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CFPB publishes the mortgage servicer edition of its Supervisory Highlights
On April 24, the CFPB published its 33rd edition of its Supervisory Highlights which covers select examinations and violations regarding mortgage servicing from April 1, 2023, through December 31, 2023. This edition of Supervisory Highlights focused on alleged violations of law identified in CFPB examinations including (i) charging illegal junk fees including impermissible property inspection and late fees; (ii) UDAAP violations; and (iii) violations of Regulation X loss mitigation requirements. The Bureau made clear in its press release that it plans to continue its focus on combatting junk fees within and beyond the mortgage servicing space.
The CFPB highlighted several violations of law resulting from mortgage servicers’ payment processing practices including the charging of property inspection fees in connection with certain Fannie Mae loans in violation of investor guidelines. To rectify this, servicers addressed system errors causing the fees in question, enhanced oversight, and were instructed to compensate affected borrowers. Other payment processing-related violations identified by the Bureau included failure to adequately describe fees in periodic statements by using the term “service fee” to describe 18 different fee-types, and failure to make timely disbursements from escrow accounts in violation of Regulation X.
The Bureau also identified unfair practices relating to the charging of late fees in excess of the amount authorized in the loan agreement or after consumers had entered into loss mitigation agreements, which should have prevented late fees. Servicers identified as having engaged in such violations were required to refund the fees to consumers and improve internal processes in response to the findings.
The CFPB also identified violations of law relating to loss mitigation and loan modifications. Examiners noted that some servicers failed to provide a written notice confirming the receipt of loss mitigation applications and informing consumers of whether the application was complete or incomplete. Further, some servicers failed to provide timely and complete notices of loss mitigation options. Additionally, some servicers, in violation of Regulation X, failed wo waive existing fees after borrowers had accepted Covid-19 hardship loan modifications.
Examiners also found that certain servicers committed deceptive practices by sending out delinquency notices incorrectly stating that consumers had missed payments and needed to apply for loss mitigation when those consumers were actually up to date on their payments, enrolled in trial modification plans, or had inactive loans (such as those already paid off or in the process of a short sale).
Finally, the Bureau identified violations of law relating to (i) live contact and early intervention requirements in connection with delinquency and (ii) failure to retain adequate records.
FHFA seeks public input on new closed-end second mortgage product
On April 22, the FHFA sent to the Federal Register a notice of a proposed new product from Freddie Mac to begin purchasing certain single-family closed-end second mortgages. According to the proposal, Freddie Mac would purchase certain closed-end second mortgage loans from approved and active sellers and on properties for which Freddie Mac already owns the first mortgage, subject to additional product and term limitations. FHFA’s stated goal is to offer borrowers a second mortgage at a lower interest rate than other financing alternatives given the higher interest rate environment, and increased competition among second mortgage lenders. FHFA requested comments on nine questions, with comments to be received by May 22.
CSBS and FHFA sign agreement to enhance information sharing on nonbank mortgage companies
On April 10, the Conference of State Bank Supervisors (CSBS) and the FHFA announced they have signed a memorandum of understanding (MOU) to enhance information sharing on nonbank mortgage companies. The MOU reportedly aimed to improve the ability to coordinate on market developments, identify and mitigate risks, and ultimately, further protect consumers, taxpayers, and the nation’s housing finance system. CSBS Board Chair, Lise Kruse, emphasized the value of collaboration between state and federal regulators to support a stable mortgage marketplace, given the distinct authority each supervisory agency maintained over the nonbank mortgage industry. According to the CSBS, state financial regulators primarily oversee nonbank mortgage companies, while the FHFA regulated significant entities like Fannie Mae and Freddie Mac, which served as important counterparties to the nonbank mortgage industry. According to FHFA Director, Sandra L. Thompson, the new information sharing protocols will enable both state and federal regulators to supervise the mortgage industry more effectively, leading to improved outcomes for all stakeholders.
Kentucky enacts bills: on mortgage liens and unlawful trade practices
On April 9, Kentucky enacted HB 488 (the “Bill”) which will establish when a county clerk admits any amendment, renewal, modification, or extension of a recorded mortgage to record. The Bill will also establish when a county clerk admits affidavits of amendment prepared and executed by an attorney to record. Additionally, the Bill will establish recording requirements and a section to establish when a promise, acknowledgment, or payment of money operates as an extension of a lien in a recorded mortgage or deed. Finally, the Bill establishes recording requirements for extensions on a lien in a recorded mortgage or deed.
