What the CFPB May Target in Second Round of Mortgage Servicing Rules

WASHINGTON — A bulletin from the Consumer Financial Protection Bureau outlining new policies for mortgage servicing transfers has the industry on alert for another possible round of rulemaking coming down the pike.

The bulletin, which was released last week, explicitly details what examiners expect to see in formal plans of mortgage servicers when transferring loans to another servicer, particularly when it involves mortgages in the middle of loss mitigation or a modification.

Although the bulletin was partly meant as a way to provide clarity on its first round of mortgage servicing rules that went into effect in January, the CFPB indicated it is looking to additional rulemaking to address continued problems.

"The CFPB is continuing to monitor the mortgage servicing market and may engage in further rulemaking in this area," the agency said in the bulletin.

A CFPB spokesman said the agency is "carefully monitoring the impact" of its existing new servicing rules.

"As we identify areas where further action may be necessary, we will use all the tools at our disposal — including supervision, enforcement, and rulemaking — to ensure that borrowers are treated fairly no matter who is servicing their mortgage," the spokesman said.

Industry and consumer groups have offered predictions on where the agency may go next, particularly in areas where further clarification has been requested.

For example, the American Bankers Association sent a letter to the CFPB in late July asking how servicers should treat a borrower who has become delinquent but then started making payments again without making up for previously missed payments, known as rolling delinquencies. The CFPB's mortgage servicing rule prohibits a servicer from sending a foreclosure notice until the loan is more than 120 days delinquent but the ABA said it was unclear how to apply that to rolling delinquencies and potential loss mitigation.

"There are some areas where we've requested guidance and we're likely going to get it and there are some areas where they [the CFPB] have expressed orally that 'I understand that's a problem' or 'we're looking at it,' " said Bob Davis, executive vice president of mortgage policy at the ABA.

Another issue in mortgage servicing relates to so-called dual-tracking, in which a foreclosure is occurring at the same time that a borrower is going through a modification or loss mitigation process. The CFPB has already outlined rules to curtail dual-tracking, such as notifying the borrower of timeframes, whether or not they are approved for mitigation and why. But some observers said the rules can go further in potentially requiring that servicers inform the borrower of other options or resources to help save their home.

"We want homeowners to receive more options than just a 'yes' or 'no' and 'here's why' from the servicer," said Yana Miles, policy counsel at the Center for Responsible Lending. "Any area where a regulatory agency is explaining what the law is and providing examples, I think, is a good thing. But there are still more issues that need to be addressed, whether it comes from the state level or the CFPB."

The CFPB's initial mortgage servicing rules already covered significant ground in making sure companies respond to struggling consumers in a timely manner and keep accurate records, especially throughout the transfer of servicing rights.

But the Aug. 19 bulletin said the CFPB remains worried about potential errors when servicing transfers involve massive amounts of loans and when consumers are struggling to complete loan workouts when their mortgage servicer has changed hands. The bulletin details the sort of plans that supervisors want to see servicers implement in keeping accurate track of the loans before and after servicing sales, including conducting meetings with parties involved in a transfer months before the transfer occurs. Observers have speculated that the CFPB could make it a rule that servicers must have such detailed written plans with every transfer or set specific timeframes for when documents are transferred.

Many industry advocates said they welcomed the bulletin because it gives them more detail on what the CFPB is targeting. Yet it also stoked some concerns because it appeared to set specific requirements that may be difficult to meet.

For example, the bulletin said examiners will be ensuring that when a transfer is too large to be successfully implemented into a single batch that the servicer splits up the transaction so that "every loan transferred" meets compliance obligations. But vetting every single loan can get complicated when a transfer often involves thousands of loans.

"The bulletin is helpful" but "it is tough guidance because it sets a pretty high bar," said Pete Mills, senior vice president of residential policy and member services at the Mortgage Bankers Association. "The real question is how does it get implemented?"

The key to how the guidance will affect mortgage servicing transfers will depend on whether supervisors implement the bulletin in a way that gives servicers time to work out complex transactions or if it's used more as a tool for harsh enforcement actions, Mills said.

"If the CFPB goes straight to enforcement … then it becomes a guidance that could actually chill the market," he said.

It's unclear what steps the agency will take next, though it appears to be already willing to call out banks on concerns identified in the bulletin.

On Tuesday, Flagstar Bancorp in the Troy, Mich., disclosed in a regulatory filing that it is in settlement talks with the CFPB over potential violations related to loss-mitigation practices dating back to 2011. Though agency officials have indicated they would be flexible with lenders in meeting the ability-to-repay rule that took effect in January, the same month as the mortgage servicing rule, they appeared to take a more hard-line approach with mortgage servicers.

Industry sources remain worried about a speech that CFPB Deputy Director Steven Antonakes gave in February that cautioned supervisors would give no forbearance after the mortgage servicing rules took effect.

"It has felt like 'Groundhog Day' with mortgage servicing for far too long," Antonakes said during the speech, before a Mortgage Bankers Association conference. "Please understand, business as usual has ended in mortgage servicing. Groundhog Day is over."

Krista Shonk, vice president of mortgage finance and senior regulatory counsel at the ABA, said the mortgage servicing bulletin was partly a follow-up to Antonakes' speech in addition to addressing some of the large mortgage servicing sales from banks to nonbanks in the past year.

"He [Antonakes] really called out the mortgage servicing industry," she said. "I see this bulletin as a continuation of that and memorializing it in writing."