CFPB Mortgage Servicing Standards

PwC s CFPB Mortgage Servicing Standards Perspectives Issue 5/October 2013 CFPB Mortgage Servicing Standards Understanding periodic statement rules Introduction This represents the fifth in a series of publications offering perspectives on the Consumer Financial Protection Bureau s (CFPB) Mortgage Servicing Standards. This edition covers the periodic statement requirements. 1 Despite the level of detail provided by the CFPB, there are a number of components still under discussion across the industry, including the CFPB s latest publication on October 15, 2013. 2 These areas are explored further in this article. Requirements and implications Periodic statement The CFPB has issued final mortgage servicing rules requiring servicers periodic statements (and/or coupon books for closed-end consumer credit transactions secured by a dwelling) to provide customers with greater detail and transparency around how payments are applied and how amounts due are calculated. 3 The concept of periodic statements is not new to servicers, as most servicers already provide some form of periodic statement or coupon book. Nevertheless, the requirements under the new mortgage servicing rules require making changes to existing statements and the processes that generate them. Periodic statements may be provided by mail or electronically if the consumer gives affirmative consent to receive electronic statements. The new requirements for periodic statements can be broken into three categories: (1) statements timing and coverage; (2) content and format; and (3) coupon books. 1. Statements timing and coverage: Servicers are required to send a periodic statement to customers for each billing cycle. 4 The statements should be delivered or mailed within a reasonably prompt time after the payment due date or the end of any courtesy period provided for the previous billing cycle. The CFPB defines reasonably prompt to mean delivering, emailing, or placing the periodic statement in the mail within 4 days after the close of any courtesy period provided for the previous billing cycle or, if there is no courtesy period, no later than 4 days after the payment due date. 5 Servicers are required to send periodic statements to all borrowers, except for the following: Bankruptcy borrowers. Responding to industry concerns about violating bankruptcy law, the CFPB issued a Bulletin and an interim final rule to clarify how the periodic statement requirements apply when a borrower is in bankruptcy under Title 11 of the United States Code 6, specifically exempting borrowers that are debtors. As part of this release, the CFPB also acknowledged the complexity of the interactions between existing bankruptcy law and periodic statements, and the need to conduct further study in order to calibrate the requirements at a future date. 7 Reverse mortgages and timeshare plans. 8 The rule exempts both types of products from the requirement to send periodic statements. Borrowers with fixed rate loans issued coupon books. 9 Servicers are not required to provide periodic statements to borrowers with fixed-rate loans that are issued coupon books, as we describe on the following page. 1 The CFPB issued new mortgage servicing rules on January 17, 2013, with an effective date of January 10, 2014. Those rules implement Dodd-Frank Act amendments to TILA that added the new procedural standards for periodic statement 2 http://www.consumerfinance.gov/newsroom/cfpb-provides-guidance-on-mortgage-servicing-rules/?utm_source=newsletter&utm_ medium=email&utm_campaign=rmr20131015 3 https://www.federalregister.gov/articles/2013/02/14/2013-01241/mortgage-servicing-rules-under-the-truth-in-lending-act-regulation-z#p-1170 4 https://www.federalregister.gov/articles/2013/02/14/2013-01241/mortgage-servicing-rules-under-the-truth-in-lending-act-regulation-z#p-1172 5 https://www.federalregister.gov/articles/2013/02/14/2013-01241/mortgage-servicing-rules-under-the-truth-in-lending-act-regulation-z#p-1326 6 page 49 of http://files.consumerfinance.gov/f/201310_cfpb_mortgage-servicing_interim.pdf 7 page 29 of http://files.consumerfinance.gov/f/201310_cfpb_mortgage-servicing_interim.pdf 8 https://www.federalregister.gov/articles/2013/02/14/2013-01241/mortgage-servicing-rules-under-the-truth-in-lending-act-regulation-z#p-1203 9 https://www.federalregister.gov/articles/2013/02/14/2013-01241/mortgage-servicing-rules-under-the-truth-in-lending-act-regulation-z#p-1205

