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FHA proposes changes to defect taxonomy for loan servicing
On October 28, FHA requested stakeholder review and feedback on a draft update to Appendix 8.0 – FHA Defect Taxonomy for its Single Family Housing Policy Handbook 4000.1. The updated draft appendix includes, among other things, (i) six new defect areas to incorporate loan-level servicing reviews (servicer operations, account administration, delinquent and default servicing, loss mitigation processing, home retention, and home disposition); (ii) severity tier descriptions explaining the process used for determining whether defects require corrective servicing action or a different response “based on the impact of non-compliance on FHA, the property, or both”; and (iii) and expanded, servicing-specific remedies for violations. As previously covered by InfoBytes, FHA issued an update to Section III of the handbook, which streamlined many standard mortgage servicing operational requirements and incorporated FHA actions taken to support borrowers experiencing Covid-19-related financial hardships. The proposed defect taxonomy updates are intended to increase transparency into FHA’s servicing loan review process and provide clarity on how FHA will hold servicers accountable for loan-level compliance. Comments are due December 27.
FHA publishes draft HECM sections of handbook
On September 29, FHA requested stakeholder review and feedback on the draft Home Equity Conversion Mortgage (HECM) Origination through Servicing sections of its Single Family Housing Policy Handbook 4000.1. The new draft sections are a continuation of the agency’s move toward a consolidated, authoritative Handbook 4000.1, and contain revisions to policy language to improve clarity and consistency along with proposed new policies. FHA stated that once the final version is published, the HECM Origination through Servicing sections will conform to the new organizational structure of Handbook 4000.1 and will replace existing HECM guidance on: (i) origination through post-closing and endorsement; (ii) appraiser and property requirements; (iii) servicing and loss mitigation; and (iv) glossary and acronyms. Feedback on the draft sections (posted on the agency’s drafting table) are due by November 15.
CFPB offers reminder on forbearance options for borrowers
On September 30, the CFPB issued an analysis of recent rules that ensure mortgage servicers provide options to potentially vulnerable borrowers exiting forbearance. The analysis points out that there are approximately 1.6 million borrowers exiting mortgage forbearance programs and that many may be vulnerable to a greater risk of harm due to a variety of circumstances, which may have been exacerbated by the effects of the Covid-19 pandemic. As previously covered by a Buckley Special Alert, the Bureau issued a final rule earlier this year, which took effect August 31, obligating servicers to continue specifying, with substantial detail, any loss mitigation options that may help borrowers resolve their delinquencies. In April, the CFPB also urged mortgage servicers “to take all necessary steps now to prevent a wave of avoidable foreclosures this fall.” Citing the millions of homeowners in forbearance due to the Covid-19 pandemic, the Bureau’s April compliance bulletin warned servicers that consumers would need assistance when pandemic-related federal emergency mortgage protections expire (covered by InfoBytes here). In addition, in August the Bureau released an overview report of Covid-19 pandemic responses from 16 large mortgage servicers, finding that, among other things: (i) most servicers reported abandonment rates of less than 5 percent during the reporting period, while others’ rates exceeded 20 percent, with one servicer as high as 34 percent; (ii) most servicers saw increased rates of borrowers who were delinquent upon exiting pandemic hardship forbearance programs in March and April 2021 compared to previous months; and (iii) delinquency rates ranged from about 1 percent to 26 percent for federally-backed and private loans (covered by InfoBytes here). According to the September analysis, the Bureau “encourages servicers to enhance their communication capabilities and outreach efforts to educate and assist all borrowers in resolving delinquency and enrolling in widely available assistance and loss mitigation options.” The Bureau further encourages servicers to ensure that their compliance management systems include robust measures and warns against one-size-fits-all practices that may harm vulnerable consumers.
Pennsylvania adopts mortgage servicing regulations
On September 25, the Pennsylvania Department of Banking and Securities adopted provisions regarding mortgage servicing regulations. Among other things, the regulations clarify the definition of a “COVID-19 related hardship,” establish general disclosure requirements, and provide early intervention and loss mitigation procedures and options. Specifically, the regulations establish that until October 22, 2022, a servicer must, after establishing live contact for borrowers not in forbearance programs, inform them that forbearance programs are available for those experiencing a “COVID-19-related hardship” and must list and describe these forbearance programs and the actions the borrower must take to be evaluated for the programs, among other things. Additionally, for borrowers in forbearance programs at the time of live contact, servicers, until October 22, 2022, must provide the end date of the borrower’s current forbearance program, a list and description of the types of forbearance extensions, and a way that the borrower can find contact information for homeownership counseling services, among other things. The regulations also establish loss mitigation procedures in that a servicer may offer a borrower a loss mitigation option based upon evaluation of an incomplete application, provided that certain criteria are met. In addition, the regulations create certain Covid-19-related loan modification options, such as a loan modification can be made available to borrowers experiencing a Covid-19-related hardship. The regulations are effective immediately.
