Monday, May 13, 2019

Mortgage Servicers: CFPB Supervisory Highlights Report

On March 12, 2019, the Consumer Financial Protection Bureau (CFPB) released the 18th edition of its Supervisory Highlights report. The report covers supervision activities completed between June 2018 and November 2018 and discusses supervisory observations related to automobile loan servicing, deposits, mortgage servicing, and remittances.

I am going to provide a synopsis of the highlights as they pertain to mortgage servicing.

When I read the highlights, I am particularly glad that we help our mortgage servicer clients to avoid violations.

If you need assistance, we are the cost-effective solution. Contact us for more information!

A highlight from the CFPB should be understood as a violation of federal banking law. Be careful and vigilant!

Charging Consumers Unauthorized Amounts
One or more examinations observed that servicers charged consumers late fees greater than the amount permitted by mortgage notes. Examiners identified several types of affected mortgage notes. For example, certain Federal Housing Administration (FHA) mortgage notes permit servicers to collect late fees in the amount of 4.00 percent of the overdue principal and interest. However, on large numbers of loans, the servicer charged late fees on 4.00 percent of the overdue principal, interest, taxes, and insurance rather than on only the principal and interest. Examiners also identified mortgage notes containing provisions that limit the late fee amount. Programming errors in the servicing platform and lapses in service provider oversight caused the overcharges. The examination found that the servicer engaged in an unfair practice. The conduct caused a substantial injury to consumers because they paid more in late fees than required by their mortgage notes.

Misrepresenting Private Mortgage Insurance Cancellation Denial Reasons
In relevant part, the Homeowners Protection Act (HPA) requires servicers to cancel private mortgage insurance (PMI) in connection with a residential mortgage transaction if certain conditions are met. At one or more servicers, borrowers who verbally requested PMI cancellation were informed that they were declined because they had not reached 80 percent loan to value (LTV). Although the relevant amortization schedules did not yet provide for 80 percent LTV, examiners found that these borrowers had in fact reached 80 percent LTV based on actual payments because they had made extra principal payments. Although the borrowers did not satisfy other criteria necessary to trigger borrower-initiated cancellation rights under the HPA, such as certifying that the property is unencumbered by subordinate liens or submitting the requests in writing, the servicer did not provide these as reasons to borrowers for denying the requests.

One or more examinations identified servicer representations as deceptive because they misrepresented the conditions for PMI removal. Consumers might think that they had miscalculated payments such that they had not yet reached 80 percent LTV or had misunderstood some other aspect of meeting the LTV requirement. Note that the HPA does not require servicers to respond to verbal requests to eliminate PMI, and therefore, the servicer did not violate the HPA.

Failing to Exercise Reasonable Diligence to Complete Loss Mitigation Applications
Regulation X requires servicers to exercise reasonable diligence in obtaining documents and information to complete a loss mitigation application. In examinations covering 2016 (this is outside the time frame of other activities in the report), examiners found that one or more servicers did not meet the Regulation X reasonable diligence requirements. These servicers offered short-term payment forbearance programs during collection calls to delinquent borrowers who expressed interest in loss mitigation and submitted financial information that the servicer would consider in evaluating them for loss mitigation. However, the servicer did not notify the borrowers that such short-term payment forbearance programs were based on an incomplete application evaluation. And near the end of the forbearance period, the servicer did not contact the borrowers as to whether they wished to complete the applications to receive a full loss mitigation evaluation. As a result, one or more examinations found that the servicer violated 12 CFR 1024.41(b)(1) requirements to exercise reasonable diligence in obtaining documents and information to complete a loss mitigation application.

Requirements for Foreclosure Timeline Extensions in Home Equity Conversion Mortgages
One or more examinations reviewed the servicing of home equity conversion mortgage (HECM) loans, a type of reverse mortgage insured by the Department of Housing and Urban Development (HUD). Under the terms of such mortgages, the death of the borrower on the loan constitutes default, and HUD generally requires HECM servicers to refer such loans to foreclosure within six months of the death of the borrower to be eligible for HUD insurance. HUD also allows servicers to request up to two 90-day extensions to enable successors to purchase the property or market the property for sale without losing the benefit of HUD insurance. One or more servicers sent a notice to successors-in-interest after the borrower on the loan died. The notice stated that the loan balance was due and payable, but that the successor could qualify for an extension of time to delay or avoid foreclosure. Examiners found that some successors did not receive a complete list of all the documents needed to evaluate them for an extension. Some of these successors returned the form indicating their intentions to purchase the property or market the property for sale, but did not return all the documents that were needed for the evaluation. As a result, the servicer did not seek an extension for these successors.

