Against the backdrop of the COVID-19 pandemic and the economic stress it is imposing on US residential mortgage borrowers, lenders and servicers, the Consumer Financial Protection Bureau (“CFPB”) recently released a compliance bulletin and policy guidance regarding the handling of information and documents in mortgage servicing transfers. While not specifically motivated by the COVID-19 pandemic, Bulletin 2020-02, issued on April 24, 2020 (the “Bulletin”), is quite timely. The economic disruption caused by the pandemic is likely to lead to both voluntary and involuntary changes in servicers of mortgage loans. Moreover, the increasing number of borrowers obtaining forbearances and loan modifications will make servicing transfers more difficult. Indeed, in the aftermath of the last financial crisis, servicers were “asked” to take over servicing from troubled institutions, which resulted in non-cooperative transferors and inaccurate or incomplete data. The incomplete or inaccurate data made it difficult in certain cases to service the loans. Unfortunately, the CFPB and other enforcement agencies did not accept this as an excuse for subsequent servicing errors, and several investigations and enforcement actions centered on servicing of loans following involuntary or forced transfers. Mortgage loan servicers and subservicers therefore should pay close attention to the perspective of the CFPB set forth in the Bulletin.
The housing finance industry as it exists today depends on an active mortgage servicing market in which the rights to service mortgage loans and the obligations to perform the operative servicing of mortgage loans move among market participants, including banks, non-banks, investors in servicing rights, and subservicers. While borrowers may not be participants in this market, they are impacted by the transactions, as the transfers result in changes in payment address and other points of contact. The impact may be particularly significant for borrowers in the middle of the loss mitigation process since that requires considerable interaction between servicers and borrowers, including exchanges of documents and information, and application of new terms of loan payment. With an eye on the potential negative impacts on borrowers from improper servicing transfers, the CFPB wants servicers to employ transfer policies and procedures that will prevent adverse effects on borrowers and comply with applicable regulations under the Real Estate Settlement Procedures Act, as implemented by CFPB Regulation X. While Regulation X does not require any specific policies or procedures, it requires that policies and procedures be “reasonably designed” to achieve the goal of a seamless transaction from a borrower’s perspective, including policies and procedures regarding timely identification of and transfer of accurate information and documents necessary for the servicing of the mortgage loan.
The Bulletin, applicable to servicers and subservicers of residential mortgage loans, is focused on these transfers of information and documents and builds on the CFPB’s Bulletin 2014-01, which addressed mortgage servicing transfers more broadly.
Identified Failures in Past Servicing Transfers
The Bulletin notes that in supervisory examinations over the past half-decade, the CFPB has found weaknesses in compliance management systems as well as violations of Regulation X related to mortgage servicing transfers. In particular, the CFPB found in some cases that a servicer’s policies and procedures with respect to transfer of loan information and documentation to a subsequent servicer were inadequate, potentially causing delays in transfer or inaccuracies in data. These statements echo the findings of the CFPB in other contexts. Many of the findings related to servicing transfers that the CFPB has included in its Supervisory Highlights and consent orders relate to failures to properly handle the transfer of loss mitigation-related information and documents. Since many more borrowers likely are submitting loss mitigation applications or entering into deferral or forbearance agreements given the impacts of COVID-19, policies and procedures related to the transfer of loss mitigation information and documents may be especially relevant in the coming months.
The Bulletin sets forth examples of servicer practices the CFPB “may consider as contributing to policies and procedures that are reasonably designed to achieve the objectives” of the transfer requirements. It puts the practices in bulleted lists but then closes by noting that “[a]s the composition and complexity of servicer portfolios vary, servicers may not need to implement all of the example policies and procedures listed,” making it clear that it isn’t setting forth absolute requirements. In sum, the CFPB does not require the listed practices but indicates that it will look favorably on servicers that use them.
The CFPB places a special emphasis on two overlapping areas. The first area of emphasis is post-transfer monitoring to make sure transferred data is complete and accurate, and adequate for continuation and completion of in-process loss mitigation applications and agreements. The second area of emphasis is receipt and maintenance of a complete servicing file, which would include information and documentation the CFPB intends to assess (examples of which are listed in Appendix A to the Bulletin). The Bulletin provides additional areas of focus for servicers’ policies and procedures, however, and includes the following examples of practices the CFPB will consider to be designed to meet the transfer requirements:
Planning and Pre-Transfer Testing
- Developing a transfer plan that includes a communications plan, a system conversion testing plan, a timeline with key milestones and an escalation plan for potential problems.
- Conducting meetings among the parties to discuss and clarify issues in a timely manner. For large transfers, the meeting could occur months in advance for development transfer plans and the obligations of all involved parties, including service providers and investors.