Trends & Perspectives on the impacts of CFPB Mortgage Servicing Standards Periodic statement rules 2 Small servicers. 10 In light of the operational and technology challenges resulting from the complexity of the requirements for the periodic statements, and the costs of implementing the requirements, the CFPB exempted small servicers from this requirement. No other exemptions were prescribed. As a result, servicers need to address any pockets of borrowers that may not be receiving periodic statements today under current processes, and system flags or indicators that are currently used to exclude these loans from periodic statement batches may need to be removed or amended. Possible examples include the following: Borrowers who have invoked the cease communication provisions under the Fair Debt Collections Practice Act (FDCPA). 11 In a Bulletin issued in October 2013, the CFPB clarified that servicers must provide periodic statements to these borrowers and that that a servicer acting as a debt collector would not be liable under the FDCPA for providing periodic statements in compliance with these requirements despite a borrower s cease communication request; Automated Clearing House (ACH) accounts. Historically, servicers have not sent periodic statements to these borrowers except in the event of a payment change, as automated payments are deducted and agreed upon by the borrower. Under the new rules, however, servicers will be required to send these accounts periodic statements. This change may significantly increase the volume of statements they mail out. As a result, it will be critical to determine whether current mail-out processes will be sufficient to meet the new requirement. Borrowers in loss mitigation. Some servicers may not currently send these borrowers periodic statements today because of the potential for required payments to change as a result of the loss mitigation. However, because the CFPB has not exempted these borrowers from receiving statements, servicers will need to ensure accurate payment due amounts are shown in line with loss mitigation agreements (and trial agreements). A reconciliation between the contractual payment amount and revised payment due whilst in trial payment will need to be disclosed in the periodic statement. Borrowers in foreclosure. 12 Despite industry feedback requesting an exemption for borrowers in foreclosure, the CFPB has not done so. As a result, servicers will need to provide such borrowers with periodic statements, and those statements will need to include any foreclosure specific fees charged to borrower. Loans that have been accelerated. Periodic statements will need to reflect that the payment due amount equals the total outstanding balance; Charged-off accounts. The CFPB has not exempted these borrowers as the charge-off treatment is a tax and accounting event that has no direct effect on the borrower s obligation. Charging off loans may, however, have an operational impact in that the servicing of charged-off loans may be transferred to a recovery team, which may rely on different systems. This may complicate the way in which these statements are prepared. What all of this means is that servicers will need to re-visit their operations and business rules to provide periodic statements to all borrowers that must receive them under the new rules. Servicers also need to revise or develop controls, as appropriate, bearing in mind that borrowers do not have the option to opt out of receiving statements. 13 If a servicer provides option for electronic delivery of borrower communications, the revised layout must be applied to the electronic statements. 2. Content and format: The CFPB has provided detailed guidance on the required content, proximity, grouping and placement of that content within the periodic statement. Table 1 (on page 5) shows the content grouping and placement requirements. As additional guidance, the CFPB has released sample forms of periodic statements. 14 Although servicers are not required to adopt the sample forms, most servicers have leveraged its format to some extent to meet regulatory expectation and provide consistency. On the other hand, many are finding that the information may not fit as neatly on one page as the sample. The impact of the new content requirements on individual servicers varies depending on their underlying servicing systems and data availability. For example, providing a breakdown of past payments due requires not only systems ready to provide the data, but it also requires processes to appropriately capture data for loan transfers, partial payments, and payment breakdowns for daily simple-interest loans. Many existing servicing systems do not have all necessary capabilities. Delinquent customers: For customers who are more than 45 days delinquent, servicers are required to provide delinquency information on, or accompanying, each periodic statement, in addition to providing a periodic statement containing the other required information. 15 10 https://www.federalregister.gov/articles/2013/02/14/2013-01241/mortgage-servicing-rules-under-the-truth-in-lending-act-regulation-z#p-1213 11 page 7 of http://files.consumerfinance.gov/f/201310_cfpb_mortgage-servicing_bulletin.pdf 12 https://www.federalregister.gov/articles/2013/02/14/2013-01241/mortgage-servicing-rules-under-the-truth-in-lending-act-regulation-z#p-590 13 https://www.federalregister.gov/articles/2013/02/14/2013-01241/mortgage-servicing-rules-under-the-truth-in-lending-act-regulation-z#p-1324 14 https://www.federalregister.gov/articles/2013/02/14/2013-01241/mortgage-servicing-rules-under-the-truth-in-lending-act-regulation-z#p-1223 15 https://www.federalregister.gov/articles/2013/02/14/2013-01241/mortgage-servicing-rules-under-the-truth-in-lending-act-regulation-z#p-1195

