CFPB Releases Supervision and Examination Manual
Editor’s note: The following memo was published by NRMLA’s legal counsel, Weiner, Brodsky, Sidman, Kider. While the manual being discussed does not specifically address reverse mortgages, the guidelines and procedures discussed apply to all consumer residential mortgage loans, including reverse mortgages, and most lenders and servicers, including large depository institutions (i.e., large “banks”) and non- depository institutions (i.e., “non-banks”).
On October 13, 2011, the Consumer Financial Protection Bureau (CFPB) issued the first edition of its Supervision and Examination Manual (the Manual). Of special note are the separate, specific Mortgage Servicing Examination Procedures (Servicing Exam Procedures) within the examination procedures provisions of the Manual. Mortgage servicing will be a high priority for the CFPB given the reported challenges in the mortgage servicing industry over the past several years.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) provides the CFPB with authority over entities that offer financial services products, including banks, credit unions and non-depository entities. The Dodd-Frank also grants authority to the CFPB to implement and enforce “enumerated consumer laws” which include, among others, the Truth in Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA), the Fair Debt Collection Practices Act (FDCPA), the Equal Credit Opportunity Act (ECOA), the Home Mortgage Disclosure Act (HMDA), portions of the Gramm-Leach-Bliley Act (GLBA), and the Fair Credit Reporting Act (FCRA).
The Manual is divided into three parts. The first part describes the supervision and examination process. The second part contains examination procedures, including both general instructions and procedures for determining compliance with specific regulations. The third part presents templates for documenting information about supervised entities and the examination process, including examination reports. The examination procedures incorporate procedures developed for the federal banking agencies by the FFEIC.
The Servicing Exam Procedures, however, are a new development, and outline how the CFPB will determine whether mortgage servicers, including non-bank mortgage servicers, are in compliance with applicable Federal law, and describe how the CFPB will assess other risks to consumers that are not specifically governed by statutory or regulatory provisions, such as potential unfair, deceptive, or abusive acts or practices.
Of note in this regard is the following excerpt from the American Association of Residential Mortgage Regulators (or AARMR) Multi-State Mortgage Committee Examination Manual:
“Full loan servicing exams are in the early stages for the few states that conduct them, and are non-existent for the majority of states. Given that and the low volume of loan servicing conducted in state regulated (i.e., non-bank) institutions, the mortgage servicing module and exam procedures are not incorporated into the core portion of the MMC exam process.”
Multi-State Mortgage Committee Examination Manual, page 244, found at http://www.aarmr.org/pdf/MMCExamManual-Published.pdf, last accessed on July 21, 2011.
The CFPB undoubtedly will look to fill this gap and its servicing compliance examination process will be comprehensive, and will apply not just to banks, but to non-bank servicers that may not be accustomed to in-depth servicing compliance reviews. All servicers should study the CFPB’s Servicing Exam Procedures carefully, in order to ensure that they are in full compliance with applicable Federal law at all times, and should ensure that their servicing policies and procedures conform to the standards set forth in the Servicing Exam Procedures.
The Servicing Exam Procedures are divided into nine Modules that describe the examination procedures for discreet aspects of mortgage servicing. The first six Modules address routine servicing activities. The next two Modules address default servicing activities, and the final Module addresses foreclosure activities. Of particular note are the CFPB’s examination procedures regarding loss mitigation procedures, as well as qualified written requests, force-placed insurance, payoff statements, accuracy of filings, and payment processing, since the requirements regarding many of these topics were recently added by regulation and/or amended by the Dodd-Frank Act. These Modules typically reference the examination procedures for specific statutes and regulations set forth in the Manual.
Module 1 of the Servicing Exam Procedures addresses the examination procedures for servicing transfers, loan ownership transfers, and escrow disclosures, to ensure (among other things) that servicers are providing the proper transfer notices to consumers under Regulation Z, RESPA, and the FDCPA. In particular, servicers should ensure that they are in compliance with all escrow requirements under RESPA and Regulation X, including the transfer of servicing notice requirements under Regulation X which requires that a new servicer provide an initial escrow account statement within sixty (60) days of the date of servicing transfer to the consumer if the new servicer changes either the monthly payment amount or the accounting method used by the old servicer.