On April 4, Kentucky also enacted HB 88 (the “Act”) which will amend provisions related to unlawful trade practices, prohibiting (i) entities that are not banks or trust companies from implying that they are engaged in banking or trust activities, and (ii) entities to use in their marketing materials the name, trademark, logo or symbol of any financial institution or similarly resembling any financial institution, with exceptions for permitted use or disclosure of non-consent.
The Act will also state that residential real property service agreements cannot give rise to rights or obligations lasting longer than two years after their effective date. Additionally, barring exceptions, service agreements cannot (i) be enforceable on future owners of interests in the residential real property or otherwise purport to remain attached to the property; (ii) create or impose a lien, encumbrance, or other real property interest on the residential real property; or (iii) require or permit recording of the agreement or any notice or memorandum of the agreement, among other things.
Kansas updates UCCC provisions including credit card surcharges
On March 29, the Governor of Kansas signed into law HB 2247, a comprehensive bill that updated UCCC provisions in an effort to regulate the credit industry more efficiently, and moved provisions from the UCCC to the Kansas Mortgage Business Act, among other things. The bill amended provisions relating to credit card surcharges—allowing retailers and other persons to impose a surcharge on a customer who uses a credit card payment if such retailer or person provided a clear and conspicuous disclosure of the surcharge amount at the point of entry or sale or in advance of the transaction. The bill nearly tripled the “threshold amount” on certain consumer loans and leases from $25,000 to $69,500. The bill also clarified license requirements, among other things. HB 2247 will go into effect on July 1.
Borrower’s RESPA claim stays afloat in District Court
The U.S. District Court for the Southern District of Ohio, Eastern Division, granted in part and denied in part defendant mortgage servicer’s motion to dismiss claims for RESPA Qualified Written Requests violations. Defendant approved plaintiffs for a trial payment plan for their mortgage loan. After plaintiffs completed that plan, defendants sent an initial modification agreement with a misspelled plaintiff name. Plaintiffs notified defendant of the error but continued making payments pursuant to the initial modification agreement. Defendant then sent a corrected version which plaintiffs signed, and defendants recorded with the Delaware County Recorder’s office. However, defendants did not update the new terms in its billing system and, after realizing the agreement contained terms different from what it intended, sent a third version of the modification agreement to plaintiffs with an adjusted principal balance and interest rate. Plaintiffs refused to sign the third modified agreement, and defendants refused to honor the recorded version or accept payments, stating that plaintiffs were in default on their mortgage.
In making its judgement, the court considered how defendant handled plaintiffs’ qualified written requests (QWR). Regarding defendant’s response to plaintiffs’ notice of error, plaintiffs claimed defendant did not conduct a reasonable investigation, inadequately explained the discrepancy between the modification agreements’ interest rates and fee charges to their account, and entirely ignored the change in principal balances between the initial and the recorded modification agreements. Defendant argued that its conclusion, that no enforceable loan modification existed, would not change had it conducted the investigation. The court found that defendant could not bypass its responsibility to conduct a reasonable investigation, and that defendant did not address the difference in principal balance between the initial and recorded modification agreements.
On the issue of defendant’s response to plaintiffs’ request for information (RFI), plaintiffs claimed defendant’s response did not address their claims of missing records, nor did it mention that such records were unavailable. Plaintiffs also claimed defendant failed to produce requested documents. Refuting defendant’s argument that plaintiffs did not “even hint” that they suffered damages from the RFI portion of the QWR, the court found that plaintiffs’ damages were legally cognizable. However, the court dismissed plaintiffs’ claim as to the RFI because it did not satisfy the necessary standing requirements.