Jonathan Foxx, PhD, MBA
Managing Director
Lenders Compliance Group

Wednesday, January 30, 2019


Chairman & Managing Director

Filing the HMDA LAR annually often seems like a Rite of Passage. Most filers vacillate between dread and certitude in their evaluation of the data integrity, let alone enduring the stress of submitting the report by the deadline. The acronyms HMDA LAR refer (of course) to the Loan Application Register (LAR) of the Home Mortgage Disclosure Act (HMDA or “Act”) and its implementing Regulation C (“Regulation”). By the way, the HMDA acronym is pronounced “hummda” – not “himmda”. Each year about this time, we get a lot of calls for HMDA support, especially in LAR preparation and filing. In the last few years, changes in filing requirements seem to have pushed filers to the point of reaching for the bottle (of Maalox). But the filing requirements are not that complicated, though they are now more involved in obtaining data and include partial exemptions (more on that later).

If you don’t think HMDA data is all that important except to the PhD’s at the Federal Reserve, you should spend some time with financial institutions who have undergone fair lending examinations. One of the first data sets a regulator asks for in a fair lending audit happens to be the HMDA LAR. The data is used to help identify possibly discriminatory lending patterns, and compliance with the Equal Credit Opportunity Act, the Fair Housing Act, and the Community Reinvestment Act. Inaccurate HMDA data can make it difficult for the public and regulators to discover and stop discrimination in home mortgage lending or for public officials and lenders to tell whether a community’s credit needs are being met. Yet I was told by a senior executive that there is nothing to be concerned about these days, given that under the current Administration there has been a reduction of regulatory enforcement. The same person told me that regulators have been advised to go easy on examinees. So, that means you can get away with lowering the compliance bar. After all, less enforcement means less worries, right? Wrong!

The bird of compliance flies on two wings: examination and enforcement. Examination is intrinsic to supervision; and enforcement is intrinsic to ensuring implementation of the regulatory framework. If an examiner finds violations and defects, administrative actions can ensue. If you want to be a test case, go ahead, tempt the devil, see what happens! In compliance, virtually all transactions and policies leave tracks. If “don’t get caught” is your game plan, I am going to tell you straight-out that you will get caught. Any creditor that fails to comply with a requirement imposed by the Act or the Regulation is subject to civil liability for actual and punitive damages in individual or class actions.[i] Violations of the Act or the Regulation also constitute violations of other federal laws. The civil monetary penalties can be onerous! Last year a financial institution was ordered to pay a civil money penalty of $1.75 million for persistent and substantial reporting errors.[ii] Liability for punitive damages can apply only to nongovernmental entities and is limited to $10,000 in individual actions and the lesser of $500,000 or 1 percent of the creditor's net worth in class actions.[iii] There is not only equitable and declaratory relief but also the awarding of costs and reasonable attorney fees to an aggrieved applicant in a successful action.[iv] Still want to tempt the devil?

When it comes to HMDA, a financial institution must make a good faith effort to record all data concerning covered transactions fully and accurately within 30 days after the end of each calendar quarter.[v] The concept of “good faith” is a feature of many statutes, but the notion comes down to a simple idea: if you operate on the basis of a positive commitment to fulfill the terms and spirit of a regulation, yet despite doing so you still had some defects in implementation, regulators will take this into consideration in determining administrative actions. How would you prove such good faith? Just show the regulator the compliance tracks which support your actions and best efforts.

A financial institution is not required to record all of its HMDA data for a quarter on a single LAR. Instead, an institution may record data on a single LAR or may record data on one or more LARs for different branches or different loan types (such as home purchase loans, home improvement loans, and loans on multifamily dwellings).

A financial institution may maintain its quarterly records in electronic or any other format, provided it can make the information available to the regulatory agency in a timely manner upon request.[vi]

Whatever the case, institutions must submit their LARs to their regulatory agencies by March 1st following the calendar year for which they are reporting.[vii] The required data requested on the LAR must be entered for each loan origination, each application acted on, and each loan purchased during the calendar year.[viii] An application must be reported in the year when final action is taken. Originations must be reported in the year they close; if an application has been approved but not yet closed, it must be reported the next year.[ix]