Compliance Blog

Written by Brandy Bruyere, Director of Regulatory Compliance

As everyone gears up to consume turkey tomorrow (or Tofurkey, or some other option, to each their own!), I wanted to share with everyone an issue with the mortgage servicing rules that a couple of our eagle eye members have asked about recently. This gets technical, so hang in there with me.

Most of the 2016 mortgage servicing rules go into effect on October 19, 2017, although provisions relating to successors in interest and borrowers in bankruptcy go into effect on April 19, 2018. Here's an excerpt from the preamble to the rule:

The Bureau is adopting an effective date of one year after publication for all provisions, except for an effective date of 18 months after publication for the bankruptcy periodic statement exemption and modified statements (§1026.41(e)(5) and (f)) and for the following regulation text and commentary provisions specifically addressing successors in interest: In Regulation X, §1024.30(d) and related comments 30(d)-1 through -3; the definitions of successor in interest and confirmed successor in interest in §1024.31 and related comments 31 (Successor in interest)-1 and -2; §1024.32(c) and related comments 32(c)(1)-1, 32(c)(2)-1 and -2, and 32(c)(4)-1; §1024.35(e)(5); §1024.36(d)(3) and (i) and related comments 36(i)-1 through -3; §1024.38(b)(1)(vi) and related comments 38(b)(1)(vi)-1 through -5; comment 41(b)-1; comment appendix MS to part 1024-2; and in Regulation Z, §1026.2(a)(11) and (27) and related comments 2(a)(11)-4 and 2(a)(27)(i)-1 and -2; comment 20(e)(4)-3; §1026.20(f); comment 36(c)(1)(iii)-2; §1026.39(f); comment 41(c)-5; and §1026.41(g). The Bureau considered the comments, including the potential issues that could arise as a result of an inadequate implementation period and industry's focus on other recent mortgage rulemakings, and believes that these effective dates achieve the right balance between affording industry sufficient time for implementation and promptly affording consumers the benefits of the final rule.

(Emphasis added).

Notice, the preamble specifically notes that the commentary relating to successors in interest will take 18 months to become effective, but what about the commentary to the provisions on periodic statements for borrowers in bankruptcy (sections 1026.41(e)(5) and (f))? These provisions of the regulatory text have an 18 month implementation period, but there is no corresponding reference to the commentary to these two provisions being effective in 18 months.

This seems like a possible error in drafting. Commentary that does not reference a rule that is in effect does not have much meaning or weight as guidance. For example, should Regulation Z be updated with commentary to section 1026.41(f) before section 1026.41(f) is formally incorporated into the regulation, it would essentially be commentary to nothing, temporarily orphaned. Additionally, throughout the preamble, the CFPB is consistent in its position that the provisions specific to borrowers in bankruptcy become effective 18 months after the rule published in the Federal Register, or April 19, 2017. Here's another excerpt relating to the effective dates:

The Bureau recognizes that the final rule provisions regarding bankruptcy periodic statements and successors in interest may take more time to implement than the other final rule provisions. Specifically, servicers and third-party service providers need sufficient time to coordinate, develop, and test systems required to modify periodic statements for consumers in bankruptcy. They also need sufficient time to train employees regarding the bankruptcy periodic statement requirements. In addition, although the successor in interest provisions generally should not require the same levels of operating systems changes as the bankruptcy periodic statement requirements, the Bureau acknowledges that these proposed provisions generated more comments than any other aspect of the proposal. Many servicers may need to institute new systems to track potential and confirmed successors in interest who are not obligated on the loan, particularly as to those successors in interest who are not already covered under the policies and procedures requirement in existing [rules]. Servicers also need sufficient time to develop policies and procedures relating to the types of documents that they will accept to confirm successor in interest status for common factual scenarios that could arise under the final rule's broader definition of successor in interest. The Bureau also recognizes that servicers may wish to work with third-party service providers to ensure compliance with the successor in interest provisions. Thus, the Bureau believes that an implementation period of 18 months is reasonable for the changes to the bankruptcy periodic statement exemption and modified statements and to the provisions specifically addressing successors in interest.

So if the commentary looks a little odd and refer to provisions not yet in effect when it is published in the Code of Federal Regulations, it would seem to be an error. The CFPB has issued technical corrections on somewhat similar occurrences but for now, the intention that the effective date of April 19, 2018 apply to these bankruptcy provisions seems clear.

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Programming Note. NAFCU's offices will close at noon today and also be closed on Thursday and Friday in observance of Thanksgiving. We wish you all a safe and wonderful holiday. We'll be open and back to blogging on Monday.