Supervisory Highlights: Mortgage Servicing Special Edition 2016, 46063-46068 [2016-16786]

Download as PDF Federal Register / Vol. 81, No. 136 / Friday, July 15, 2016 / Notices Distribution: A-List Barry S. Lineback, Director, Business Operations. [FR Doc. 2016–16784 Filed 7–14–16; 8:45 am] BILLING CODE 6353–01–P BUREAU OF CONSUMER FINANCIAL PROTECTION Supervisory Highlights: Mortgage Servicing Special Edition 2016 Bureau of Consumer Financial Protection. ACTION: Supervisory Highlights; notice. AGENCY: The Bureau of Consumer Financial Protection (CFPB) is issuing its eleventh edition of its Supervisory Highlights. In this issue, the CFPB shares findings from supervisory examination work in mortgage servicing between January 2014 and April 2016. The issue also discusses Supervision’s approach mortgage to servicing exams, including a description of recent changes to the mortgage servicing chapter of the CFPB Supervision and Examination Manual. DATES: The Bureau released this edition of the Supervisory Highlights on its Web site on June 22, 2016. FOR FURTHER INFORMATION CONTACT: Christopher J. Young, Managing Senior Counsel and Chief of Staff, Office of Supervision Policy, 1700 G Street NW., 20552, (202) 435–7408. SUPPLEMENTARY INFORMATION: sradovich on DSK3GMQ082PROD with NOTICES SUMMARY: 1. Introduction Mortgage servicers play a central role in homeowners’ lives by managing their mortgage loans. Servicers collect and apply payments, work out modifications to loan terms, and handle the difficult process of foreclosure. As the financial crisis made clear, weak customer support, lost paperwork, and mishandled accounts can lead to many wrongful foreclosures and other serious harm. Since consumers do not choose their mortgage servicers they cannot take their business elsewhere. To improve practices in the servicing market, the Dodd-Frank Act Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) imposed new requirements on servicers and gave the Consumer Financial Protection Bureau (CFPB) the authority to implement those new requirements and adopt additional rules to protect consumers. The CFPB released rules, effective January 10, 2014, to improve the information consumers receive from their servicers, to enhance the protections available to consumers to address servicer errors, VerDate Sep<11>2014 19:03 Jul 14, 2016 Jkt 238001 and to establish baseline servicing requirements that provide additional protections for consumers who have fallen behind on their mortgage payments. Supervisory examinations of mortgage servicers now generally focus on reviewing for compliance with these servicing rules and for unfair, deceptive, and abusive acts or practices. To assist industry in its efforts to comply Federal consumer financial law, this Special Edition of Supervisory Highlights discusses recent supervisory examination observations in mortgage servicing. To provide additional context for readers, we integrate these recent observations with observations from previous editions of Supervisory Highlights by subject matter.1 The magnitude and persistence of compliance challenges since 2014, particularly in the areas of loss mitigation and servicing transfers, show that while the servicing market has made investments in compliance, those investments have not been sufficient across the marketplace. Outdated and deficient servicing technology continues to pose considerable risk to consumers in the wider servicing market. These shortcomings are compounded by lack of proper training, testing, and auditing of technology-driven processes, particularly to handle more individualized situations related to delinquencies and loss mitigation processes. None of these problems is insurmountable, however, with the proper focus on making necessary improvements, especially in the information technology systems necessary for effective implementation. Supervisory examinations do show that some servicers have significantly improved their compliance positions, and this edition concludes by sharing how these servicers have strengthened their compliance. 2. Our Approach to Mortgage Servicing Examinations To determine which mortgage servicers to examine, we use a prioritization framework that considers a broad range of factors to predict the likelihood of consumer harm.2 For instance, because a servicer’s market share corresponds to the number of consumers affected, we prioritize relatively larger servicers with a more 1 Observations shared in previous editions of Supervisory Highlights will be footnoted. Questions or comments may be directed to CFPB_ Supervision@cfpb.gov. 2 See Supervisory Highlights: Summer 2013, Section 3.2.3, input from housing counselors and other stakeholders. PO 00000 Frm 00020 Fmt 4703 Sfmt 4703 46063 dominant market presence over comparatively smaller servicers. Our prioritization approach counterbalances this size consideration with what we call field and market intelligence. We consider qualitative and quantitative factors for each servicer such as the strength of compliance management systems, the existence of other regulatory actions, findings from our prior examinations, servicing transfer activity, the number, severity and trends of consumer complaints, as well as input from housing counselors and other stakeholders about institutional performance based on their experience. In fall 2011, we published the initial mortgage servicing chapter of the CFPB Supervision and Examination Manual. We update the manual periodically, most recently in May 2016, to reflect regulatory changes, to make technical corrections and to update examination priorities.3 In the latest version, we enhance the section related to consumer complaints to highlight that for mortgage servicers, examiners will be reviewing whether the servicer has an adequate process for expedited evaluation of complaints or notices of error for borrowers or borrower advocates alleging regulatory compliance issues where the borrower is facing imminent foreclosure. The possibility of foreclosure puts even more weight on the importance of an appropriate complaint escalation process, which is essential to any compliance management system.4 Generally, our examinations review compliance management systems and evaluate compliance through transaction testing of specific loan files. In many instances, examiners conduct specific transaction testing based on consumer complaints submitted to housing counselors or the CFPB’s Office of Consumer Response, particularly where the servicer did not provide a sufficient response or remedy. The scope for the content of our examinations reflects the size and risk profile of each servicer, and as a result, the content of our transaction testing may vary across market participants. Our supervisory work also has included use of the Equal Credit Opportunity Act (ECOA) Baseline Modules, which are part of the CFPB 3 See CFPB Supervision and Examination Manual, available at http:// files.consumerfinance.gov/f/201401_cfpb_mortgageservicing-exam-procedures.pdf. 4 See page CMR 10 ‘‘Consumer Complaint Response’’ in the CFPB Supervision and Examination Manual, available at: http:// files.consumerfinance.gov/f/201210_cfpb_ supervision-and-examination-manual-v2.pdf. E:\FR\FM\15JYN1.SGM 15JYN1 46064 Federal Register / Vol. 81, No. 136 / Friday, July 15, 2016 / Notices Supervision and Examination Manual. Examination teams use these modules to conduct ECOA Baseline Reviews, which evaluate how well institutions’ compliance management systems identify and manage fair lending risks. The module 4, covering fair lending risks related to servicing, includes questions on such topics as fair lending training of servicing staff, fair lending monitoring of servicing, and servicing consumers with Limited English Proficiency. Based on the information gathered through these ECOA Baseline Reviews, and other inputs used in our prioritization process, Supervision will be conducting more comprehensive ECOA Targeted Reviews of mortgage servicers in 2016. Where we observe more significant violations during an examination, we may refer matters to our Action Review Committee.5 The committee uses a deliberative and rigorous process to determine whether matters that originate from our examinations will be resolved through confidential supervisory action, such as a board resolution or memorandum of understanding, or through a public enforcement action. In determining the appropriate action, the committee considers a variety of factors, including the magnitude of consumer harm, whether the violation was selfidentified, and the timeliness and scope of remediation. Additionally, we have identified potential risk areas and provided general compliance suggestions related to mortgage servicing by publishing several compliance bulletins. The bulletins issued to date have covered the following topics: Permanent Change of Station Orders,6 Mortgage Servicing Transfers,7 and Private Mortgage Insurance Cancellation and Termination.8 sradovich on DSK3GMQ082PROD with NOTICES 3. Supervisory Observations In examining for compliance with the servicing rules, Supervision has 5 See Supervisory Highlights: Summer 2015, Section 3.1.4, available at http:// files.consumerfinance.gov/f/201506_cfpb_ supervisory-highlights.pdf. 6 See Interagency Guidance on Mortgage Servicing Practices Concerning Military Homeowners with Permanent Change of Station Orders, available at http:// files.consumerfinance.gov/f/201206_cfpb_PCS_ Orders_Guidance.pdf. 7 See CFPB Bulletin 2014–01 (Aug. 19, 2014), available at http://files.consumerfinance.gov/f/ 201408_cfpb_bulletin_mortgage-servicingtransfer.pdf. 8 See CFPB Bulletin 2015–03 (Aug. 4, 2015), available at http://files.consumerfinance.gov/f/ 201508_cfpb_compliance-bulletin_privatemortgage-insurance-cancellation-andtermination.pdf. VerDate Sep<11>2014 19:03 Jul 14, 2016 Jkt 238001 addressed issues across servicing business areas, and most extensively in the areas of loss mitigation acknowledgement notices (3.1); loss mitigation offers and related communications (3.2); loan modification denial notices (3.3); policies and procedures (3.4); and servicing transfers (3.5). The following findings reflect information obtained from supervisory activities as captured in examination reports or supervisory letters. In some instances, not all corrective actions, including through enforcement, have been completed at the time of this report’s publication. 