“Under the new CFPB [Consumer Financial Protection Bureau] rules, servicers will have to provide very detailed and accurate information to borrowers about each aspect of their loans and/or any foreclosure procedures that may occur,” according to Richard Koch, SVP at Morningstar Credit Ratings.
“There will be a very strict interpretation of the guidelines with penalties to servicers if they fail to adhere to the new requirements,” Koch said. He explained that the prominent rule changes will impact nine mortgage servicing areas:
- Periodic billing statements—detailed breakdown of the amounts that make up payments
- Adjustable-rate mortgage (ARM) interest rate change notices
- Prompt crediting of payments and payoff payments
- Force-placed insurance
- Error resolution and information requests
- Information management policies and procedures
- Early intervention with delinquent borrowers
- Continuity of contact with delinquent borrowers
- Loss mitigation procedures
Though regulators are expected to be stringent when it comes to enforcing the new servicing rules, Koch says there will be some exemptions for small servicers—those that service 5,000 or fewer mortgage loans.
To qualify, these must be loans that the servicer or an affiliate originated or owns. This would exempt them from several rules, including sending periodic statements, but not from sending interest rate adjustment notices, timely crediting of payments, and resolution of errors within certain timeframes.
“In the past, there have been numerous litigated cases where proof of claims and payment statements presented to the court were not accurate,” Koch said. “Some of the new rules were created to correct that.”
One prominent area of dispute in the past has been the issue of forced-placed insurance. If a borrower has not obtained insurance for the property, after a certain time period, the servicer can take out insurance on the property and charge the borrower for the premiums.
“Force-placed insurance is often much more expensive than borrowers can get on their own,” Koch explained. “CFPB rules require that the servicer must have a reasonable basis to believe a borrower has failed to maintain hazard insurance before actually being able to charge that person for the insurance, and this must be done within certain timelines.”
Other regulations dictate timelines and standards for interacting with delinquent homeowners including early intervention, establishment of a single point of contact, easy access to records, and guidelines to efficiently manage the loss mitigation process.
The benefit to servicers is that these new rules create consistency in a lot of different areas of loan servicing. “Because this is an industry that really has not been highly regulated in the past, there is a lot of work for them to do to come up to standards in terms of policies and procedures, compliance, and technology,” Koch said. “The new rules clearly let servicers know what they will be accountable for in the future regarding CFPB standards. The rules also establish clear expectations so that borrowers will know what to expect from their servicers.”
To prepare for all these changes, a lot of servicing companies have spent the better part of the last 12 to 18 months getting ready for the changeover. Koch says the downside of all this is the added expense for services that must be performed within the same profit margin as before the rules went into effect.
“Ultimately, I think the cost of compliance will encourage or necessitate some servicers to exit the market,” Koch said. “However, others with a long track record of compliance expertise may be able to grow their businesses by providing servicing for other companies such as small lenders or credit unions unable to handle their own servicing.”
Koch believes the new regulations will provide opportunity for some, but hardships for others because of the increased burden of time and expense necessary for compliance.