CFPB Mortgage Servicing Transfers

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1 PwC s CFPB Mortgage Servicing Standards Perspectives Issue 9/October 2014 CFPB Mortgage Servicing Transfers Mortgage Servicing Transfer Bulletin: The revised CFPB guidelines should be a key chapter in your transfer playbook Introduction This newsletter represents the 9th in a series of publications offering perspectives on the Consumer Financial Protection Bureau s (CFPB) Mortgage Servicing Standards. This edition explores planning considerations in light of CFPB bulletin , which was published on August 19, 2014 and provides additional guidance related to mortgage servicing transfers. Overview According to CFPB bulletin , servicers engaged in mortgage servicing right (MSR) sales or acquisitions (including sub-servicers) should be aware that the CFPB may require them to demonstrate that they are taking appropriate measures to facilitate an effective transfer process and mitigate customer impact. One of the cornerstones of an effective transfer program is a well-documented action plan. An effective action plan can support the integrity of information in transit and avoid adverse impacts to customers as a result of transfer execution. For example, a tool such as a Transfer Playbook can help mitigate key compliance and execution risks, and can enable a servicer to readily produce a formal written plan, which the bureau may request at any time during the transfer, as described in the new bulletin. Building on a bulletin issued in 2012, the new, refreshed bulletin draws from lessons learned overseeing 2013 and 2014 transfer activity in the industry and more clearly defines expectations for transferor and transferee. As noted in the summary table below, areas of focus highlighted in the bulletin include: Measures taken to facilitate the transfer of loans in active loss mitigation Monitoring adherence to the new servicing standards throughout the transfer process Installing due diligence protocol to support data quality and completeness Creating an effective borrower strategy This article provides an overview of the updated guidance, compliance considerations and overall thoughts for implementing an effective transfer program. CFPB bulletin key takeaways Policies and procedures New servicing rules Consumer protection Written servicing transfer plans Ensure that transfer specific policies and procedures have been developed Install process to support timely, complete, and accurate transfer of data and documents Understand the linkage between the new servicing rules and the transfer process Loss mitigation in process continues to be a prevalent theme Understand the linkage between consumer protection legislation and the transfer process Bulletin highlights compliance with the Fair Credit Reporting Act (FCRA), the Fair Debt Collection Practices Act (FDCPA), and the prohibition of Unfair, Deceptive, or Abusive Acts or Practices (UDAAPs) Ensure that a robust Compliance Management System ( CMS ) has been established CFPB will, at its discretion, require servicers engaged in transfers to provide a written plan detailing steps that they will take to mitigate customer impact 1 Compliance Bulletin and Policy Guidance: Mortgage Servicing Transfers, Bulletin , August 19, 2014.

2 Trends & Perspectives on the impacts of CFPB Mortgage Servicing Standards Mortgage Servicing Transfer Perspectives 2 CFPB transfer requirements: Focus on loss mitigation and customer service Among other measures that servicers should consider, the bulletin highlights two areas: loss mitigation and customer service protocol. Loss mitigation The handling of loss mitigation applications and approved plans may be heavily scrutinized as the bureau has stated that there is a heightened risk inherent in transferring loans in loss mitigation. 1 That assessment is based on previous CFPB examination results, including findings of servicers: These are just a few examples of many loss mitigation pitfalls that heighten the risk of a regulatory violation. Refer to Figure 1 for additional considerations. Figure 1: Common pitfalls when transferring loans in active loss mitigation Failing to identify modifications (trial or permanent), Failing to honor modifications from previous servicers, Offering another modification with inferior terms. To help mitigate the risk of adverse impacts to borrowers during transfer, certain servicer actions have been identified as pre-requisites to any major transfer. For example, servicers are expected to flag all loans in a loss mitigation status and provide workout information to the new servicer prior to boarding (e.g., mod terms, trial status, etc.) An effective strategy can support the new servicer s preparation efforts, which is critical to facilitate active loss mitigation hand-off. Another area specifically highlighted in the bulletin is workout evaluation. The bureau indicates it will scrutinize workout evaluations that take longer than 30 days from the date that the original servicer received a complete application. Ineffective document hand-off Programs offered by the seller but not the buyer Uncoordinated borrower solicitation in advance of the transfer Loss Mitigation Pitfalls Poor pipeline Trial modifications based on internal logic Customer service Customer service should also be a priority when developing transfer protocol. Negative customer experience can heighten operational costs (increased call volume and complaints), increase regulatory scrutiny, and have adverse reputational consequences. Common themes mentioned in the bulletin include: seamlessly transferring borrower information so that the new servicer does not contact borrowers for redundant requests; properly recognizing borrowers loan statuses (e.g., loss mitigation) and providing appropriate treatment before, during and after the transfer; and honoring all prescribed timelines and actions regardless of whether they were initiated with the previous servicer. A robust execution and strategy can mitigate confusion during the transfer process and support consistent and fair treatment from the borrower perspective. Figure 2: Customer point of view across the transfer process Goodbye Letters Drop T-10 T+45 Unsure, seeking general info and process reassurance new servicer intro, transfer explanation, etc. T-15 Have had time to read the goodbye letter, now seeking more specifics account info, payment guidance, contact info, etc Expect that the new servicer has access to account information Concern around payment channels / timeline posting T+10 Noticing servicing differences (statements, selfservice options, etc.) Possibly missed a payment during transfer confusion New escrow analysis may result in higher payment Noticing fee differences T+65 The customer has a voice. Predict information needs at each phase of the transfer and tailor approach/resource availability accordingly.

