Compliance Blog

Earlier this month, the CFPB issued a consent order against yet another mortgage servicer. The order claims that Fay Servicing, LLC (Fay) failed to inform borrowers of certain foreclosure protections, did not provide required notices informing borrowers of their options to save their homes and moved forward with the foreclosure process in violation of the mortgage servicing regulations. The CFPB ordered Fay to stop their illegal practices, create policies and procedures to ensure compliance with the mortgage servicing regulations and pay $1.15 million to harmed borrowers.

Applicable Laws. Regulation X provides a number of requirements for mortgage loan servicers. Section 1024.38 generally requires servicers to have policies and procedures in place that ensure the servicer complies with the mortgage servicing regulations. Among other things, the rule requires that these policies and procedures be reasonably designed to ensure the servicer provides timely notices and accurate information to borrowers, properly evaluates loss mitigation applications and identifies all loss mitigation options available to a borrower.

Section 1024.41 provides specific requirements regarding all loss mitigation applications. The rules require servicers to provide an acknowledgement notice that informs the borrower that her application has been received and, if the servicer needs additional information, what documents the borrower must submit in order for the servicer to evaluate the application. Once a servicer has evaluated a complete loss mitigation application, the rules require the servicer to provide an evaluation notice that informs the borrower whether she has been approved for a loss mitigation option and, if she has been denied all options, that she has the right to appeal the decision. The loss mitigation rules also prohibit a servicer from taking certain foreclosure actions, including filing for foreclosure or conducting a foreclosure sale, after the servicer has received a complete loss mitigation application.

Fay's Actions. According to the CFPB, Fay repeatedly failed to send the acknowledgement and evaluation notices within the timeframes required by the rules and, in some instances, failed to send the notices altogether. The order explains that these failures stemmed from the fact that Fay did not have proper procedures in place to ensure these notices were sent. At first, Fay's policies did not address either acknowledgment or evaluation notices at all. Fay's policies later addressed both of these notices but only regarding applications where the borrower indicated a preference for retaining her home. Even after implementing these policies, the order explains that Fay still failed to send the required notices. At no point did Fay's policies address notices for those loss mitigation applications where a borrower did not indicate a preference to retain her home.

Even where Fay did send an acknowledgment or evaluation notice, the CFPB found that these notices did not contain all required information. Where Fay needed additional documentation from the borrower, the acknowledgement notice did not adequately inform the borrower of the required documentation. For example, for a self-employed borrower, Fay needed profit and loss statements as documentation of the borrower's income; however, the acknowledgement notice simply stated "Income Documentation (e.g., two most recent paystubs)." Also, Fay's evaluation notices did not adequately inform borrowers of their right to appeal a decision. The rules allow a borrower to appeal the denial of any option as long as the servicer received the loss mitigation application more than 90 days before a foreclosure sale. Fay's evaluation notices instead stated that the borrower could appeal only if "a foreclosure sale was 90 days or more from the date on the Evaluation Notice."

In addition to the notification issues, the CFPB also determined that Fay moved forward in the foreclosure process after receiving a complete loss mitigation application by moving for foreclosure judgments and conducting foreclosure sales. Again, Fay failed to have policies and procedures in place to prevent these violations and, even after implementing such policies, the policies were only for those applications where the borrower indicated a preference to retain her home. According to the CFPB, these policies also failed to properly address when borrowers were entitled to foreclosure protections. For example, when Fay denied a borrower's application for all available options, it lifted all foreclosure holds as soon as it made this determination, rather than waiting until all appeals had been exhausted as required by Regulation X. For borrowers who submitted a loss mitigation application and did not indicate a preference for retaining their home, Fay left it up to its personnel and its Foreclosure Review Committee to determine whether the borrower was entitled to any foreclosure protections. The rule affords foreclosure protections to all borrowers.

CFPB's Judgment. As a result of these violations, the CFPB ordered Fay to comply with a number of requirements. First, Fay was ordered to stop its illegal practices. Depending on where the borrower was in the loss mitigation process, this meant that Fay must stop the foreclosure process (dismissing the complaint, vacating the judgment, etc.), properly evaluate the borrower for all loss mitigation options, or send required notices. Second, Fay was ordered to establish a compliance committee, made up of three members of Fay's board of directors, and develop a compliance plan that would ensure future compliance with the mortgage servicing regulations. Finally, Fay was ordered to pay $1.15 million to harmed borrowers.

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These rules, along with a number of other servicing rules in Regulations X and Z, have been amended recently. These amendments go in effect in October 2017 and April 2018. For more on these amendments, check out NAFCU's mortgage servicing webpage and blogs.