- Recognizing when a transfer cannot be implemented successfully at one time and implementing alternatives, such as splitting the transfer into several smaller transfers in subsequent months to ensure that the transferee can comply with its servicing obligations for all loans.
- Determining servicing responsibilities for legacy accounts including tax reporting, credit bureau reporting and other questions that may arise.
- Using tailored testing protocols to evaluate the compatibility of the transferred data with the transferee servicer’s systems and data mapping protocols.
- Proactively identifying material issues that could affect the accuracy or completeness of the loan data or documentation or a party’s ability to comply with the law or investor guidelines for the transferred loans.
- Identifying loans in default, active foreclosure and bankruptcy.
- Including documentation of loss mitigation activity, including status and related notes, copies of agreements with a borrower for loss mitigation options, and analysis of potential recovery from non-performing loans.
- Engaging in quality control work after a transfer of preliminary data to validate that the data on the transferee’s system matches the data submitted and prioritizing data mapping errors from de-boarding or on-boarding process for resolution.
- Conducting a post-transfer review or de-brief to determine effectiveness of the transfer plan and whether gaps have arisen that require resolution.
- Monitoring consumer complaints and loss mitigation performance metrics, including borrower engagement rate, approvals of trial modifications, repayment plans, non-home retention options, and completed workouts for at least four to six months after transfer.
- Monitoring delinquencies, foreclosures and bankruptcies to detect trends, including month-to-month increases after transfer.
In addition, the Bulletin encourages servicers to adopt a common data standard and data dictionary (such as the Mortgage Industry Standards Maintenance Organization standard) to facilitate data compatibility and data field consistency across the servicing industry, with the goal of ensuring the timely transfer of accurate information and documents with respect to each servicing transfer.
The CFPB clearly posits the Bulletin as general guidance and not a statement of requirements. As discussed above, the Bulletin expressly states that servicers do not necessarily need to implement all of the practices and policy examples listed in the Bulletin. The CFPB also describes Bulletin 2020-02 as a “non-binding general statement of policy.” Like other agency guidance, this Bulletin is not legally enforceable, and the CFPB has explained that it generally will not take enforcement action or cite a regulated entity for a violation of guidance.
Also, in what undoubtedly was a late addition to the Bulletin, it notes that the CFPB is not blind to the current difficulties facing the housing industry due to the COVID-19 pandemic and will take those difficulties into account. The Bulletin specifically addresses transfers that may be required by regulators, Fannie Mae, Freddie Mac or Ginnie Mae in this regard. It says that, for the duration of the declared COVID-19 national emergency and for 120 days thereafter, if a servicing transfer is requested or required by a federal regulator or by the security issuer for “Government Loans” as defined in the CARES Act, the CFPB intends to consider challenges entities may face due to the pandemic and will be sensitive to servicers’ good faith efforts to transfer servicing without adverse impact on borrowers. The term “Government Loans” isn’t actually defined in the CARES Act, however the term “Federally backed mortgage loan” is defined in the act to include Fannie Mae and Freddie Mac loans and FHA, VA, and USDA loans, and this may be what the CFPB intended. Regardless whether that’s what the CFPB specifically meant, it appears clear that the CFPB means to cover transfers of servicing required by governmental authorities, if not also Fannie Mae and Freddie Mac. As has been reported, Mark Calabria, the director of Fannie Mae’s and Freddie Mac’s regulator, has indicated that those investors may force transfers of servicing rights from distressed mortgage loan servicers.
Notwithstanding statements that appear to soften the impact, servicers will want to take notice of the Bulletin because it may provide a helpful roadmap on how to comply with the broad requirement to maintain policies and procedures to achieve certain goals related to servicing transfers. Although the Bulletin makes it clear that servicers don’t need to follow all of the suggested practices, servicers should consult the bulleted lists of suggested practices in the Bulletin and examples of information to be transferred, which can serve as useful checklists.
The importance of properly handling the servicing transfer processes is evidenced by the number of violations related to transfers identified by the CFPB in past supervision and enforcement. For example, in-flight modifications were the subject of several consent orders, and alleged failures to honor in-flight modifications resulted in hundreds of millions of dollars of remediation and penalties.
As well known by those in the mortgage lending and servicing industry, and as evidenced by the past identification of violations, the enforcement approach of the CFPB and other regulators is subject to change over time. Transfers of servicing today may be judged by regulators acting under new and different leadership, or different authorities altogether, and seeming flexibility now may evaporate over time. Servicers should therefore consider the content of the Bulletin seriously and be prepared to explain the steps they’ve taken consistent with its guidance.