3 Trends & Perspectives on the impacts of CFPB Mortgage Servicing Standards Mortgage Servicing Transfer Perspectives 3 Transfer requirements: In-depth While the CFPB bulletin does not present a new rule, it expands on previous guidance and incorporates the new servicing standards which became effective in January Transferor responsibilities Contracts requiring transferor to provide all documents/information at loan boarding Tailored transfer instructions Protocols to evaluate compatibility of systems Post-transfer QC Batch transfer requirements/contingency plan Error resolution Obligated to respond to Notice of Errors or information requests up to one year post-transfer Figure 3: Effective planning outcomes Does your organization have a plan? Governance Communication Execution A robust action plan goes to the heart of a successful and secure transfer. Action plans should clearly demonstrate roles, responsibilities, timelines and contingency planning. It is key for stakeholders from across the enterprise to know how and when to engage the transfer team. This will support a more seamless transition from the borrower perspective while promoting operational effectiveness before, during and after the transfer for the transferee and transferor. While there are some actions targeted toward the transferor or transferee; the guidance implies that both servicers involved in a servicing transfer have a shared responsibility in managing loss mitigation procedures to ensure prompt and proper with borrowers. Many of the Transferee responsibilities Post-transfer process validating functionality of new data and ability to identify/remediate errors Labeling and leveraging transfer information correctly before reaching out to borrowers Post-transfer QC Regular with transferor and remediate within reasonable time ( and remediation strategies) Error resolution Notice of Errors and information requests must comply with requirements and timeframes even if alleged errors occurred under previous servicer Forced-placed insurance Force placing a new policy can be done only if there is a reasonable basis for concluding the borrower has failed to maintain hazard insurance and proper notifications are sent in a timely manner Notices do not need to be resent if the transferor has sent the notices; however the new servicer must ensure the notices have been sent Early intervention Regardless of whether delinquency began with previous servicer, the new servicer must: Ensure good faith efforts of making live contact after 36 days of delinquency for each billing cycle Ensure adherence to the 45 day written notice requirement Continuity of contact Identify those borrowers that are 45 days past due and assist at loan boarding Provide all borrowers with accurate information, including loss mitigation (LM) applications initiated at previous servicer Have immediate access to borrower s records, documents and information that borrower may have provided to previous servicer Provide delinquent borrowers with contact numbers (e.g., welcome letter, early intervention letters) actions required relate to the transferor s ability to timely and accurately transmit information and the transferee s ability to accept and act on that information to ensure a seamless process from the perspective of the borrower. Transferor responsibilities Flag all loans with pending loss mitigation applications and approved loss mitigation plans to ensure a seamless flow of this information from system to system Transferee responsibilities Require that transferor supply a detailed list of loans with LM applications and approved plans Require that LM loans be provided pre-transfer Require that documentation for loans with LM applications or approved plans be transferred pre-boarding Ensure receipt of information around borrower discussions, including LM documents Determine if partial payments received from borrowers are actually reduced payments under a modification