Module 2 addresses the critical issues of payment processing and account maintenance requirements under Regulation Z, the Electronic Fund Transfer Act and the Homeowners Protection Act. Of particular importance are the CFPB’s examination procedures with respect to payment posting requirements. The CFPB will examine compliance with the closed-end and open-end loan payment posting requirements under Regulation Z. Additionally, it will examine how the servicer uses suspense accounts for both daily simple interest and non-daily simple interest loans, including examining when servicers place payments into suspense accounts, determining whether servicers assess if a consumer has cumulatively made a full PITI payment and applying it as necessary, and how the servicer applies funds in a suspense account to late fees or default-related fees. The CFPB will also examine whether the servicer credits payments toward principal and interest before it applies payments to fees and other charges. In addition to payment posting, under Module 2 the CFPB will also examine whether servicers provide payoff statements on a timely basis under TILA (as amended by the Dodd-Frank Act), which requires that servicers of home loans must provide an accurate payoff balance within a reasonable time, but in no case later than seven (7) business days after the receipt of a written request for such balance made by or on behalf of the consumer.
Module 3 addresses compliance with requirements regarding customer inquiries and complaints. Servicers should be aware that the CFPB will examine compliance with Dodd-Frank Act requirements regarding responding in a timely fashion to qualified written requests (QRWs) from consumers. The Dodd-Frank Act now requires that servicers provide initial written responses to QRWs within five (5) days instead of twenty (20) days, with the final resolution due in thirty (30) days instead of sixty (60) days. The CFPB will also examine servicers’ entire systems, procedures, and/or flowcharts for receiving, tracking, and responding to consumer complaints.
Module 4 addresses general compliance with escrow account and insurance product requirements under RESPA and Regulation X.
Servicers should note that the CFPB will examine compliance with the Dodd-Frank Act’s requirements on force-placed hazard insurance, including determining whether servicers have adequate procedures to prevent improper assessment of force-placed insurance, to inform consumer about force-placed insurance, to cancel force-placed insurance if the consumer provides adequate evidence of existing and sufficient insurance coverage, and to refund insurance premiums and related fees for improperly-imposed force-placed insurance.
Module 5 addresses compliance with credit reporting requirements. The CFPB will focus on furnisher requirements under FCRA and will compare sample loan information in the servicer’s system with information reported to the credit reporting agencies for accuracy. Module 6 addresses information sharing and privacy issues under the GLBA and the FCRA Affiliate Marketing Rule. Servicers should note that Modules 5 and 6 are not particularly fleshed-out in this version of the Servicing Exam Procedures; it is possible that the CFPB may amend the Servicing Exam Procedures to further enhance their examinations under these Modules.
Module 7 addresses compliance with collections issues for consumers in default. In particular, the CFPB will focus on compliance with the requirements of the FDCPA, and will examine whether third-party contractors engaged by servicers to contact consumers in default are also in compliance with the requirements of the FDCPA and do not engage in deceptive means to collect debts. This Module addresses examination of servicer practices in the event that a consumer files for bankruptcy.
Module 8 addresses the important issue of loss mitigation. Under this Module, the CFPB will examine servicing records of consumers who are delinquent or at imminent risk of default to assess the servicer’s loss mitigation activities. The CFPB will focus on fair lending issues under ECOA, in order to ensure that there is no disparate treatment on a prohibited basis in the determination of eligibility for loss mitigation programs. Additionally, the CFPB will examine servicer practices to determine if the servicer’s loss mitigation program has an adverse impact on the basis of a protected class under ECOA, even in the absence of actual disparate treatment. The CFPB will also review a list of factors relating to the application process for loss mitigation programs, including whether the servicer has procedures in place to ensure paperwork is collected and tracked in an efficient and reliable manner, and will review whether the servicer fully informs the consumer regarding the consequences of participation in a loss mitigation program, including whether the servicer has disclosed all fees associated with a loan modification in a timely and understandable fashion.
Module 9 addresses actual foreclosure issues, including a fair lending analysis of a servicer’s foreclosure practices, as described in Module 8. Of particular importance in this Module, the CFPB will examine whether a servicer is engaged in “robosigning” by determining whether the factual assertions made in the servicer’s foreclosure documents are accurate and adequately supported by file documentation, determining whether affiants have reviewed adequate information to confirm the right to foreclosure, and determine under what circumstances the servicer files a lost note affidavit instead of filing the note in a foreclosure action.
Servicers can find the Manual at http://www.consumerfinance.gov/guidance/supervision/manual/, and the Servicing Exam Procedures at http://www.consumerfinance.gov/guidance/supervision/manual/mortgage-servicing-examination-procedures/.