3.1. Loss Mitigation Acknowledgement Notices Before the new servicing rules, gaps in servicer communication and coordination kept many distressed consumers in the dark about available options to avoid foreclosure. Consumers who applied for such options sometimes found themselves stuck in a cycle of lost paperwork and redundant document requests while their foreclosure dates grew nearer. To address this set of issues, the servicing rules now require that if a servicer receives a loss mitigation application 45 days or more before a foreclosure sale, it must notify the borrower in writing within five days to acknowledge receipt of the application and whether it is complete or incomplete.9 If incomplete, the notice must state the additional documents and information the borrower must submit to complete the application and a reasonable date by which the borrower should submit those documents and information.10 CFPB examiners have found multiple violations related to these critical process requirements. Examiners found that one or more servicers failed to send any loss mitigation acknowledgment notices due to a repeated loss mitigation processing platform malfunction over a significant period of time. Supervision cited the servicer(s) for violating Regulation X and directed the servicer(s) to remediate affected borrowers, including for interest, fees, and any additional harm incurred.11 Supervision also directed the servicer(s) to fix and monitor the servicing 9 12 CFR 1024.41(b)(2)(i)(B). The acknowledgment notice also must include a statement that the borrower should consider contacting servicers of any other mortgage loans secured by the same property to discuss available loss mitigation options. 11 12 CFR 1024.41(b)(2)(i)(B). Previously discussed in the Summer 2015 edition of Supervisory Highlights, available at http:// files.consumerfinance.gov/f/201506_cfpb_ supervisory-highlights.pdf. 10 Id. PO 00000 Frm 00021 Fmt 4703 Sfmt 4703 platform for compliance weaknesses. Supervision later confirmed that the servicer(s) undertook appropriate corrective actions. Supervision also found deceptive statements in loss mitigation acknowledgement notices. One or more servicers sent acknowledgement notices that represented homes would not be foreclosed on before the deadline passed for submitting missing documents. But the servicer(s) foreclosed on homes before the submission deadline. Supervision determined the representations to be deceptive, independent of whether or not the servicing rules permitted the servicer(s) to foreclose on the specific borrower(s) at that time. Supervision directed the servicer(s) to undertake remedial and corrective actions which are under review.12 Supervision also observed deficiencies with the timeliness and content of acknowledgment notices. One or more servicers sent acknowledgement notices more than five days after receiving a borrower’s loss mitigation application. And at one or more servicers, the noncompliant acknowledgment notices for incomplete loss mitigation applications: • Failed to state the additional documents and information for borrowers to submit to complete the application, such as income and tax forms that the servicer’s internal records showed were necessary at that time,. Instead, the servicer(s) separately requested the necessary documents several weeks after the acknowledgment notice. • Requested documents, sometimes dozens in number, inapplicable to borrower circumstances and which were not needed to evaluate borrowers for loss mitigation.13 • Requested documents that borrowers already submitted. • Failed to include any reasonable date by which borrowers must return additional documents and information. • Gave borrowers 30 days to submit additional documents, but the servicer(s) then denied borrowers’ applications for loss mitigation before 30 days.14 • Failed to include a statement that borrowers should consider contacting servicers of any other mortgage loans 12 12 U.S.C. 5536(a)(1)(B). discussed in the Summer 2015 edition of Supervisory Highlights, available at http://files.consumerfinance.gov/f/201506_cfpb_ supervisory-highlights.pdf. 14 Previously discussed in the Fall 2015 edition of Supervisory Highlights, available at http:// files.consumerfinance.gov/f/201506_cfpb_ supervisory-highlights.pdf. 13 Previously E:\FR\FM\15JYN1.SGM 15JYN1 Federal Register / Vol. 81, No. 136 / Friday, July 15, 2016 / Notices secured by the same property to discuss available loss mitigation options. Supervision cited the servicer(s) above for violating Regulation X and directed them to revise deficient acknowledgement notices to meet Regulation X requirements.15 sradovich on DSK3GMQ082PROD with NOTICES 3.2 Loss Mitigation Offer Letters and Related Communications Supervision also found serious violations of Federal consumer financial law with servicer loss mitigation offer letters, loss mitigation offers, and related communications. In offering proprietary modifications, one or more servicers engaged in deceptive and abusive practices in connection with communicating whether and when outstanding fees, charges, and advances would be assessed. Specifically, one or more servicers engaged in a deceptive practice by misrepresenting to borrowers that it would defer such charges to the maturity date of the loan, when in fact it often assessed hundreds of dollars in these charges after the borrowers signed and returned the permanent modification agreements. Additionally, one or more servicers took unreasonable advantage of borrowers’ lack of understanding of the material risks of the loan modification and took unreasonable advantage of borrowers’ inability to protect their interests in selecting or using the modification because the language in the proprietary modification offer made it impossible for a borrower to understand the true nature of how and when these charges would be assessed. Without such knowledge, a borrower could not have understood the material risks of the modification, nor could he adequately protect himself from the potential payment shock from the assessment of such charges. Supervision cited the servicer(s) for deceptive and abusive practices and required the servicer(s) to provide accurate information regarding fee assessment practices about its proprietary loss mitigation options to borrowers.16 Furthermore, one or more servicers sent loss mitigation offer letters with response deadlines that had already passed or were about to pass by the time the borrower received the letter. The servicer(s) generated the letters in timely fashion, but delayed sending them to borrowers for a substantial number of days. Supervision cited this practice as unfair and directed the servicer(s) to undertake remedial and 15 12 16 12 CFR 1024.41(b)(2)(i)(B). U.S.C. 5536(a)(1)(B) VerDate Sep<11>2014 19:03 Jul 14, 2016 Jkt 238001 corrective actions which are under review.17 With respect to permanent modification agreements, one or more servicers sent agreements to some borrowers that did not match the terms approved by its underwriting software. Many borrowers signed and returned the agreements, but then the agreements were not executed by the servicer(s). Instead, after substantial delays, the servicer(s) sent updated modification agreements with materially different terms to the borrowers. These misrepresentations about the available terms affected the ultimate payments the borrowers would make, influencing both whether they would accept the modification and how they could subsequently budget based on their expected payment. Supervision determined that the servicer(s) engaged in a deceptive practice in connection with these modifications and directed the servicer(s) to undertake remedial and corrective actions, which are under review.18 One or more servicers represented in loan modification trial period plans that borrowers would receive a permanent modification after making three trial payments. However, after borrowers made the required trial payments, the servicer(s) could still deny the permanent modification based on the results of a title search. The servicer(s) did not communicate to borrowers that permanent loan modifications were contingent on a title search in the trial period offer letter. Supervision determined the practice to be deceptive and directed the servicer(s) to provide accurate information to borrowers about loss mitigation options.19 Against investor guidelines, one or more servicers treated borrower selfemployed gross income as net income when evaluating loss mitigation applications. The practice inflated borrower income and may have led to less affordable modifications. Supervision traced the practice to an underwriting error and cited the servicer(s) for violating Regulation X.20 It directed the servicer(s) to conduct training for loss mitigation personnel to calculate self-employment income according to investor guidelines. One or more servicers failed to convert a substantial number of trial modifications to permanent modifications timely after borrowers U.S.C. 5536(a)(1)(B). U.S.C. 5536(a)(1)(B). Previously discussed in the Fall 2014 edition of Supervisory Highlights, available at http://files.consumerfinance.gov/f/ 201410_cfpb_supervisory-highlights_fall-2014.pdf. 19 12 U.S.C. 5536(a)(1)(B). 20 1024.41(c)(1)(i). PO 00000 17 12 18 12 Frm 00022 Fmt 4703 Sfmt 4703 46065 successfully completed trial modifications. The delays harmed borrowers who then owed higher amounts of accrued interest under the finalized permanent modifications than they would have owed under a timely conversion. During the delay, the interest accrued at the original contractual rate, rather than at the lower rate provided under the modification’s terms. The servicer then capitalized the additional interest into the principal balance owed under the permanent modification. The servicer(s) also continued to report borrowers that had been delinquent at the beginning of their trial modifications as delinquent to the consumer reporting agencies during the length of the delay. Some affected borrowers filed complaints with the CFPB’s Office of Consumer Response describing how the uncertainty of the loan modification decisions hurt their ability to plan for the future. Supervision determined that the substantial delays, combined with the negative consequences attributable to the delays, constituted an unfair practice and directed the servicer(s) to undertake remedial and corrective actions which are under review.21 Supervision found a deceptive practice related to how one or more servicers disclosed the terms of a payment plan that deferred mortgage payments for daily simple interest mortgage loans.22 The communications included misleading representations about the deferments, which represented that deferred interest would be repayable at the end of the loan term when, in fact, the servicer collected the deferred interest from consumer immediately after the deferment ended. Supervision directed the servicer(s) to clearly disclose how interest accrues while on the plan and its impact on monthly payments after the deferment period concludes. Supervision found that one or more servicers sent notices warning that foreclosure would be imminent to borrowers who were current on their low-balance home equity lines of credit (HELOCs) and no monthly payment due. Supervision cited the practice as deceptive and directed servicer(s) to cease sending collection letters that 21 12 U.S.C. 5536(a)(1)(B). Previously discussed in the Fall 2014 edition of Supervisory Highlights, available at http://files.consumerfinance.gov/f/ 201410_cfpb_supervisory-highlights_fall-2014.pdf. 22 12 U.S.C. 5536(a)(1)(B). Previously discussed in the Summer 2015 edition of Supervisory Highlights, available at http://files.consumerfinance.gov/f/ 201506_cfpb_supervisory-highlights.pdf. E:\FR\FM\15JYN1.SGM 15JYN1 46066 Federal Register / Vol. 81, No. 136 / Friday, July 15, 