DFPI issues mortgage servicer requirements
On September 13, the California Department of Financial Protection and Innovation (DFPI) issued a notice detailing a new requirement that mortgage servicers provide information to DFPI describing the actions servicers are taking to help homeowners avoid foreclosure. According to the announcement, DFPI intends to “ensure that licensees tell consumers about assistance that is or will soon be available to delinquent mortgage borrowers and document their good faith efforts toward screening borrowers for applicable loan modifications, mortgage relief funds and other protections, including the upcoming federal Homeowner Assistance Fund,” which licensees are strongly encouraged to participate in. To protect vulnerable homeowners, DFPI will require licensees handling residential mortgages, either directly or through sub-servicers, to provide information describing the servicer’s: (i) screening process for determining borrower eligibility for foreclosure aid; (ii) compliance policies and procedures regarding loss mitigation; and (iii) assessment of the “magnitude of foreclosure risk among the loans they service.”
The same day, DFPI released a social media campaign designed to educate consumers about the California Homeowner Bill of Rights, the availability of HUD-certified housing counselors, and foreclosure options, among other things. The announcement also notes that DFPI recently launched a multi-pronged communications campaign to educate consumers and protect homeowners from foreclosure.
6th Circuit reverses FCRA ruling over misreported debt
On September 13, the U.S. Court of Appeals for the Sixth Circuit reversed a district court’s summary judgment ruling in favor of a defendant mortgage servicer, holding that a jury could find the defendant “willfully and negligently” violated the FCRA by incorrectly reporting a past due account status to consumer reporting agencies (CRAs) for over a year after the plaintiff’s mortgage loan was discharged in bankruptcy. The plaintiff discovered the loan was being mis-reported as past due when he checked his credit score in advance of buying a car and found it to be lower than expected. The plaintiff disputed the tradeline, and the CRAs forwarded his dispute to the mortgage servicer. In response to the dispute, the servicer changed the plaintiff’s account status from past due to “no status”—which meant the status had not changed from the prior month—and continued reporting it to the CRAs.
The plaintiff sued the servicer for violating the FCRA, claiming the defendant knew the loan had been discharged but still reported it as past due for more than a year. The defendant countered, among other things, that because the plaintiff “chose not to apply for a car loan” he could not prove that he was harmed by negligence due to the mis-reporting. The district court ultimately ruled that (i) the plaintiff did not have standing to allege a negligent violation of the FCRA, and (ii) no “reasonable jury” would find that the defendant had willfully violated the statute.
On appeal, the 6th Circuit disagreed, finding that the plaintiff had standing to assert a negligence claim under FCRA and that a reasonable jury could find a negligent and willful violation. The court pointed out that the plaintiff’s credit score increased by almost 100 points once the tradeline was removed, suggesting the servicer’s mis-reporting did harm the plaintiff and gave him standing to sue in negligence. The court also found the defendant “knew that [the plaintiff’s] loan had been discharged but for more than a year told the credit-reporting agencies that the loan was past due. A jury could therefore find that [the defendant] was either incompetent or willful in its failure to correct its reports sooner.” The 6th Circuit added that the defendant’s implementation of policies to guide its analysts through resolving credit disputes “hardly disproves as a matter of law that [the defendant] acted willfully.” The court held the defendant was not entitled to summary judgment and remanded the case for further proceedings.
CFPB finds varying pandemic response among servicers
On August 10, the CFPB released an overview report of Covid-19 pandemic responses from 16 large mortgage servicers (servicers). The CFPB used supervisory data from the servicers to understand how they are interacting with homeowners throughout the pandemic and if those interactions are effective. The CFPB’s observations include the following:
- According to the report, most servicers reported abandonment rates, a measure of how many borrowers disconnected from servicing calls before completion, of less than 5 percent during the reporting period, while others exceeded 20 percent, and one peaked at 34 percent.
- Many servicers saw increased rates of borrowers who were delinquent upon exiting pandemic hardship forbearance programs in March and April 2021 compared to previous months. According to the report, these borrowers “may be at risk of harm from advanced delinquency, foreclosure and foreclosure-related costs, and negative credit reporting.”
- Delinquency rates ranged from about 1 percent to 26 percent for federally-backed and private loans. According to the report, “[d]elinquency rates increased sharply around March 2020 and remain elevated.”
- According to the CFPB, “[n]early half of servicers in the report clearly stated that they did not collect or maintain information about borrowers’ LEP [limited English proficiency] status, which may lead to borrowers not receiving needed language assistance. Some of the servicers also reported not maintaining data on borrowers’ race, which may raise the risk of fair lending violations.”
- The report found that denial rates for Covid-19 hardship forbearance requests were consistently low for both federally-backed loans and private loan forbearance programs.
According to the CFPB, the Bureau “will continue its oversight work through examinations and enforcement, and it will hold servicers accountable for complying with existing regulatory requirements, as well as the amended Mortgage Servicing Rules that take effect August 31, 2021.”
