By Krista ShonkLast October, the Consumer Financial Protection Bureau released comprehensive amendments to the mortgage servicing rules—the sixth servicing-related rulemaking since February 2013. While some of the new rules can be characterized as a much-needed “sweep up” that provides clarifications and technical corrections, the rules also include significant substantive changes that will require banks to invest in technology, make changes to servicing systems and develop new policies, procedures and processes.
Most of the new provisions go into effect on Oct. 19, 2017. However, the portions of the rule that will be the most laborious to implement—those dealing with successors in interest and periodic statements for borrowers in bankruptcy—will go into effect on April 19, 2018. Now is the time for banks to mobilize their change management teams, budget for implementation, allocate staff time and proactively inquire about third-party vendor preparations to comply with the new requirements.
Successors in interest
One of the most significant changes to the servicing rules involves situations where a borrower transfers a legal interest in mortgaged property to a “successor in interest.”
Historically, successors in interest were defined as individuals who received a property interest after the death of a borrower. However, under the new CFPB servicing rules, successors may obtain a property interest while the transferor is still living, including transfers resulting from divorce or legal separation, transfers to the borrower’s spouse or children during the borrower’s lifetime and certain transfers into a family trust.
Policies and procedures. The servicing rules establish several types of policies and procedures that a bank must maintain with respect to successors in interest. For example, a bank must have policies and procedures that explain how the bank will, among other things, communicate with potential successors in interest. Policies and procedures must also describe how a bank determine the documents that the bank requires to confirm a potential successor’s identity and ownership interest in the property. Significantly, the documents that a servicer requires to confirm a successor’s identity and ownership interest must be “reasonable” in light of the laws of the jurisdiction where the property is located. For this reason, banks should analyze the laws in all of the states in which they service mortgage loans and tailor their policies and procedures accordingly.
Confirmed successors treated as borrowers. In addition to establishing requirements for communicating with successors in interest and confirming a successor’s claim to the property, banks must treat a successor in interest the same as a borrower for purposes of the servicing rules—even if the successor is not an obligor on the mortgage loan account. This means that confirmed successors are entitled to the same disclosures and procedural protections as borrowers as it relates to servicing transfers, escrow requirements, error resolution procedures, information requests, force-placed insurance, early intervention, continuity of contact, loss mitigation, adjustable rate mortgage notices, payment crediting and periodic statement requirements. Successors in interest, like borrowers, are entitled to enforce certain provisions of the servicing rules via a private right of action (for example, the loss mitigation procedural protections).
Importantly, the servicing rules attempt to address privacy concerns associated with providing sensitive information to persons not obligated on a mortgage loan. Because a successor in interest may receive an ownership interest in property while the transferor or obligor is still alive, banks are not required to provide some of these disclosures to a successor in interest if the bank provides the same disclosures to a borrower on the account. Similarly, the CFPB permits servicers to limit the information that they provide to confirmed and potential successors in interest pursuant to the servicing rule’s information request and error resolution procedures.
Periodic statements for borrowers in bankruptcy
Previously, banks were exempt from providing periodic statements to borrowers who had filed for bankruptcy. In a significant departure from this exemption, the servicing rules now require that servicers provide modified periodic statements to consumers in bankruptcy, subject to certain exemptions. The modified statement requirement applies regardless of the chapter of bankruptcy under which the borrower files. The rules establish detailed content requirements for the modified statements, including special content for borrowers in Chapter 12 and 13 bankruptcy. Providing periodic statements that meet the rule’s content requirements will be a significant undertaking, and servicers should make their implementation preparations accordingly.
Importantly, coupon book providers are not off the hook. The new rules specify modifications that banks must make to coupon books (or separate pages enclosed with coupon books) when providing coupon books in lieu of modified periodic statements.
Even though the requirements pertaining to successors in interest and periodic statements for borrowers in bankruptcy don’t go into effect until April 2018, implementation of these provisions is anticipated to be a substantial task. Banks should begin implementation as soon as possible, while being mindful of the October 2017 implementation deadline for all other provisions of the new servicing rules.
Krista Shonk is VP and senior regulatory counsel for mortgage finance at ABA.
Navigate the Servicing Rule Changes with ABA’s Mortgage Servicing Guide
The CFPB’s recent mortgage servicing rules are the latest addition to the thousands of pages of servicing regulations. To help bankers, compliance professionals and mortgage lenders navigate the rules, ABA has published a members-only Mortgage Servicing Reference Guide. Available at no charge to ABA members, the guide pulls together all servicing-related information into one central location. The publication is organized based on the lifecycle of a mortgage loan, making it easier to find information, and contains a linked table of contents for easy navigation. The guide contains several charts that serve as a quick-reference compliance aids, as well as practical tips for compliance.