2016 / Notices misled consumers into believing that the loans were delinquent.23 Additionally, Supervision has repeatedly identified waivers of consumer rights in loss mitigation agreements. Regulation Z states that a ‘‘contract or other agreement relating to a consumer credit transaction secured by a dwelling . . . may not be applied or interpreted to bar a consumer from bringing a claim in court pursuant to any provision of law for damages or other relief in connection with any alleged violation of any Federal law.’’ 24 Examiners found one or more servicers required borrowers to sign waivers agreeing that they would have no ‘‘defenses, set-offs, or counterclaims to the indebtedness of borrowers pursuant to the Loan Document’’ in order to enter mortgage repayment and loan modification plans. Defenses, set-offs, and counterclaims pertain to a contract or other agreement to a consumer credit transaction secured by a dwelling. As borrowers were likely to read the waiver as barring them from bringing claims— including Federal claims—related to their mortgage, Supervision cited the waiver language as deceptive and directed the servicer(s) to remove it from all loss mitigation agreements.25 sradovich on DSK3GMQ082PROD with NOTICES 3.3 Loan Modification Denial Notices Where servicers deny complete loss mitigation applications for any trial or permanent loan modification option, denial notices help borrowers understand the reasons and, where appropriate, provide relevant information about the appeals process. Generally, the servicing rules require that denial notices provide the specific reason or reasons for denying the borrower the trial or permanent loan modification option and, if applicable, that the borrower was not evaluated on other criteria. The rules enable a borrower to appeal a denial of a trial or permanent loan modification option so long as the borrower’s complete loss mitigation application is received 90 days or more before a foreclosure sale or during the pre-foreclosure review period.26 Supervision found that denial notices at one or more servicers failed to state the correct reason(s) for denying a trial or permanent loan modification option 23 12 U.S.C. 5536(a)(1)(B). Previously discussed in the Summer 2015 edition of Supervisory Highlights, available at http://files.consumerfinance.gov/f/ 201506_cfpb_supervisory-highlights.pdf. 24 12 CFR 1026.36(h)(2). 25 12 U.S.C. 5536(a)(1)(B). Previously discussed in the Fall 2015 edition of Supervisory Highlights, available at http://files.consumerfinance.gov/f/ 201506_cfpb_supervisory-highlights.pdf. 26 12 CFR 1024.41(d), (h). VerDate Sep<11>2014 19:03 Jul 14, 2016 Jkt 238001 as required by Regulation X.27 For example, the notices’ denial reason stated that the borrower ‘‘did not provide the requested additional information needed to complete the workout review.’’ However, the servicer(s) platform indicated that the borrower’s application was complete and was instead denied for a specific reason related to the borrower’s income. One or more servicers’ notices also stated ‘‘Not Available*’’ as the reason for denying loss mitigation applications. The asterisk elaborated: ‘‘Not Available means this program was not considered due to an eligibility requirement or requirements not met.’’ Supervision cited the two practices above for violating Regulation X and directed the servicer(s) to state the specific reason or reasons for its denial of each trial or permanent loan modification option and, if applicable, that the borrower was not evaluated on other criteria.28 When a borrower has the right to appeal the denial of a trial or permanent loan modification, a servicer must, in its notice after evaluating the borrower’s complete loss mitigation application, inform the borrower of the appeal right and the amount of time the borrower has to file the appeal.29 One or more servicers sent denial notices that failed to communicate a borrower’s specific right to appeal. The notices instead generically stated that the borrower may have a right to appeal if the borrower met certain requirements. Supervision cited servicer(s) for violating Regulation X and directed the servicer(s) to include more specific appeal language in their denial letters where appropriate, rather than only generic appeal language in all instances.30 3.4 Servicing Policies, Procedures, and Requirements To undergird the loss mitigation application process, Regulation X requires servicers to maintain policies and procedures reasonably designed to achieve specific objectives that include: Providing timely and accurate information; properly evaluating loss mitigation applications; facilitating oversight of and compliance by service providers; and facilitating transfer of information during servicing transfers.31 In reviewing for these requirements, Supervision found that one or more servicers violated Regulation X because their policies and procedures were not reasonably designed to achieve the following objectives: • Providing a borrower with accurate and timely information and documents in response to the borrower’s requests for information with respect to the borrower’s mortgage loan. One or more servicers failed to provide information and loss mitigation application forms to a substantial number of borrowers who called in to request such information.32 • Upon the death of a borrower, promptly identifying and facilitating communication with the successor in interest of the deceased borrower with respect to the property secured by the deceased borrower’s mortgage loan.33 One or more servicers required probate for borrowers to establish themselves as successors in states where probate was not required. • Identifying with specificity all loss mitigation options for which a borrower may be eligible pursuant to any requirements established by an owner or assignee of the borrower’s mortgage loan.34 One or more servicers sent letters to borrowers soliciting loss mitigation applications when internal records showed that the borrowers were not eligible for any loss mitigation option.35 • Providing prompt access to all documents and information submitted by a borrower in connection with a loss mitigation option to servicer personnel assigned to assist the borrower under the rules.36 One or more servicers failed to identify and process material submitted by borrowers to complete a loss mitigation application. The servicer(s) permitted borrowers to send material through fax, but lacked policies and procedures for date-stamping, cataloging and distributing loss mitigation material to appropriate departments, which resulted in servicer personnel assigned to assist the borrower under the rules being unable to access relevant information in a timely way. • Properly evaluating a loss mitigation application for all options for which the borrower may be eligible based on the loan owner’s requirements.37 One or more servicers evaluated applications only for the loss mitigation options preselected by 32 12 CFR 1024.41(d). 28 12 CFR 1024.41(d). 29 12 CFR 1024.41(c)(1)(ii). 30 12 CFR 1024.41(c)(1)(ii). Previously discussed in the Fall 2015 edition of Supervisory Highlights, available at http://files.consumerfinance.gov/f/ 201506_cfpb_supervisory-highlights.pdf. 31 12 CFR 1024.38(a), (b). PO 00000 27 12 Frm 00023 Fmt 4703 Sfmt 4703 CFR 1024.38(b)(1)(iii). CFR 1024.38(b)(1)(vi). 34 12 CFR 1024.38(b)(2)(ii). 35 Reported in the Fall 2015 edition of Supervisory Highlights, available at http:// files.consumerfinance.gov/f/201506_cfpb_ supervisory-highlights.pdf. 36 12 CFR 1024.38(b)(2)(iii). 37 12 CFR 1024.38(b)(2)(v). 33 12 E:\FR\FM\15JYN1.SGM 15JYN1 Federal Register / Vol. 81, No. 136 / Friday, July 15, 2016 / Notices servicer personnel and not for all options available to the borrower.38 • Facilitating the sharing of accurate and current information regarding the status of any evaluation of a borrower’s loss mitigation application and the status of any foreclosure proceeding among appropriate servicer personnel, including service provider personnel. One or more servicer(s)’ foreclosure attorneys sent a foreclosure referral letter to the borrower after the borrower entered into a loss mitigation agreement with the servicer.39 • As a transferee servicer, ensuring that it can identify necessary documents or information that may not have been transferred by a transferor and obtain such documents from the transferor servicer. One or more transferee(s) failed to identify necessary documents, including loss mitigation agreements and mortgage notes not transmitted by the transferor.40 In the above cases where Supervision detected policies, procedures, or requirements not in compliance with Regulation X, Supervision directed servicers to implement policies, procedures, and requirements compliant with the Rule and to monitor for their effectiveness. sradovich on DSK3GMQ082PROD with NOTICES 3.5 Servicing Transfers Transferring loans during the loss mitigation process heightens risks to consumers, including the risk that documents and information might not be accurately transferred.41 While Supervision has observed more attention to pre-transfer planning by transferor and transferee servicers since 2014, Supervision found that at one or more servicers incompatibilities between servicer platforms led, in part, to transferees failing to identify and honor in-place loss mitigation after receiving the loans. Additionally, one or more servicers failed to honor the terms of in-place trial modifications after transfer. Some borrowers who completed trial payments with the new servicer nevertheless encountered substantial delays before receiving a permanent loan modification. Supervision concluded that the delay caused 38 Reported in the Fall 2015 edition of Supervisory Highlights, available at http:// files.consumerfinance.gov/f/201506_cfpb_ supervisory-highlights.pdf. 39 12 CFR 1024.38(b)(3)(iii). Reported in the Fall 2015 edition of Supervisory Highlight, available at http://files.consumerfinance.gov/f/201506_cfpb_ supervisory-highlights.pdf. 40 12 CFR 1024.38(b)(4)(ii). 41 See CFPB Bulletin 2014–01 (Aug. 19, 2014), available at http://files.consumerfinance.gov/f/ 201408_cfpb_bulletin_mortgage-servicingtransfer.pdf. VerDate Sep<11>2014 19:03 Jul 14, 2016 Jkt 238001 substantial injury as trial payments were less than the amounts required by the promissory note, and consumers continuing to make trial payments while waiting for the permanent modification accrued interest on the unpaid principal balance. Such delays were exacerbated by the transferee(s)’ failure to obtain timely access to an online workout tool required by the investor. Supervision cited this practice as unfair and directed the transferee servicers(s) to develop and implement policies, procedures, training, and audits to promptly identify and honor prior loss mitigation agreements, whether completed or inflight at the time of transfer.42 Supervision also observed some servicers improve transfer policies, procedures, and practices. For example, in response to Supervision’s direction to one or more transferee servicers to identify in-flight modifications, the transferee(s) began to use certain tools generally available to industry participants—the HomeSavers Solutions Network and the HAMP Reporting Tool—to reconcile loan data during transfer. Supervision noted that this approach gave transferee(s) the ability to identify more in-flight modifications. Despite this improvement, Supervision observed that transferee(s) still failed to recognize modifications not registered by the transferor or not otherwise in the databases and could benefit from conducting a post-transfer review for inflight loss mitigation. The transferee(s) agreed to further enhance transfer protocols. Also in connection with servicing transfers, one or more transferee(s) found that delays in honoring in-flight modifications were caused by their dependence on the information technology department to manually override data fields whenever the servicing platform rejected transferor data. By granting override authority to loss mitigation staff, the transferee(s) reduced the time required to honor inflight modifications. 