3 The delinquency information must contain the date the loan became delinquent; a description of the risks of being delinquent, such as foreclosure; a notice of any loss mitigation programs the borrower has agreed to; a notice stating whether the servicer has initiated foreclosure proceedings; and a detailed account history. Table 2 (on page 6) provides the full extent of content required on the delinquency notice. That content must also meet the general disclosure requirement of being clear and conspicuous 16 and to be in a reasonable understandable form 16 for the average customer. The CFPB has not defined these terms, so servicers must apply their business judgment. The sourcing and collation of the delinquency information may be one of the most complex areas for servicers implementing the periodic statement rules. This is due to the potential need to automate the populating of this information from multiple source systems. On the other hand, this may provide servicers with an opportunity to consider their existing data management structures and identify potential enhancements. 3. Coupon books. Under CFPB requirements, 17 only customers with fixed rate loans can be sent coupon books in-lieu of periodic statements. Therefore, servicers will need to send periodic statements to all adjusted-rate mortgage (ARM) loan customers even if they currently receive coupon books. To reduce confusion, servicers may want to proactively communicate with borrowers to ease the transition from a coupon book to a periodic statement from the customer experience perspective. The content requirements for coupon books are similar to those for periodic payments. These are shown in Table 3 (on page 6). As is the case generally, servicers must send delinquency information to borrowers with coupon books that are more than 45 days delinquent. Given the changes in requirements, some servicers have reconsidered their use of coupon books based on projected costs, taking into account the potential need to send delinquency information, and taking into account customer base, customer expectation and the breakdown between ARMs and fixed-rate loans in the servicing portfolio. Customer impact The upcoming changes in the requirements for periodic statements may have a direct impact on consumers. To mitigate any issues with customer experience servicers should consider the following: Customer communication: To reduce customer confusion and foster a positive customer experience, it will be critical for servicers to develop a communication strategy that includes proactively reaching out to customers and managing communication with customers throughout this delicate transition. Among the direct impacts that such a communication strategy must address are the change in the form of the periodic statements and the inability of customers to optout of receiving them. Therefore, the communication strategy should include a customer awareness campaign so that customers are not caught unaware no one wants to trigger frantic calls to the servicer s call center. For example, servicers may send a sample of the new statement with an explanation of the content before they begin sending the new statements and provide advance notices and sample statements through other channels, such as the online bill-pay website, both before and after their go live dates. Some servicers are addressing these changes as part of a broader set of educational and informative communications on the widespread CFPB-mandated changes (of which this is just one component), to benefit both customers and lenders. Staff training: To prepare servicing staff for the anticipated increase in customer questions related to the changes in periodic statements, it is important to train customer support teams to answer questions and to equip staff with FAQ scripts and provide them with access to subject matter experts to respond to more specific questions. Training may also be necessary for non-call center personnel that may field customer questions about new periodic statements, such as local branches personnel, customer outreach teams, and single point of contact (SPOC) representatives. A comprehensive and timely staff training program should enable a wide range of personnel to: 1. Read and explain the new periodic statement layout; 2. Access the servicing system to provide related account information; and 3. Anticipate and respond to the vast majority of customer questions. 16 https://www.federalregister.gov/articles/2013/02/14/2013-01241/mortgage-servicing-rules-under-the-truth-in-lending-act-regulation-z#p-1329 17 https://www.federalregister.gov/articles/2013/02/14/2013-01241/mortgage-servicing-rules-under-the-truth-in-lending-act-regulation-z#p-1205