4 Trends & Perspectives on the impacts of CFPB Mortgage Servicing Standards Mortgage Servicing Transfer Perspectives 4 Shared responsibilities Servicers must ensure that all applicable loss mitigation information was sent to the transferee by the date of transfer. The transferor is responsible for sending timely and correct information, while the transferee is responsible for acknowledging receipt of the information and taking appropriate action as to the relevant accounts. The CFPB has specifically called out the following information that should be transferred by the transfer date, including: Before loss mitigation offer is accepted by a borrower Servicer should be aware of all applicable loss mitigation notices and when they were sent (e.g., acknowledgment notices, notices stating the servicer s determination of which loss mitigation options it will offer to the borrower on behalf of the owner or assignee of the mortgage loan, denial notices) All documents and information submitted by a borrower to be evaluated for loss mitigation options Documents and information sufficient to show whether: An application was completed and whether the date received is documented Documentation provided by borrower constitutes a complete application Evaluation was completed and borrower was notified of outcome Borrower was denied for LM option Appeal for denial was filed, and if so, what is the status of the appeal Foreclosure sale is pending with scheduled sale date, and whether borrower submitted LM application 37 days before the sale date Instructions were sent to/from foreclosure counsel to ensure compliance with all foreclosure sale prohibitions After a borrower accepts a loss mitigation offer Servicer should maintain documents and information sufficient to show the borrower s acceptance of the offer and whether the borrower is performing in accordance with the terms of the offer. Examples of loss mitigation agreements include: Trial and permanent loan modification agreements Forbearance agreements Short sale agreements/deed-in-lieu of foreclosure PwC s approach to managing servicing transfers As described in greater detail in our February 2014 publication, Mortgage servicing/subservicing transfers: understanding and managing the hidden operational challenges, transferors and transferees that have traditionally proved to be most effective at managing transfer related challenges are those that have a proper governance structure. Refer below for tactical considerations to implement a governance structure. Figure 4: Building a successful transfer Building a successful transfer Transfer experience and planning Enterprise-wide collaboration Defined organizational structure Effective strategies Characteristics of a successful transfer Transfer success drivers Executive sponsorship Dedicated resources & transfer champions Structured protocol Issue management Timely issue identification & resolution Seamless transfer of loan data Coordinated borrower approach Roles & responsibilities Cross-functional escalation channels Reduced exposure (financial, operational, regulatory, reputational) Governance

5 Trends & Perspectives on the impacts of CFPB Mortgage Servicing Standards Mortgage Servicing Transfer Perspectives 5 Characteristics of an effective governance structure include: Clear roles, responsibilities, accountability, strategies, and objectives Dedicated resources Stakeholder identification Structured protocol Clear issue management and escalation channels Standardized status reporting supported by detailed project plans Executive sponsorship Active stakeholder involvement Resources with servicing transfer experience Conclusion The August transfer bulletin demonstrates the CFPB s continued commitment to providing servicing transfer oversight. Servicers engaged in the transfer of servicing responsibilities should consider utilizing the framework presented in the bulletin to develop a transfer plan. Key components of that plan should include: transfer specific policies and procedures across the organization, a servicing transfer regulatory matrix with an explanation of the activities taken to support compliance (RESPA, TILA, Regulation Z, FCRA, FDCPA, etc.), and a detailed customer plan highlighting protocol and the steps taken to facilitate a positive customer experience and minimize impact. When developing a customer approach, it is important to remember that a borrower s questions and expectations will change based on: PwC Consumer Finance contacts A robust governance structure is essential to provide leadership, consistency and accountability throughout the entire transfer process. The key activities to implement a governance structure include: Identify business units that should be involved Assign dedicated representatives from each business unit Clearly define roles and responsibilities and set delivery expectations Implement oversight cadence (internal and external) The size and complexity of the transferring portfolio will likely dictate the frequency and duration of internal and external touchpoints. However, it s typically more effective to establish robust governance early in the transfer process. Governance cadence can be adjusted if necessary as loans are transferred and the various departments become more comfortable with their responsibilities and establish relationships with their contacts at the counterparty. Delinquency the customer approach should consider unique needs that delinquent borrowers may have; particularly borrowers that are actively pursuing a loss mitigation option. Transfer lifecycle phase borrower questions and expectations will evolve from receipt of the prior servicer s goodbye letter through transfer and into post-transfer. The items outlined in the CFPB bulletin should be thought of as an important element of a broader transfer program. There are a number of other considerations about which both transferor and transferee should be aware. Refer to our February 2014 publication, Mortgage servicing/subservicing transfers: understanding and managing the hidden operational challenges, for additional thoughts about how to facilitate an effective transfer. PwC Regulatory contacts Roberto Hernandez Principal [email protected] Anthony Ricko Managing Director [email protected] Joseph Ruppert Manager [email protected] Bruce S. Oliver Director [email protected] Mike Davies Manager [email protected] Follow us on 2014 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.