4. Conclusion While Supervision continues to be concerned about the range of legal violations identified at various mortgage servicers, it also recognizes efforts made by certain servicers to properly staff effective compliance management programs. Some servicers have made significant improvements in the last several years, in part by enhancing and monitoring their servicing platforms, 42 12 U.S.C. 5536(a)(1)(B). Previously discussed in the Sumer 2015 edition of Supervisory Highlights, available at http://files.consumerfinance.gov/f/ 201506_cfpb_supervisory-highlights.pdf. PO 00000 Frm 00024 Fmt 4703 Sfmt 4703 46067 staff training, coding accuracy, auditing, and allowing for greater flexibility in operations. More generally, Supervision found compliance audits that thoroughly assessed the business unit’s internal control environment, clearly identified issues with compliance, detailed management’s response, set a target date for resolving the identified issues, and completed the necessary adjustments promptly. At one or more servicers, these audits included reviews of service providers and were part of a wider and appropriately resourced compliance framework. One or more servicers also conducted formal reviews of information technology structures that identified the root causes of earlier compliance weaknesses, including platform outages. These reviews led the servicer(s) to replace outdated technology, such as document management systems. Supervision also observed that servicers are actively reviewing complaints for allegations of law violations. One or more servicers used analytic tools to search, review, and track complaint records with content indicating regulatory violations. One or more servicers also created a complaint governance committee to oversee all customer complaints to ensure they receive appropriate engagement, including remediation as appropriate. One or more servicers also designated management level employees as primary contacts for Federal and State regulators and other government bodies for discussing complaints and inquiries from borrowers who are in default or have applied for loan modifications. As the above observations show, improvements and investments in servicing technology, staff training, and monitoring can be essential to achieving an adequate compliance position. However, such improvements have not been uniform across market participants and Supervision continues to observe compliance risks, particularly in the areas of loss mitigation and servicing transfers. A growing point of emphasis for Supervision in achieving needed improvements in servicer compliance will be to require servicers to submit specific and credible plans describing how changes in their information technology systems will offer assurance that they can systematically and effectively implement the changes made to resolve the issues identified by Supervision. 6. Regulatory Requirements This Supervisory Highlights summarizes existing requirements under the law, summarizes findings made in the course of exercising the E:\FR\FM\15JYN1.SGM 15JYN1 46068 Federal Register / Vol. 81, No. 136 / Friday, July 15, 2016 / Notices Bureau’s supervisory and enforcement authority, and is a non-binding general statement of policy articulating considerations relevant to the Bureau’s exercise of its supervisory and enforcement authority. It is therefore exempt from notice and comment rulemaking requirements under the Administrative Procedure Act pursuant to 5 U.S.C. 553(b). Because no notice of proposed rulemaking is required, the Regulatory Flexibility Act does not require an initial or final regulatory flexibility analysis. 5 U.S.C. 603(a), 604(a). The Bureau has determined that this Supervisory Highlights does not impose any new or revise any existing recordkeeping, reporting, or disclosure requirements on covered entities or members of the public that would be collections of information requiring OMB approval under the Paperwork Reduction Act, 44 U.S.C. 3501, et seq. Dated: June 22, 2016. Richard Cordray, Director, Bureau of Consumer Financial Protection. [FR Doc. 2016–16786 Filed 7–14–16; 8:45 am] BILLING CODE 4810–AM–P DEPARTMENT OF DEFENSE Department of the Army Inland Waterways Users Board; Request for Nominations Department of the Army, U.S. Army Corps of Engineers, DOD. ACTION: Notice of request for nominations. AGENCY: The Department of the Army is publishing this notice to request nominations to serve as representatives on the Inland Waterways Users Board, sponsored by the U.S. Army Corps of Engineers. Section 302 of Public Law 99–662 established the Inland Waterways Users Board. The Board is an independent Federal advisory committee. The Secretary of the Army appoints its 11 (eleven) representative organizations. This notice is to solicit nominations for 11 (eleven) appointments for terms that will begin by May 27, 2017. For additional information about the Board, please visit the committee’s Web site at http:// www.iwr.usace.army.mil/Missions/ Navigation/InlandWaterways UsersBoard.aspx. ADDRESSES: Institute for Water Resources, U.S. Army Corps of Engineers, ATTN: Mr. Mark R. Pointon, Designated Federal Officer (DFO) for the Inland Waterways Users Board, CEIWR– GM, 7701 Telegraph Road, Casey sradovich on DSK3GMQ082PROD with NOTICES SUMMARY: VerDate Sep<11>2014 19:03 Jul 14, 2016 Jkt 238001 Building, Alexandria, VA 22315–3868; by telephone at 703–428–6438; and by email at Mark.Pointon@usace.army.mil. FOR FURTHER INFORMATION CONTACT: Alternatively, contact Mr. Kenneth E. Lichtman, the Alternate Designated Federal Officer (ADFO), in writing at the Institute for Water Resources, U.S. Army Corps of Engineers, ATTN: CEIWR–GW, 7701 Telegraph Road, Casey Building, Alexandria, VA 22315–3868; by telephone at 703–428–8083; and by email at Kenneth.E.Lichtman@ usace.army.mil. SUPPLEMENTARY INFORMATION: The selection, service, and appointment of representative organizations to the Board are covered by provisions of section 302 of Public Law 99–662. The substance of those provisions is as follows: a. Selection. Representative organizations are to be selected from the spectrum of commercial carriers and shippers using the inland and intracoastal waterways, to represent geographical regions, and to be representative of waterborne commerce as determined by commodity ton-miles and tonnage statistics. b. Service. The Board is required to meet at least semi-annually to develop and make recommendations to the Secretary of the Army on waterways construction and rehabilitation priorities and spending levels for commercial navigation improvements, and report its recommendations annually to the Secretary and Congress. c. Appointment. The operation of the Board and appointment of representative organizations are subject to the Federal Advisory Committee Act of 1972 (5 U.S.C., Appendix, as amended) and departmental implementing regulations. Representative organizations serve without compensation but their expenses due to Board activities are reimbursable. The considerations specified in section 302 for the selection of representative organizations to the Board, and certain terms used therein, have been interpreted, supplemented, or otherwise clarified as follows: (1) Carriers and Shippers. The law uses the terms ‘‘primary users and shippers.’’ Primary users have been interpreted to mean the providers of transportation services on inland waterways such as barge or towboat operators. Shippers have been interpreted to mean the purchasers of such services for the movement of commodities they own or control. Representative firms are appointed to the Board, and they must be either a carrier or shipper or both. For that PO 00000 Frm 00025 Fmt 4703 Sfmt 4703 purpose a trade or regional association is neither a shipper nor primary user. (2) Geographical Representation. The law specifies ‘‘various’’ regions. For the purposes of the Board, the waterways subjected to fuel taxes and described in Public Law 95–502, as amended, have been aggregated into six regions. They are (1) the Upper Mississippi River and its tributaries above the mouth of the Ohio; (2) the Lower Mississippi River and its tributaries below the mouth of the Ohio and above Baton Rouge; (3) the Ohio River and its tributaries; (4) the Gulf Intracoastal Waterway in Louisiana and Texas; (5) the Gulf Intracoastal Waterway east of New Orleans and associated fuel-taxed waterways including the Tennessee-Tombigbee, plus the Atlantic Intracoastal Waterway below Norfolk; and (6) the ColumbiaSnake Rivers System and Upper Willamette. The intent is that each region shall be represented by at least one representative organization, with that representation determined by the regional concentration of the firm’s traffic on the waterways. (3) Commodity Representation. Waterway commerce has been aggregated into six commodity categories based on ‘‘inland’’ ton-miles shown in Waterborne Commerce of the United States. These categories are (1) Farm and Food Products; (2) Coal and Coke; (3) Petroleum, Crude and Products; (4) Minerals, Ores, and Primary Metals and Mineral Products; (5) Chemicals and Allied Products; and (6) All Other. A consideration in the selection of representative organizations to the Board will be that the commodities carried or shipped by those firms will be reasonably representative of the above commodity categories. d. Nomination. Reflecting preceding selection criteria, the current representation by the ten (10) organizations whose terms expire includes all Regions 1–6, all carrier and/ or shipper representation and all commodity representation. Individuals, firms or associations may nominate representative organizations to serve on the Board. Nominations will: (1) Include the commercial operations of the carrier and/or shipper representative organization being nominated. This commercial operations information will show the actual or estimated ton-miles of each commodity carried or shipped on the inland waterways system in a recent year (or years), using the waterway regions and commodity categories previously listed. (2) State the region(s) to be represented. E:\FR\FM\15JYN1.SGM 15JYN1