Trends & Perspectives on the impacts of CFPB Mortgage Servicing Standards Periodic statement rules 4 Implementation considerations With only months remaining before the January 10, 2014 effective date, servicers are well into implementation of the changes to their periodic statements. This includes critical milestones around template designs, business rule developments and data mapping to retrieve the necessary information from servicing systems, which has required careful planning and data validation, particularly when the process utilizes multiple systems. With the holiday season and year end fast approaching, most servicers are planning to complete their CFPB implementation around year-end scheduled system freezes. As a result, most will have, at best, a two month window remaining to work with their vendor(s) and staff to ensure a smooth transition to the new periodic statements. Depending on their reliance on vendors, testing of new data feeds and population of statement templates should be well underway. We note that, the fact that the typical servicing model may utilize multiple vendors for different functions such as servicing system support, statement development and printing, and mailing processes, increases the risk that the necessary due diligence may not be completed on time. Therefore, servicers need to be aware of the inherent risks in their vendor relationships and proactively work together with their vendors to alleviate potential constraints before they arise. Figure 1 shows the cycle and key considerations for a robust implementation plan. Figure 1: Implementation plan S ervicers Mock audit and final check Draft discussions C FPB ready V endor Timely and accurate pre-approval testing Servicers should inventory downstream impacts associated with the changes in periodic statements, such as loan interfaces, data repositories, web-based borrower access points and changes to vendor files. Accountable parties should be identified to implement necessary changes resulting from the new rule. A reasonable timeline should be developed for testing and production before the rule takes effect. Servicers should also consider scheduling periodic reviews of vendor partners on key service level agreements (SLA) to ensure they provide timely delivery. It is crucial that servicers understand that they are responsible for complying with the CFPB requirements. Therefore, if there is a dependency on vendors, servicers need to confirm that updates supported by their vendors comply with the new requirements. The vendor s non-compliance is also the servicer s non-compliance. Engagement of the Legal team will be important. In addition to reviewing the requirement changes, servicers should be having frequent conversations with their vendors to ensure that the changes in the statements are accurate and completed timely enough to allow for output user acceptance testing (UAT), data integrity testing and multiple dry-runs. Servicers should also consider planning for a mock-audit once changes are complete, in line with CFPB s readiness guide and expectations, 18 to test compliance prior to a CFPB exam. The new rule for periodic statements will significantly change the range of new information that will be provided to customers via their periodic statement. Compliance to the rule require thoughtful planning, effective quality control measures, robust technology solutions, appropriate investment, comprehensive staff training and a solid commitment from all members of the servicing organization. 18 page 18 of http://files.consumerfinance.gov/f/201307_cfpb_mortgage-implementation-readiness-guide.pdf

5 Opportunities The changes required to meet the CFPB standards are likely to result in increased costs to servicers. However, the need to review and revise servicing processes also provides servicers with an opportunity to address process inefficiencies and data integrity issues that may or may not be directly related to producing periodic statements. Possible opportunities for improvement include the following: Addressing operational inefficiencies identified as a result of sourcing data requirements; Improving oversight and controls by expanding on exception reporting, periodic monitoring and dashboards developed in connection with the preparation of periodic statements; Leveraging the training programs developed for this and other changes under the new servicing rules to enhance and standardize staff training schedules generally, to better enable staff to stay up to date as to ongoing changes in regulation and industry practices; Partnering with Marketing team to better identify crosssell opportunities that may be identified through the portfolio analysis necessary to implement the new rules for periodic statements; Addressing communication needs arising from the new periodic statement rules by optimizing call center resourcing based on call volume forecasting or other global changes to call center operations; Streamlining customer communications across servicer operations to meet compliance requirements, maximize customer experience and minimize costs; and Taking advantage of the need to re-visit vendor relationships to also explore other potential changes to contractual terms and collaborative structures. 