CFPB releases Juneteenth timing guidance rule
On August 5, the CFPB clarified that it will not penalize mortgage lenders that did not adjust some time-sensitive borrower protections for Juneteenth, noting that the quick enactment of the law designating the holiday left the industry “unsure of how to treat the day for purposes of regulatory compliance.”
The CFPB released an interpretive rule to provide guidance on the impact of the new Juneteenth federal holiday on Regulation Z timing requirements related to the provision of the TRID Closing Disclosure at least three “business days” prior to closing and a consumer’s right to rescind a transaction until midnight on the third “business day” following settlement.
On the afternoon of June 17, President Biden signed a bill establishing June 19, Juneteenth, as a federal holiday. The bill amends 5 U.S.C. § 6103(a) which codifies legal public holidays. Because June 19 fell on a Saturday this year, the holiday was observed on Friday, June 18.
The timing requirements for purposes of delivering the Closing Disclosure prior to closing and for establishing a consumer’s rescission period are measured in “specific business days” defined as “all calendar days except Sundays and legal public holidays” as specified in 5 U.S.C. § 6103(a). Thus, for some transactions, Saturday June 19 counted as a business day when Closing Disclosures were issued or the rescission period began, but no longer counted as a business day at the end of the relevant time period. In its interpretive rule, the Bureau states that it interprets the definition of “specific business day” to mean the “the version of the definition in effect when the relevant time period begins.” Accordingly, for the 2021 Juneteenth holiday and the affected timing requirements, if the relevant time period began on or before June 17, 2021, then June 19, 2021 is a business day. If the relevant time period began after June 17, 2021, then June 19, 2021 is counted as a federal holiday and not a business day for purposes of the specific business day definition.
As such, it appears that the Bureau will not penalize mortgage lenders for not adding an additional day to the applicable waiting periods to the extent that the waiting periods began on or before the day President Biden established Juneteenth as a federal holiday, while also noting the obvious that nothing prohibits creditors from providing longer wait periods. As an interpretive rule to advise the public prospectively how an agency proposes to exercise a discretionary power, the Bureau’s guidance is exempt from the notice and comment provisions of the Administrative Procedures Act.
CFPB updates mortgage servicing small entity compliance guide
On August 4, the CFPB updated the mortgage servicing Small Entity Compliance Guide to include guidance on the 2021 Mortgage Servicing COVID-19 Final Rule and the 2020 Mortgage Servicing COVID-19 Interim Final Rule. In June, the Bureau finalized amendments to certain federal mortgage servicing regulations, which added provisions applicable to borrowers as federal foreclosure protections ended. As previously covered by InfoBytes, the CFPB previously released new FAQs regarding the Mortgage Servicing Rule and Regulation X and Regulation Z relating to escrow account guidance and analysis. The guide clarifies the servicing file requirements under the existing mortgage servicing rules and provides guidance regarding compliant use of multiple electronic systems. The guide also reflects updates made to the final rule regarding, among other things: (i) loss mitigation foreclosure protections; (ii) loss mitigation incomplete application requirements; (iii) and early intervention live contact. The final rule provisions addressed in the guide are temporary and phase out over time. Miscellaneous administrative changes have been made throughout the guide, as well.
CSBS releases regulatory prudential standards for nonbank mortgage servicers
On July 26, the Conference of State Bank Supervisors (CSBS) released model state regulatory prudential standards for nonbank mortgage servicers. The prudential standards provide states with “a consistent framework that ensures covered nonbank servicers maintain the financial capacity to serve consumers and investors with heightened transparency, accountability and risk management standards.” According to CSBS, in the past 10 years, the nonbank mortgage servicer market has grown from 6 percent to 60 percent of the government agency mortgage market, representing at least 45 percent of the servicing market overall, with “[n]onbank mortgage servicers currently administer[ing] roughly three-quarters of the servicing for loans in Ginnie Mae mortgage backed-securities” (encompassing loans to veterans, first-time homebuyers, and low-to-moderate income borrowers). In response to concerns raised by state regulators about the lack of state standards to address servicers’ capital and liquidity levels, as well as inadequate corporate governance and board oversight identified by state and federal examiners, state regulators approved the prudential standards, which focus on two main areas: financial condition and corporate governance. The prudential standards—which “align with existing federal minimum eligibility requirements, wherever practical, to minimize regulatory burden for servicers”—cover both agency and non-agency servicing, and apply to servicers that service at least 2,000 loans and operate in at least two states. Exempt are small servicers that do not meet the minimum requirements, reverse mortgage loan servicers, not-for-profit mortgage servicers, and housing agencies. State agency commissioners are also given the authority to “increase requirements for high-risk servicers or even suspend the requirements in times of economic, societal or environmental volatility.” The prudential standards are part of CSBS’s eight Networked Supervision 2021 priorities, which are intended to advance its “strategy to streamline nonbank licensing and supervision and generate new data for risk analysis through expanded use of technology platforms.”