Compliance Blog

Written by Bernadette Clair, Regulatory Compliance Counsel

Earlier this week, we blogged about the CFPB’s Summer 2013 Supervisory Highlights Report, and the sections of the report dealing with compliance management systems and fair lending issues related to providing adverse action notices.  Another hot button topic covered in the report is mortgage servicing, particularly issues related to servicing transfers, payment processing, and loss mitigation.  Here are some of the highlights:

Servicing Transfers. Back in February 2013, the CFPB announced its intention to closely monitor transfer activity by mortgage servicers and issued Bulletin 2013-1 providing information on particular areas of focus. The latest Supervisory Highlights Report reflects the CFPB’s focus in this area and provides examples of some of the servicing transfer issues that the CFPB has found during reviews. From the report:

“During its reviews of mortgage servicing, the CFPB detected risks to consumers in transfers of the servicing of  loans among institutions. For example, examiners found noncompliance with the requirements of the Real Estate Settlement Procedures Act (RESPA)⁵ to provide disclosures to consumers about transfers of the servicing of their loans. In other reviews, examiners noted lack of controls relating to the review and handling of key documents –  such as loan modification applications, trial modification agreements, and other loss mitigation agreements – necessary to ensure the proper transfer of servicing responsibilities for a loan. For example, examiners noted that one servicer conducted some due diligence on transferred servicing data but did not review any individual documents that the prior servicer had transferred, such as trial loan modification agreements.” (Footnote omitted.)

Payment Processing. The CFPB also found issues related to payment processing during its reviews. A couple of the examples in the report include a servicer that failed to provide adequate notice to borrowers of a change in the address for sending payments, and a servicer that paid property taxes late. Here’s a taste of how the CFPB handled the servicer that paid property taxes late:

“In another review, the CFPB determined that a servicer paid certain property taxes late, in violation of RESPA. The CFPB directed the servicer to pay any fees associated with the late payment, and to investigate whether consumers experienced any additional harm as a result of the late payments. Further, at the CFPB’s direction, the servicer will notify consumers of the late payment and fee payment, and solicit information from borrowers about any additional harm caused by the late payment. If any such harm is identified, the servicer will remediate it.”

Loss Mitigation. In the area of loss mitigation, CFPB examiners found several issues, including:

• Inconsistent loss mitigation underwriting;

• Inconsistent waivers of certain fees or interest charges;

• Long application review periods;

• Missing denial notices;

• Incomplete and disorganized servicing files;

• Incomplete written policies and procedures; and

• Lack of quality assurance on underwriting decisions.

The CFPB also provides its expectations when these types of issues are identified by examiners. From the report:

“When examiners identify these issues, CFPB expects corrective action, and in the case of violations, directs the servicer to improve its policies and procedures governing the handling of loans in loss mitigation and the documentation of servicer actions, as well as training appropriate personnel on the new policies and procedures. Additionally, CFPB has directed servicers to engage in specific corrective actions appropriate to the circumstances, such as: reviewing loss mitigation decisions and related fees or charges to borrowers to determine whether any reimbursement is appropriate, conducting periodic testing to monitor areas of concern, and providing reports to CFPB on progress completing these corrective actions.

In addition to general compliance risks, weak compliance management surrounding loss mitigation processes creates fair lending risk. CFPB expects that entities servicing mortgage loans will implement fair lending policies, procedures, and controls to ensure that they are complying with the Equal Credit Opportunity Act. ⁸ While the appropriate program will vary from financial institution to financial institution, CFPB expects that at a minimum, entities servicing mortgage loans will conduct fair lending training for loss mitigation staff, and will engage in effective and timely fair lending risk assessments, compliance monitoring, and testing of fair lending risks.” (Footnote omitted.)

Once again, fair lending issues are emphasized, and as Mike noted in Monday’s blog post, this will continue to be a hot topic for the CFPB and NCUA.

For more details on the CFPB’s supervisory findings and program developments, check out the complete Supervisory Highlights Report.