Agencies

[Federal Register Volume 81, Number 136 (Friday, July 15, 2016)]
[Notices]
[Pages 46063-46068]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-16786]


=======================================================================
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BUREAU OF CONSUMER FINANCIAL PROTECTION


Supervisory Highlights: Mortgage Servicing Special Edition 2016

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Supervisory Highlights; notice.

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SUMMARY: The Bureau of Consumer Financial Protection (CFPB) is issuing 
its eleventh edition of its Supervisory Highlights. In this issue, the 
CFPB shares findings from supervisory examination work in mortgage 
servicing between January 2014 and April 2016. The issue also discusses 
Supervision's approach mortgage to servicing exams, including a 
description of recent changes to the mortgage servicing chapter of the 
CFPB Supervision and Examination Manual.

DATES: The Bureau released this edition of the Supervisory Highlights 
on its Web site on June 22, 2016.

FOR FURTHER INFORMATION CONTACT: Christopher J. Young, Managing Senior 
Counsel and Chief of Staff, Office of Supervision Policy, 1700 G Street 
NW., 20552, (202) 435-7408.

SUPPLEMENTARY INFORMATION: 

1. Introduction

    Mortgage servicers play a central role in homeowners' lives by 
managing their mortgage loans. Servicers collect and apply payments, 
work out modifications to loan terms, and handle the difficult process 
of foreclosure. As the financial crisis made clear, weak customer 
support, lost paperwork, and mishandled accounts can lead to many 
wrongful foreclosures and other serious harm. Since consumers do not 
choose their mortgage servicers they cannot take their business 
elsewhere.
    To improve practices in the servicing market, the Dodd-Frank Act 
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) imposed 
new requirements on servicers and gave the Consumer Financial 
Protection Bureau (CFPB) the authority to implement those new 
requirements and adopt additional rules to protect consumers. The CFPB 
released rules, effective January 10, 2014, to improve the information 
consumers receive from their servicers, to enhance the protections 
available to consumers to address servicer errors, and to establish 
baseline servicing requirements that provide additional protections for 
consumers who have fallen behind on their mortgage payments. 
Supervisory examinations of mortgage servicers now generally focus on 
reviewing for compliance with these servicing rules and for unfair, 
deceptive, and abusive acts or practices.
    To assist industry in its efforts to comply Federal consumer 
financial law, this Special Edition of Supervisory Highlights discusses 
recent supervisory examination observations in mortgage servicing. To 
provide additional context for readers, we integrate these recent 
observations with observations from previous editions of Supervisory 
Highlights by subject matter.\1\
---------------------------------------------------------------------------

    \1\ Observations shared in previous editions of Supervisory 
Highlights will be footnoted. Questions or comments may be directed 
to CFPB_Supervision@cfpb.gov.
---------------------------------------------------------------------------

    The magnitude and persistence of compliance challenges since 2014, 
particularly in the areas of loss mitigation and servicing transfers, 
show that while the servicing market has made investments in 
compliance, those investments have not been sufficient across the 
marketplace. Outdated and deficient servicing technology continues to 
pose considerable risk to consumers in the wider servicing market. 
These shortcomings are compounded by lack of proper training, testing, 
and auditing of technology-driven processes, particularly to handle 
more individualized situations related to delinquencies and loss 
mitigation processes. None of these problems is insurmountable, 
however, with the proper focus on making necessary improvements, 
especially in the information technology systems necessary for 
effective implementation. Supervisory examinations do show that some 
servicers have significantly improved their compliance positions, and 
this edition concludes by sharing how these servicers have strengthened 
their compliance.

2. Our Approach to Mortgage Servicing Examinations

    To determine which mortgage servicers to examine, we use a 
prioritization framework that considers a broad range of factors to 
predict the likelihood of consumer harm.\2\ For instance, because a 
servicer's market share corresponds to the number of consumers 
affected, we prioritize relatively larger servicers with a more 
dominant market presence over comparatively smaller servicers.
---------------------------------------------------------------------------

    \2\ See Supervisory Highlights: Summer 2013, Section 3.2.3, 
input from housing counselors and other stakeholders.
---------------------------------------------------------------------------

    Our prioritization approach counterbalances this size consideration 
with what we call field and market intelligence. We consider 
qualitative and quantitative factors for each servicer such as the 
strength of compliance management systems, the existence of other 
regulatory actions, findings from our prior examinations, servicing 
transfer activity, the number, severity and trends of consumer 
complaints, as well as input from housing counselors and other 
stakeholders about institutional performance based on their experience.
    In fall 2011, we published the initial mortgage servicing chapter 
of the CFPB Supervision and Examination Manual. We update the manual 
periodically, most recently in May 2016, to reflect regulatory changes, 
to make technical corrections and to update examination priorities.\3\ 
In the latest version, we enhance the section related to consumer 
complaints to highlight that for mortgage servicers, examiners will be 
reviewing whether the servicer has an adequate process for expedited 
evaluation of complaints or notices of error for borrowers or borrower 
advocates alleging regulatory compliance issues where the borrower is 
facing imminent foreclosure. The possibility of foreclosure puts even 
more weight on the importance of an appropriate complaint escalation 
process, which is essential to any compliance management system.\4\
---------------------------------------------------------------------------

    \3\ See CFPB Supervision and Examination Manual, available at 
http://files.consumerfinance.gov/f/201401_cfpb_mortgage-servicing-exam-procedures.pdf.
    \4\ See page CMR 10 ``Consumer Complaint Response'' in the CFPB 
Supervision and Examination Manual, available at: http://files.consumerfinance.gov/f/201210_cfpb_supervision-and-examination-manual-v2.pdf.
---------------------------------------------------------------------------

    Generally, our examinations review compliance management systems 
and evaluate compliance through transaction testing of specific loan 
files. In many instances, examiners conduct specific transaction 
testing based on consumer complaints submitted to housing counselors or 
the CFPB's Office of Consumer Response, particularly where the servicer 
did not provide a sufficient response or remedy. The scope for the 
content of our examinations reflects the size and risk profile of each 
servicer, and as a result, the content of our transaction testing may 
vary across market participants.
    Our supervisory work also has included use of the Equal Credit 
Opportunity Act (ECOA) Baseline Modules, which are part of the CFPB

[[Page 46064]]

Supervision and Examination Manual. Examination teams use these modules 
to conduct ECOA Baseline Reviews, which evaluate how well institutions' 
compliance management systems identify and manage fair lending risks. 
The module 4, covering fair lending risks related to servicing, 
includes questions on such topics as fair lending training of servicing 
staff, fair lending monitoring of servicing, and servicing consumers 
with Limited English Proficiency. Based on the information gathered 
through these ECOA Baseline Reviews, and other inputs used in our 
prioritization process, Supervision will be conducting more 
comprehensive ECOA Targeted Reviews of mortgage servicers in 2016.
    Where we observe more significant violations during an examination, 
we may refer matters to our Action Review Committee.\5\ The committee 
uses a deliberative and rigorous process to determine whether matters 
that originate from our examinations will be resolved through 
confidential supervisory action, such as a board resolution or 
memorandum of understanding, or through a public enforcement action. In 
determining the appropriate action, the committee considers a variety 
of factors, including the magnitude of consumer harm, whether the 
violation was self-identified, and the timeliness and scope of 
remediation.
---------------------------------------------------------------------------

