. In addition, the Regulatory Flexibility Act requires the CFPB to consider the potential economic impact of its regulations on small entities. As explained above, we believe this proposed interpretation to the 120-day rule could have significant implications beyond changes to processes and procedures. Therefore, we request that the CFPB conduct a Section 1022 analysis and revisit its Regulatory Flexibility Act analysis of the impacts that the proposed interpretation of first notice or filing may have on smaller banks. III. Exceptions to 120-Day Foreclosure Ban CFPB proposes to provide exceptions to the 120-day rule s foreclosure ban in two circumstances: (1) when the foreclosure is based on a borrower s violation of a due-on-sale clause and (2) when the servicer is joining the foreclosure action of a subordinate lienholder. We agree that there should be an exception to the 120-day rule when the foreclosure is based on a borrower s violation of a due-on-sale clause and when the servicer is joining the foreclosure action of a subordinate lienholder. We do not believe that the borrower protections provided by the 120-day rule are necessary or appropriate in these circumstances. We also believe that there are other situations where exceptions to the 120 day rule are warranted, including when the property is abandoned or the borrower voluntarily surrenders the property to the lender. Blighted properties are a safety and economic concern for many states and localities across the country. It is commonly known that unoccupied properties have a heightened risk of falling into

8 Page 8 disrepair, being vandalized, and presenting health and safety issues. These conditions depress home values in the immediate neighborhood and are detrimental to the surrounding community. Several states have enacted laws to help address this problem. For example, some states require lenders to take certain actions to protect and preserve abandoned property prior to foreclosure. Other states have an expedited foreclosure process for abandoned properties. 11 The 120 day rule, together with the proposed interpretation of first notice or filing discussed above, would delay the foreclosure action in circumstances where the property is or will become vacant. This would impede state efforts to address neighborhood blight and would interfere with a lender s ability to preserve its collateral. Therefore, we request the CFPB to expand the exceptions to the 120-day rule to include abandoned properties and cases where the borrower voluntarily surrenders the property to the lender. IV. Loss Mitigation Procedures Time Period for Submission of Missing Documents Pursuant to the January 2013 rule, upon receipt of a loss mitigation application, a servicer has five days to notify the borrower whether the application is complete. Servicers must include in the 5 day notice the date by which a borrower should submit any missing documents and information necessary to make a loss mitigation application complete. The due date must be the earliest of four dates set forth in the regulation. 12 We appreciate the certainty that the January 2013 regulation provides for banks. However, our members have pointed out that this approach could negatively impact borrowers. For example, assume that a customer submits an incomplete loan modification application on the 115 th day of delinquency. Under the January rule, when the servicer sends the notification, the earliest remaining date that must be stated on the disclosure is the 120 th day of delinquency, which would give the borrower only five days to respond. To address this challenge, CFPB proposes a new approach that would require a servicer to identify a reasonable date by which the borrower should submit the missing documents and information necessary to complete the loss mitigation application. In determining what constitutes a reasonable date, CFPB would expect a servicer to (1) consider the four deadlines included in the current regulations as factors and (2) select the deadline that preserves maximum borrower rights under the rule s Loss Mitigation provisions, except when doing so would be impractical. We appreciate the CFPB s acknowledgement that facts and circumstances may dictate the need for a response date other than the four specific dates set forth in the existing rule. While it is helpful that the proposal would enable banks to continue to rely on the four dates as factors in setting a response time, we note that the reasonable date standard is a subjective term. Our members are concerned that they may be subject to regulatory criticism or second guessing or 11 See Oklahoma S.B. 798, signed into law on May 26, 2011; New Jersey S.B. 2156, signed into law December 6, 2012; Illinois S.B. 16, signed into law February 8, 2013; and Florida H.B. 87, signed into law June 7, The four deadlines are 1) 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; 2) date that is the 120 th day of the borrower s delinquency; 3) date that is 90 days before a foreclosure sale; and 4) date that is 38 days before a foreclosure sale. 12 C.F.R (b)(2)(ii).

9 Page 9 consumer complaints in the event that they establish a response date that is outside of the four factors. V. Short-Term Forbearance Under the existing rule, servicers must evaluate a borrower for all available loss mitigation options at the same time. Industry participants have inquired whether this requirement would prohibit servicers from offering forbearance prior to evaluating the borrower for longer-term loss mitigation alternatives. To address this issue, CFPB proposes to amend the regulation to permit servicers to offer a shortterm payment forbearance program to a borrower based upon an evaluation of an incomplete loss mitigation application. Under the proposal, short-term forbearance programs would allow the forbearance of payments due for a maximum of two months. Such a program would be shortterm regardless of the amount of time a servicer allows the borrower to make up the missing payments (e.g., over the next 12 payments or when the loan matures). The proposal would also require that a servicer offering short-term forbearance provide the borrower with a notice of incomplete application that contains certain information specified by CFPB. A. The Two-Month Period Is Too Restrictive We appreciate the CFPB s acknowledgement that servicers should be able to offer short-term forbearance payment plans without a complete loss mitigation application from the consumer. However, the proposed two-month limit is too restrictive. Lenders offer forbearance based on the needs and circumstances of a particular borrower. It is not uncommon for a borrower s temporary hardship to exceed the two-month period proposed by CFPB. ABA members report that their institutions may agree to forbearance ranging from a half payment or partial payment to as much as six months, depending on a borrower s situation. We also note that Freddie Mac and Fannie Mae allow short-term forbearance of up to six months. ABA recommends that CFPB align its proposal with industry and GSE standards and allow banks to provide forbearance of up to six months based on a borrower s incomplete loss mitigation application. These changes would generally allow servicers to continue to provide immediate assistance to borrowers with short-term financial hardships. The full procedural requirement of the final regulation should apply only to those consumers who need a long-term loss mitigation evaluation and solution. B. Portfolio Lenders and Forbearance Some community bank portfolio lenders do not offer extensive loss mitigation programs. 13 They do, however, provide forbearance to troubled borrowers in an effort to avoid foreclosure. We request that CFPB specify that the proposed time restriction on forbearance based on an incomplete loss mitigation application would not apply to servicers who do not offer other forms of loss mitigation. 13 The CFPB s mortgage servicing regulations do not mandate specific loss mitigation programs or outcomes.

10 Page 10 ABA is of the understanding that an application for forbearance would be considered a loss mitigation application. If a consumer submits an incomplete application to a lender that does not provide other loss mitigation alternatives, we are concerned that the lender would be precluded from considering the borrower for forbearance that extends beyond the time period that the CFPB considers to be short-term. This result would be particularly problematic if the CFPB chooses to adopt the proposed two-month time limit, as it would deny borrowers needed relief for temporary hardships lasting longer than two months. We also request that such lenders not be required to include in their notice of incomplete application certain information proposed by the CFPB, including a statement that (1) absent further action by the borrower, the servicer will not review the incomplete application for other loss mitigation options and (2) if the borrower would like to be considered for other loss mitigation options, the borrower must notify the servicer and submit the missing documents and information. These disclosures are not applicable in situations where a servicer does not have a formal loss mitigation program and they would unnecessarily confuse customers. VI. Conclusion ABA appreciates the opportunity to comment on this very important rulemaking. Should you have any questions regarding ABA s comments, please contact the undersigned or Krista Shonk at Sincerely, Robert R. Davis

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