OCC releases Q4 report on first-lien mortgage performance
On March 19, the OCC released a report on the performance of first-lien mortgages in the federal banking system during the fourth quarter of 2023. According to the report, 97.2 percent of mortgages included in the report were current and performing at the end of the quarter, which is a slight improvement from the fourth quarter of 2022, but also a minor decline from the third quarter of 2023. The report also shows
- a rise in the percentage of seriously delinquent mortgages compared to the previous quarter (1.2 percent in the fourth quarter compared to 1.1 percent in the third quarter), but this percentage has trended down since the fourth quarter of 2021 (when it was 2.3 percent);
- a decline in new foreclosures, with 8,320 new foreclosures in the fourth quarter of 2023, compared to 8,965 new foreclosures the previous quarter and a high of 19,524 new foreclosures in the first quarter of 2022;
- finalization of 7,382 loan modifications, which was less than the 7,436 modifications completed in the prior quarter. Eighty-seven percent of the modifications were “combination modifications,” which are modifications that incorporate more than one type of modification action to improve the loan’s affordability, such as an interest rate reduction and a loan term extension.
First-lien mortgages account for 22.2 percent of the total outstanding residential mortgage debt in the country, representing approximately 11.7 million loans with a combined principal balance of $2.9 trillion.
FHA implements changes to branch office registration requirements
On March 19, the FHA issued Mortgagee Letter 2024-04 to implement the provisions of a Final Rule, “Changes in Branch Office Registration Requirements.” The Final Rule will eliminate the requirement for mortgagees and lenders to register with HUD in each branch office from which they conduct FHA business, making branch registration optional and branch registration fees applicable only to branch offices that mortgagees or lenders choose to register with FHA. As previously covered by InfoBytes, FHA proposed the rule last March. Following public comments, HUD published the Final Rule without changes from the proposed rule, and the Final Rule became effective on March 4.
The Final Rule will exclude branch offices not registered with HUD from the HUD Lender List Search page. The Mortgagee Letter will summarize changes that will be incorporated into Handbook 4000.1 to implement the Final Rule, including updating the policy for registering branch offices, clarifying the “Area Approved for Business” for home offices and branch offices, updating the definitions for Branch Manager and Regional Manager, and clarifying the policy requirements that apply to registered branch offices. Although the Mortgagee Letter will go into effect immediately, it will not impact annual recertifications due to be completed by March 31; rather, the recertification fee “will be calculated based on the registered branches as of the last business day of the mortgagee’s certification period (fiscal year end).”
CFPB blog post tackles mortgage closing costs, seeks consumer feedback
On March 8, the CFPB published a blog post seeking consumer input on experiences with the closing process of consumer mortgages, and in particular, closing costs. The blog post posited that closing costs significantly impact a borrower’s financial commitment and, potentially, monthly payments and identified a “noticeable increase” in closing costs, with median total loan expenses on home purchase loans increasing by 21.8 percent between 2021 and 2022. In particular, the Bureau singled out title insurance fees and credit reporting fees. It labeled title insurance as a fee that borrowers are charged and for which they have no control over the cost, alleging that “the amount that borrowers pay for lender’s title insurance is often much greater than the risk.” With respect to credit reports, the Bureau remarked that the highly concentrated industry dictates the price of credit reports, citing anecdotal evidence of cost increases of 25 to 400 percent.
The blog post also indicated that borrowers with smaller mortgages, including those with lower incomes, first-time homebuyers, and individuals residing in Black and Hispanic communities, are often disproportionately affected by closing costs, because they are typically fixed costs and do not change based on the size of the loan. The Bureau requested that consumers provide input on their experience with mortgage or closing costs, signaling that it will continue to analyze and if necessary “issue rules and guidance to improve competition, choice, and affordability.”
District Court decides in favor of bank despite alleged FDCPA and RESPA violations
On February 15, the U.S. District Court for the Central District of California granted a bank defendant’s motion to dismiss certain claims presented in the plaintiff’s complaint alleging violations of the Fair Debt Collection Practices Act (FDCPA) and Real Estate Settlement Practices Act (RESPA).
With respect to the FDCPA claim, the court found that the defendant did not qualify as a “debt collector” within the meaning of the statute because the defendant acquired the loan through its merger with the original creditor of the plaintiff’s mortgage. The court noted that several other district courts have held that an entity that acquires a debt through its merger with another creditor is not a “debt collector” under the FDCPA even if the merger occurred following the borrower’s default on the debt.
With respect to the plaintiff’s RESPA claim, the court found that the plaintiff failed to allege a violation of the statute because the plaintiff’s letter to the defendant, which requested a copy of the original promissory note underlying the deed of trust as well as a loan payoff amount, did not constitute a “qualified written request” triggering the defendant’s obligations under RESPA to respond.