    \5\ See Supervisory Highlights: Summer 2015, Section 3.1.4, 
available at http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf.
---------------------------------------------------------------------------

    Additionally, we have identified potential risk areas and provided 
general compliance suggestions related to mortgage servicing by 
publishing several compliance bulletins. The bulletins issued to date 
have covered the following topics: Permanent Change of Station 
Orders,\6\ Mortgage Servicing Transfers,\7\ and Private Mortgage 
Insurance Cancellation and Termination.\8\
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    \6\ See Interagency Guidance on Mortgage Servicing Practices 
Concerning Military Homeowners with Permanent Change of Station 
Orders, available at http://files.consumerfinance.gov/f/201206_cfpb_PCS_Orders_Guidance.pdf.
    \7\ See CFPB Bulletin 2014-01 (Aug. 19, 2014), available at 
http://files.consumerfinance.gov/f/201408_cfpb_bulletin_mortgage-servicing-transfer.pdf.
    \8\ See CFPB Bulletin 2015-03 (Aug. 4, 2015), available at 
http://files.consumerfinance.gov/f/201508_cfpb_compliance-bulletin_private-mortgage-insurance-cancellation-and-termination.pdf.
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3. Supervisory Observations

    In examining for compliance with the servicing rules, Supervision 
has addressed issues across servicing business areas, and most 
extensively in the areas of loss mitigation acknowledgement notices 
(3.1); loss mitigation offers and related communications (3.2); loan 
modification denial notices (3.3); policies and procedures (3.4); and 
servicing transfers (3.5). The following findings reflect information 
obtained from supervisory activities as captured in examination reports 
or supervisory letters. In some instances, not all corrective actions, 
including through enforcement, have been completed at the time of this 
report's publication.

3.1. Loss Mitigation Acknowledgement Notices

    Before the new servicing rules, gaps in servicer communication and 
coordination kept many distressed consumers in the dark about available 
options to avoid foreclosure. Consumers who applied for such options 
sometimes found themselves stuck in a cycle of lost paperwork and 
redundant document requests while their foreclosure dates grew nearer.
    To address this set of issues, the servicing rules now require that 
if a servicer receives a loss mitigation application 45 days or more 
before a foreclosure sale, it must notify the borrower in writing 
within five days to acknowledge receipt of the application and whether 
it is complete or incomplete.\9\ If incomplete, the notice must state 
the additional documents and information the borrower must submit to 
complete the application and a reasonable date by which the borrower 
should submit those documents and information.\10\
---------------------------------------------------------------------------

    \9\ 12 CFR 1024.41(b)(2)(i)(B).
    \10\ Id. The acknowledgment notice also must include a statement 
that the borrower should consider contacting servicers of any other 
mortgage loans secured by the same property to discuss available 
loss mitigation options.
---------------------------------------------------------------------------

    CFPB examiners have found multiple violations related to these 
critical process requirements. Examiners found that one or more 
servicers failed to send any loss mitigation acknowledgment notices due 
to a repeated loss mitigation processing platform malfunction over a 
significant period of time. Supervision cited the servicer(s) for 
violating Regulation X and directed the servicer(s) to remediate 
affected borrowers, including for interest, fees, and any additional 
harm incurred.\11\ Supervision also directed the servicer(s) to fix and 
monitor the servicing platform for compliance weaknesses. Supervision 
later confirmed that the servicer(s) undertook appropriate corrective 
actions.
---------------------------------------------------------------------------

    \11\ 12 CFR 1024.41(b)(2)(i)(B). Previously discussed in the 
Summer 2015 edition of Supervisory Highlights, available at http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf.
---------------------------------------------------------------------------

    Supervision also found deceptive statements in loss mitigation 
acknowledgement notices. One or more servicers sent acknowledgement 
notices that represented homes would not be foreclosed on before the 
deadline passed for submitting missing documents. But the servicer(s) 
foreclosed on homes before the submission deadline. Supervision 
determined the representations to be deceptive, independent of whether 
or not the servicing rules permitted the servicer(s) to foreclose on 
the specific borrower(s) at that time. Supervision directed the 
servicer(s) to undertake remedial and corrective actions which are 
under review.\12\
---------------------------------------------------------------------------

    \12\ 12 U.S.C. 5536(a)(1)(B).
---------------------------------------------------------------------------

    Supervision also observed deficiencies with the timeliness and 
content of acknowledgment notices. One or more servicers sent 
acknowledgement notices more than five days after receiving a 
borrower's loss mitigation application. And at one or more servicers, 
the noncompliant acknowledgment notices for incomplete loss mitigation 
applications:
     Failed to state the additional documents and information 
for borrowers to submit to complete the application, such as income and 
tax forms that the servicer's internal records showed were necessary at 
that time,. Instead, the servicer(s) separately requested the necessary 
documents several weeks after the acknowledgment notice.
     Requested documents, sometimes dozens in number, 
inapplicable to borrower circumstances and which were not needed to 
evaluate borrowers for loss mitigation.\13\
---------------------------------------------------------------------------

    \13\ Previously discussed in the Summer 2015 edition of 
Supervisory Highlights, available at http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf.
---------------------------------------------------------------------------

     Requested documents that borrowers already submitted.
     Failed to include any reasonable date by which borrowers 
must return additional documents and information.
     Gave borrowers 30 days to submit additional documents, but 
the servicer(s) then denied borrowers' applications for loss mitigation 
before 30 days.\14\
---------------------------------------------------------------------------

    \14\ Previously discussed in the Fall 2015 edition of 
Supervisory Highlights, available at http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf.
---------------------------------------------------------------------------

     Failed to include a statement that borrowers should 
consider contacting servicers of any other mortgage loans

[[Page 46065]]

secured by the same property to discuss available loss mitigation 
options.
    Supervision cited the servicer(s) above for violating Regulation X 
and directed them to revise deficient acknowledgement notices to meet 
Regulation X requirements.\15\
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    \15\ 12 CFR 1024.41(b)(2)(i)(B).
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3.2 Loss Mitigation Offer Letters and Related Communications

    Supervision also found serious violations of Federal consumer 
financial law with servicer loss mitigation offer letters, loss 
mitigation offers, and related communications. In offering proprietary 
modifications, one or more servicers engaged in deceptive and abusive 
practices in connection with communicating whether and when outstanding 
fees, charges, and advances would be assessed. Specifically, one or 
more servicers engaged in a deceptive practice by misrepresenting to 
borrowers that it would defer such charges to the maturity date of the 
loan, when in fact it often assessed hundreds of dollars in these 
charges after the borrowers signed and returned the permanent 
modification agreements. Additionally, one or more servicers took 
unreasonable advantage of borrowers' lack of understanding of the 
material risks of the loan modification and took unreasonable advantage 
of borrowers' inability to protect their interests in selecting or 
using the modification because the language in the proprietary 
modification offer made it impossible for a borrower to understand the 
true nature of how and when these charges would be assessed. Without 
such knowledge, a borrower could not have understood the material risks 
of the modification, nor could he adequately protect himself from the 
potential payment shock from the assessment of such charges. 
Supervision cited the servicer(s) for deceptive and abusive practices 
and required the servicer(s) to provide accurate information regarding 
fee assessment practices about its proprietary loss mitigation options 
to borrowers.\16\
---------------------------------------------------------------------------

    \16\ 12 U.S.C. 5536(a)(1)(B)
---------------------------------------------------------------------------

    Furthermore, one or more servicers sent loss mitigation offer 
letters with response deadlines that had already passed or were about 
to pass by the time the borrower received the letter. The servicer(s) 
generated the letters in timely fashion, but delayed sending them to 
borrowers for a substantial number of days. Supervision cited this 
practice as unfair and directed the servicer(s) to undertake remedial 
and corrective actions which are under review.\17\
---------------------------------------------------------------------------

    \17\ 12 U.S.C. 5536(a)(1)(B).
---------------------------------------------------------------------------

    With respect to permanent modification agreements, one or more 
servicers sent agreements to some borrowers that did not match the 
terms approved by its underwriting software. Many borrowers signed and 
returned the agreements, but then the agreements were not executed by 
the servicer(s). Instead, after substantial delays, the servicer(s) 
sent updated modification agreements with materially different terms to 
the borrowers. These misrepresentations about the available terms 
affected the ultimate payments the borrowers would make, influencing 
both whether they would accept the modification and how they could 
subsequently budget based on their expected payment. Supervision 
determined that the servicer(s) engaged in a deceptive practice in 
connection with these modifications and directed the servicer(s) to 
undertake remedial and corrective actions, which are under review.\18\
---------------------------------------------------------------------------

