Compliance Blog

Last week, the Consumer Financial Protection Bureau (CFPB) issued a consent order against Specialized Loan Servicing, LLC (SLS). The consent order came after the CFPB concluded its investigation into certain practices related to SLS’s mortgage servicing portfolio. Under the consent order, SLS must pay $775,000 to consumers as redress and waive an additional $500,000 in borrower deficiencies. The order also requires SLS to pay the CFPB a civil money penalty of $250,000. In addition to these monetary obligations, the consent order requires SLS to implement policies and procedures to address the regulatory violations, develop comprehensive compliance plans to ensure that these corrective policies and procedures comply with applicable law, and satisfy recordkeeping and compliance monitoring requirements.

CFPB’s Findings

The consent order addressed two issues. First, the CFPB found that SLS failed to comply with the foreclosure protections set forth in sections 1024.41(f)(2) and (g) of Regulation X. Section 1024.41(f)(2) prohibits mortgage servicers from making the first notice or filing in a judicial or nonjudicial foreclosure unless:

• They have provided written notice to the borrower that the borrower is ineligible for any loss mitigation option and the borrower’s right to appeal has been exhausted;
• The borrower rejected all options offered; or
• The borrower failed to perform under a loss mitigation agreement.

The protections in section 1024.41(f)(2) are triggered when a borrower submits a complete loss mitigation application – the servicer has all the information it needs to evaluate the borrower for loss mitigation – before the first notice or filing is made or during the pre-foreclosure review period. What constitutes a complete loss mitigation application can vary from credit union to credit union. The limits of the pre-foreclosure review period are set forth in section 1024.41(f)(1):

• The borrower is more than 120 days delinquent;
• The borrower violates a due-on-sale clause; or
• Another lienholder has filed a foreclosure action.

Section 1024.41(g) prohibits a servicer from moving for a foreclosure judgment or sale or conducting a foreclosure sale unless the same criteria that triggers the 1024.41(f)(2) protections are satisfied. Like, the protections in section 1024.41(f)(2), the protections in section 1024.41(g) must be triggered. Under the rule, these protections kick in if a borrower submits a complete loss mitigation application after the first foreclosure notice or filing has been filed but more than 37 days before a sale is scheduled.

The CFPB specifically found that SLS violated these protections “by making [f]irst [f]ilings, moving for foreclosure judgments or orders for sale, and conducting foreclosure sales when the borrower was entitled to protection from those actions.”

The second issue addressed by the consent order related to SLS’s evaluation of complete loss mitigation applications. Section 1024.41(c)(1)(ii) requires servicers to provide borrowers – within 30 days of receipt of a complete loss mitigation application – with a written notice explaining which loss mitigation options will be offered to borrowers. The written notice also needs to advise borrowers how much time they have to accept or reject an offer and whether they have a right to appeal the denial of any loan modification option, including any applicable timing requirements. This protection arises if a borrower submits a complete loss mitigation application more than 37 days before a foreclosure sale is scheduled. The CFPB found that SLS failed to comply with these requirements by “fail[ing] to send or timely send [e]valuation [n]otices to certain borrowers who were entitled to [e]valuation [n]otices under Regulation X.”

Small Servicer Exemption

Small servicers service 5,000 or fewer mortgage loans for which they are the creditor or assignee, and mortgage loans here generally means closed-end consumer credit secured by a dwelling. Small servicers are exempt from several of the mortgage servicing requirements in Regulations X and Z. This includes most of the loss mitigation rules, but small servicers are subject to the prohibition on foreclosure referral activity and shall not move for judgment or conduct a sale if a borrower is performing pursuant to the terms of a loss mitigation agreement. With respect to the CFPB’s findings in this consent order, small servicers may be subject to the parts of the loss mitigation rule covering foreclosure protections, but they may not be subject to the second issue addressed in the consent order related to the evaluation of complete loss mitigation applications.

Because of the anticipated wave of loss mitigation applications that may be on the horizon due to the COVID-19 pandemic, credit unions may wish to review their policies and procedures to determine whether they have adequate controls in place to ensure that they will not violate the foreclosure prohibitions and the complete loss mitigation evaluation requirements found in section 1024.41.

Programming note: NAFCU is closing today at 12 PM EDT for the Memorial Day holiday weekend. No blog will be published on Monday, but the blog will resume next Wednesday.