1026.41 Periodic statements for residential mortgage loans (d) Content and layout of the periodic statement Table 1. periodic statement requirements Content, grouping and placing of information Grouping Amount due Explanation of amount due Past payment breakdown Transaction activity Partial payment information Contact information Account information Delinquency information Error Notice & Information Request contact detail Information required Grouped together in close proximity and located at the top of the first page: Payment due date Amount of late fee if payment is late and the date on which that fee will be imposed Amount due Grouped together in close proximity on the first page: Monthly payment amount and breakdown of how that will be applied to principal, interest, and escrow Total of fees imposed since the last statement Past amount due Grouped together in close proximity on the first page: Total of all payments since the last statement and application to principal, interest, escrow, fees, and suspense/unapplied funds Total of all payments since the beginning of the calendar year and application to principal, interest, escrow, and fees as well as total amount in the suspense account List of all the transaction activity since the last statement, including date of the transaction, brief description of the transaction, and the amount of the transaction Only if funds are held in a suspense account, information on what must be done for the funds to be applied A toll-free number and email address (if applicable) where consumers may obtain information about their account, located on the first page of the statement Outstanding principal balance Current interest rate Date when that interest rate may change Existence of any prepayment penalty Housing counselor information Only required if the consumer is 45 days or more delinquent, refer to Table 2 for breakdown An address for consumers to use to submit their notices of errors and requests for information

Trends & Perspectives on the impacts of CFPB Mortgage Servicing Standards Periodic statement rules 6 Table 2: Delinquency information requirements on periodic statement ( 1026.41 (d) (8)) No. Information required 1 The date on which the consumer became delinquent 2 A notification of possible risks and expenses (for example, foreclosure or legal fees) that the consumers could face if the delinquency is not cured 3 An account history showing the previous 6 months or the period since the last time the account was current, whichever is shorter. Show the amount remaining past due from each billing cycle. If the consumer made a full payment, show the date payment was credited to the account for the full payment. 4 A notice showing any loss mitigation program the consumer has agreed to, if applicable 5 A notice that servicers have made the first notice or filing required to start a foreclosure, if applicable 6 The total payment the consumer would have to make to bring the account current 7 A reference to the homeownership counselor information to include in the periodic statement Table 3: Coupon book requirements Content, grouping and placing of information ( 1026.41 (e) (3)) Grouping Every coupon Provided on the coupon book Information required The payment due date The amount of any late payment fee and the date on which a late fee will be charged if payment is not received The outstanding principal balance at the beginning of the time period covered by the coupon book The current interest rate and the date on which the interest rate may next change The existence of any prepayment penalty (as defined in 1026.32(b)(6)(i)) HUD s toll-free telephone number ((800) 569-4287) to access contact information for homeownership counselors/counseling organizations Website address for either the CFPB s information page on homeownership counselors (http://www. consumerfinance.gov/mortgagehelp/) HUD s list of homeownership counselors and counseling organizations (http://www.hud.gov/offices/hsg/sfh/hcc/ hcs.cfm) Servicer contact information, A toll-free telephone number and, if applicable, an electronic mailing address that may be used by the consumer to obtain information about the consumer s account www.pwc.com/consumerfinance PwC Consumer Finance contacts www.pwcregulatory.com PwC Regulatory contacts Roberto Hernandez Principal roberto.g.hernandez@us.pwc.com 940 367 2386 Jeff Lavine Partner jeff.lavine@us.pwc.com 703 918 1379 Martin Touhey Principal martin.e.touhey@us.pwc.com 206 790 8751 Anthony Ricko Managing Director anthony.ricko@us.pwc.com 978 692 1701 Annie Liao Senior Manager annie.liao@us.pwc.com 646 256 1825 Bruce S. Oliver Director bruce.oliver@us.pwc.com 703 918 6990 Gabriela Fregoso Manager gabriela.fregoso@us.pwc.com 858 677 2512 Follow us on Twitter @PwC_US_FinSrvcs 2013 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. 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 www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.