    \18\ 12 U.S.C. 5536(a)(1)(B). Previously discussed in the Fall 
2014 edition of Supervisory Highlights, available at http://files.consumerfinance.gov/f/201410_cfpb_supervisory-highlights_fall-2014.pdf.
---------------------------------------------------------------------------

    One or more servicers represented in loan modification trial period 
plans that borrowers would receive a permanent modification after 
making three trial payments. However, after borrowers made the required 
trial payments, the servicer(s) could still deny the permanent 
modification based on the results of a title search. The servicer(s) 
did not communicate to borrowers that permanent loan modifications were 
contingent on a title search in the trial period offer letter. 
Supervision determined the practice to be deceptive and directed the 
servicer(s) to provide accurate information to borrowers about loss 
mitigation options.\19\
---------------------------------------------------------------------------

    \19\ 12 U.S.C. 5536(a)(1)(B).
---------------------------------------------------------------------------

    Against investor guidelines, one or more servicers treated borrower 
self-employed gross income as net income when evaluating loss 
mitigation applications. The practice inflated borrower income and may 
have led to less affordable modifications. Supervision traced the 
practice to an underwriting error and cited the servicer(s) for 
violating Regulation X.\20\ It directed the servicer(s) to conduct 
training for loss mitigation personnel to calculate self-employment 
income according to investor guidelines.
---------------------------------------------------------------------------

    \20\ 1024.41(c)(1)(i).
---------------------------------------------------------------------------

    One or more servicers failed to convert a substantial number of 
trial modifications to permanent modifications timely after borrowers 
successfully completed trial modifications. The delays harmed borrowers 
who then owed higher amounts of accrued interest under the finalized 
permanent modifications than they would have owed under a timely 
conversion. During the delay, the interest accrued at the original 
contractual rate, rather than at the lower rate provided under the 
modification's terms. The servicer then capitalized the additional 
interest into the principal balance owed under the permanent 
modification. The servicer(s) also continued to report borrowers that 
had been delinquent at the beginning of their trial modifications as 
delinquent to the consumer reporting agencies during the length of the 
delay. Some affected borrowers filed complaints with the CFPB's Office 
of Consumer Response describing how the uncertainty of the loan 
modification decisions hurt their ability to plan for the future. 
Supervision determined that the substantial delays, combined with the 
negative consequences attributable to the delays, constituted an unfair 
practice and directed the servicer(s) to undertake remedial and 
corrective actions which are under review.\21\
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    \21\ 12 U.S.C. 5536(a)(1)(B). Previously discussed in the Fall 
2014 edition of Supervisory Highlights, available at http://files.consumerfinance.gov/f/201410_cfpb_supervisory-highlights_fall-2014.pdf.
---------------------------------------------------------------------------

    Supervision found a deceptive practice related to how one or more 
servicers disclosed the terms of a payment plan that deferred mortgage 
payments for daily simple interest mortgage loans.\22\ The 
communications included misleading representations about the 
deferments, which represented that deferred interest would be repayable 
at the end of the loan term when, in fact, the servicer collected the 
deferred interest from consumer immediately after the deferment ended. 
Supervision directed the servicer(s) to clearly disclose how interest 
accrues while on the plan and its impact on monthly payments after the 
deferment period concludes.
---------------------------------------------------------------------------

    \22\ 12 U.S.C. 5536(a)(1)(B). Previously discussed in the Summer 
2015 edition of Supervisory Highlights, available at http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf.
---------------------------------------------------------------------------

    Supervision found that one or more servicers sent notices warning 
that foreclosure would be imminent to borrowers who were current on 
their low-balance home equity lines of credit (HELOCs) and no monthly 
payment due. Supervision cited the practice as deceptive and directed 
servicer(s) to cease sending collection letters that

[[Page 46066]]

misled consumers into believing that the loans were delinquent.\23\
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    \23\ 12 U.S.C. 5536(a)(1)(B). Previously discussed in the Summer 
2015 edition of Supervisory Highlights, available at http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf.
---------------------------------------------------------------------------

    Additionally, Supervision has repeatedly identified waivers of 
consumer rights in loss mitigation agreements. Regulation Z states that 
a ``contract or other agreement relating to a consumer credit 
transaction secured by a dwelling . . . may not be applied or 
interpreted to bar a consumer from bringing a claim in court pursuant 
to any provision of law for damages or other relief in connection with 
any alleged violation of any Federal law.'' \24\ Examiners found one or 
more servicers required borrowers to sign waivers agreeing that they 
would have no ``defenses, set-offs, or counterclaims to the 
indebtedness of borrowers pursuant to the Loan Document'' in order to 
enter mortgage repayment and loan modification plans. Defenses, set-
offs, and counterclaims pertain to a contract or other agreement to a 
consumer credit transaction secured by a dwelling. As borrowers were 
likely to read the waiver as barring them from bringing claims--
including Federal claims--related to their mortgage, Supervision cited 
the waiver language as deceptive and directed the servicer(s) to remove 
it from all loss mitigation agreements.\25\
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    \24\ 12 CFR 1026.36(h)(2).
    \25\ 12 U.S.C. 5536(a)(1)(B). Previously discussed in the Fall 
2015 edition of Supervisory Highlights, available at http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf.
---------------------------------------------------------------------------

3.3 Loan Modification Denial Notices

    Where servicers deny complete loss mitigation applications for any 
trial or permanent loan modification option, denial notices help 
borrowers understand the reasons and, where appropriate, provide 
relevant information about the appeals process. Generally, the 
servicing rules require that denial notices provide the specific reason 
or reasons for denying the borrower the trial or permanent loan 
modification option and, if applicable, that the borrower was not 
evaluated on other criteria. The rules enable a borrower to appeal a 
denial of a trial or permanent loan modification option so long as the 
borrower's complete loss mitigation application is received 90 days or 
more before a foreclosure sale or during the pre-foreclosure review 
period.\26\
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    \26\ 12 CFR 1024.41(d), (h).
---------------------------------------------------------------------------

    Supervision found that denial notices at one or more servicers 
failed to state the correct reason(s) for denying a trial or permanent 
loan modification option as required by Regulation X.\27\ For example, 
the notices' denial reason stated that the borrower ``did not provide 
the requested additional information needed to complete the workout 
review.'' However, the servicer(s) platform indicated that the 
borrower's application was complete and was instead denied for a 
specific reason related to the borrower's income.
---------------------------------------------------------------------------

    \27\ 12 CFR 1024.41(d).
---------------------------------------------------------------------------

    One or more servicers' notices also stated ``Not Available*'' as 
the reason for denying loss mitigation applications. The asterisk 
elaborated: ``Not Available means this program was not considered due 
to an eligibility requirement or requirements not met.''
    Supervision cited the two practices above for violating Regulation 
X and directed the servicer(s) to state the specific reason or reasons 
for its denial of each trial or permanent loan modification option and, 
if applicable, that the borrower was not evaluated on other 
criteria.\28\
---------------------------------------------------------------------------

    \28\ 12 CFR 1024.41(d).
---------------------------------------------------------------------------

    When a borrower has the right to appeal the denial of a trial or 
permanent loan modification, a servicer must, in its notice after 
evaluating the borrower's complete loss mitigation application, inform 
the borrower of the appeal right and the amount of time the borrower 
has to file the appeal.\29\ One or more servicers sent denial notices 
that failed to communicate a borrower's specific right to appeal. The 
notices instead generically stated that the borrower may have a right 
to appeal if the borrower met certain requirements. Supervision cited 
servicer(s) for violating Regulation X and directed the servicer(s) to 
include more specific appeal language in their denial letters where 
appropriate, rather than only generic appeal language in all 
instances.\30\
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    \29\ 12 CFR 1024.41(c)(1)(ii).
    \30\ 12 CFR 1024.41(c)(1)(ii). Previously discussed in the Fall 
2015 edition of Supervisory Highlights, available at http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf.
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3.4 Servicing Policies, Procedures, and Requirements

    To undergird the loss mitigation application process, Regulation X 
requires servicers to maintain policies and procedures reasonably 
designed to achieve specific objectives that include: Providing timely 
and accurate information; properly evaluating loss mitigation 
applications; facilitating oversight of and compliance by service 
providers; and facilitating transfer of information during servicing 
transfers.\31\ In reviewing for these requirements, Supervision found 
that one or more servicers violated Regulation X because their policies 
and procedures were not reasonably designed to achieve the following 
objectives:
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    \31\ 12 CFR 1024.38(a), (b).
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     Providing a borrower with accurate and timely information 
and documents in response to the borrower's requests for information 
with respect to the borrower's mortgage loan. One or more servicers 
failed to provide information and loss mitigation application forms to 
a substantial number of borrowers who called in to request such 
information.\32\
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    \32\ 12 CFR 1024.38(b)(1)(iii).
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     Upon the death of a borrower, promptly identifying and 
facilitating communication with the successor in interest of the 
deceased borrower with respect to the property secured by the deceased 
borrower's mortgage loan.\33\ One or more servicers required probate 
for borrowers to establish themselves as successors in states where 
probate was not required.
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    \33\ 12 CFR 1024.38(b)(1)(vi).
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     Identifying with specificity all loss mitigation options 
for which a borrower may be eligible pursuant to any requirements 
established by an owner or assignee of the borrower's mortgage 
loan.\34\ One or more servicers sent letters to borrowers soliciting 
loss mitigation applications when internal records showed that the 
borrowers were not eligible for any loss mitigation option.\35\
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    \34\ 12 CFR 1024.38(b)(2)(ii).
    \35\ Reported in the Fall 2015 edition of Supervisory 
Highlights, available at http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf.
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     Providing prompt access to all documents and information 
submitted by a borrower in connection with a loss mitigation option to 
servicer personnel assigned to assist the borrower under the rules.\36\ 
One or more servicers failed to identify and process material submitted 
by borrowers to complete a loss mitigation application. The servicer(s) 
permitted borrowers to send material through fax, but lacked policies 
and procedures for date-stamping, cataloging and distributing loss 
mitigation material to appropriate departments, which resulted in 
servicer personnel assigned to assist the borrower under the rules 
being unable to access relevant information in a timely way.
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    \36\ 12 CFR 1024.38(b)(2)(iii).
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     Properly evaluating a loss mitigation application for all 
options for which the borrower may be eligible based on the loan 
owner's requirements.\37\ One or more servicers evaluated applications 
only for the loss mitigation options preselected by

[[Page 46067]]

servicer personnel and not for all options available to the 
borrower.\38\
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    \37\ 12 CFR 1024.38(b)(2)(v).
    \38\ Reported in the Fall 2015 edition of Supervisory 
Highlights, available at http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf.
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     Facilitating the sharing of accurate and current 
information regarding the status of any evaluation of a borrower's loss 
mitigation application and the status of any foreclosure proceeding 
among appropriate servicer personnel, including service provider 
personnel. One or more servicer(s)' foreclosure attorneys sent a 
foreclosure referral letter to the borrower after the borrower entered 
into a loss mitigation agreement with the servicer.\39\
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    \39\ 12 CFR 1024.38(b)(3)(iii). Reported in the Fall 2015 
edition of Supervisory Highlight, available at http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf.
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     As a transferee servicer, ensuring that it can identify 
necessary documents or information that may not have been transferred 
by a transferor and obtain such documents from the transferor servicer. 
One or more transferee(s) failed to identify necessary documents, 
including loss mitigation agreements and mortgage notes not transmitted 
by the transferor.\40\
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    \40\ 12 CFR 1024.38(b)(4)(ii).
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    In the above cases where Supervision detected policies, procedures, 
or requirements not in compliance with Regulation X, Supervision 
directed servicers to implement policies, procedures, and requirements 
compliant with the Rule and to monitor for their effectiveness.

3.5 Servicing Transfers

    Transferring loans during the loss mitigation process heightens 
risks to consumers, including the risk that documents and information 
might not be accurately transferred.\41\ While Supervision has observed 
more attention to pre-transfer planning by transferor and transferee 
servicers since 2014, Supervision found that at one or more servicers 
incompatibilities between servicer platforms led, in part, to 
transferees failing to identify and honor in-place loss mitigation 
after receiving the loans.
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    \41\ See CFPB Bulletin 2014-01 (Aug. 19, 2014), available at 
http://files.consumerfinance.gov/f/201408_cfpb_bulletin_mortgage-servicing-transfer.pdf.
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    Additionally, one or more servicers failed to honor the terms of 
in-place trial modifications after transfer. Some borrowers who 
completed trial payments with the new servicer nevertheless encountered 
substantial delays before receiving a permanent loan modification. 
Supervision concluded that the delay caused substantial injury as trial 
payments were less than the amounts required by the promissory note, 
and consumers continuing to make trial payments while waiting for the 
permanent modification accrued interest on the unpaid principal 
balance. Such delays were exacerbated by the transferee(s)' failure to 
obtain timely access to an online workout tool required by the 
investor. Supervision cited this practice as unfair and directed the 
transferee servicers(s) to develop and implement policies, procedures, 
training, and audits to promptly identify and honor prior loss 
mitigation agreements, whether completed or in-flight at the time of 
transfer.\42\
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    \42\ 12 U.S.C. 5536(a)(1)(B). Previously discussed in the Sumer 
2015 edition of Supervisory Highlights, available at http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf.
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    Supervision also observed some servicers improve transfer policies, 
procedures, and practices. For example, in response to Supervision's 
direction to one or more transferee servicers to identify in-flight 
modifications, the transferee(s) began to use certain tools generally 
available to industry participants--the HomeSavers Solutions Network 
and the HAMP Reporting Tool--to reconcile loan data during transfer. 
Supervision noted that this approach gave transferee(s) the ability to 
identify more in-flight modifications. Despite this improvement, 
Supervision observed that transferee(s) still failed to recognize 
modifications not registered by the transferor or not otherwise in the 
databases and could benefit from conducting a post-transfer review for 
in-flight loss mitigation. The transferee(s) agreed to further enhance 
transfer protocols.
    Also in connection with servicing transfers, one or more 
transferee(s) found that delays in honoring in-flight modifications 
were caused by their dependence on the information technology 
department to manually override data fields whenever the servicing 
platform rejected transferor data. By granting override authority to 
loss mitigation staff, the transferee(s) reduced the time required to 
honor in-flight modifications.

4. Conclusion

    While Supervision continues to be concerned about the range of 
legal violations identified at various mortgage servicers, it also 
recognizes efforts made by certain servicers to properly staff 
effective compliance management programs. Some servicers have made 
significant improvements in the last several years, in part by 
enhancing and monitoring their servicing platforms, staff training, 
coding accuracy, auditing, and allowing for greater flexibility in 
operations. More generally, Supervision found compliance audits that 
thoroughly assessed the business unit's internal control environment, 
clearly identified issues with compliance, detailed management's 
response, set a target date for resolving the identified issues, and 
completed the necessary adjustments promptly. At one or more servicers, 
these audits included reviews of service providers and were part of a 
wider and appropriately resourced compliance framework. One or more 
servicers also conducted formal reviews of information technology 
structures that identified the root causes of earlier compliance 
weaknesses, including platform outages. These reviews led the 
servicer(s) to replace outdated technology, such as document management 
systems.
    Supervision also observed that servicers are actively reviewing 
complaints for allegations of law violations. One or more servicers 
used analytic tools to search, review, and track complaint records with 
content indicating regulatory violations. One or more servicers also 
created a complaint governance committee to oversee all customer 
complaints to ensure they receive appropriate engagement, including 
remediation as appropriate. One or more servicers also designated 
management level employees as primary contacts for Federal and State 
regulators and other government bodies for discussing complaints and 
inquiries from borrowers who are in default or have applied for loan 
modifications.
    As the above observations show, improvements and investments in 
servicing technology, staff training, and monitoring can be essential 
to achieving an adequate compliance position. However, such 
improvements have not been uniform across market participants and 
Supervision continues to observe compliance risks, particularly in the 
areas of loss mitigation and servicing transfers. A growing point of 
emphasis for Supervision in achieving needed improvements in servicer 
compliance will be to require servicers to submit specific and credible 
plans describing how changes in their information technology systems 
will offer assurance that they can systematically and effectively 
implement the changes made to resolve the issues identified by 
Supervision.

6. Regulatory Requirements

    This Supervisory Highlights summarizes existing requirements under 
the law, summarizes findings made in the course of exercising the

[[Page 46068]]

Bureau's supervisory and enforcement authority, and is a non-binding 
general statement of policy articulating considerations relevant to the 
Bureau's exercise of its supervisory and enforcement authority. It is 
therefore exempt from notice and comment rulemaking requirements under 
the Administrative Procedure Act pursuant to 5 U.S.C. 553(b). Because 
no notice of proposed rulemaking is required, the Regulatory 
Flexibility Act does not require an initial or final regulatory 
flexibility analysis. 5 U.S.C. 603(a), 604(a). The Bureau has 
determined that this Supervisory Highlights does not impose any new or 
revise any existing recordkeeping, reporting, or disclosure 
requirements on covered entities or members of the public that would be 
collections of information requiring OMB approval under the Paperwork 
Reduction Act, 44 U.S.C. 3501, et seq.

    Dated: June 22, 2016.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2016-16786 Filed 7-14-16; 8:45 am]
 BILLING CODE 4810-AM-P