Servicing Transfer Process: Borrower Payments

QUESTION

As part of our company’s efforts to build up the servicing side of our business, and as a hedge against the loss of income from a drop in refinance originations, we just acquired a servicing portfolio from another lender. I am confused about what our reporting obligations are under the Fair Credit Reporting Act (FCRA) with respect to borrower payments that may (or may not) have been made to the previous servicer during the servicing transfer process.  Can you give us any guidance on this issue?

ANSWER

Under FCRA, a “furnisher” of information to credit reporting agencies (1) shall not furnish any information relating to a consumer if the person “knows or has reasonable cause to believe that the information is inaccurate” and (2) has an affirmative duty to “correct” and “update” information it has previously furnished that is “not complete or accurate.” [15 U.S.C. §1681s-2(a)(1) and (2)]  

This can create significant challenges for subservicers or companies acquiring mortgage servicing rights (MSRs) from other lenders or servicers because the transfer of detailed borrower account information from one servicer to another typically does not occur instantaneously on the date that the servicing transfer becomes “effective.” Moreover, borrowers’ payments may be in transit during the transfer process or sent to the former servicer because the borrower has simply failed to process the new servicer’s instructions.  

This issue is addressed in Regulation X of RESPA [12 CFR 1024.21(d)(5)] which provides that, during the 60-day period beginning on the effective date of transfer of the servicing of any mortgage servicing loan, if the transferor servicer (rather than the transferee servicer that should properly receive payment on the loan) receives payment on or before the applicable due date (including any grace period allowed under the loan documents), a late fee may not be imposed on the borrower with respect to that payment and the payment may not be treated as late “for any other purposes.” (Emphasis added.)

This creates an FCRA reporting issue for the new servicer or subservicer because, during the first 60 days after the servicing transfer becomes effective, the new servicer cannot automatically assume that a loan is delinquent just because the new servicer itself has not received payment. It is not uncommon for servicers to suspend credit reporting during that 60 day period to wait for payments from the former servicer. But what happens after that?

The new servicer’s affirmative duty to “correct” and “update” information it has previously furnished that is “not complete or accurate” [supra] now requires that any previous credit reporting be revised and updated to show any payments actually received (or not received) by the previous servicer during the 60 day period. This is not something the servicer can just ignore. If the “furnisher” (servicer) becomes aware that payments were in fact received during that period by the previous servicer, the furnisher now “knows” or “has reason to believe” that information previously reported (i.e., absence of payment history because reporting was suspended during the servicing transfer) is inaccurate or incomplete because it now has evidence in its files that payments were in fact received. That information must be reported.

In that regard, even though there is no Federal private right of action for violation of these provisions, there can be civil liability to regulatory enforcement authorities for both willful and negligent non-compliance with these requirements. [See 15 U.S.C. §1681n and o, not to mention possible violation of the “Unfair, Deceptive, Abusive Acts or Practices” (UDAAP) provisions of the Dodd-Frank Act [12 U.S.C. §§ 5481, 5531 & 5536(a)].

Moreover, the examination guidelines of the Consumer Financial Protection Bureau (CFPB) now include reviews for compliance with the new Mortgage Servicing Rule (Rule) that went into effect on January 10, 2014 imposing additional obligations on servicers. The provisions of that Rule, and related commentary pertaining to mortgage servicing transfers, can be found at 12 CFR 1024.33, 12 CFR 1024.38, and 12 CFR 1024.41.2 and are summarized in CFPB Compliance Bulletin 2014-01, issued on August 14, 2014 to help servicers with these issues. A copy of this Bulletin and the applicable regulations can be found on the CFPB website (www.consumerfinance.gov). 

Among other things, the Rule requires servicers to maintain policies and procedures that are “reasonably designed” to achieve the objectives of facilitating the transfer of information during mortgage servicing and of properly evaluating loss mitigation applications. [12 CFR 1024.38(a), (b)(4)]

As you can see, this is a highly technical area. So do not hesitate to call us or your attorney if you need help.

Michael Pfeifer

Director/Legal & Regulatory Compliance

Lenders Compliance Group

Servicers Compliance Group

Human Resources Compliance

QUESTION

Our bank is undergoing an internal review of its human resources department. I know you conduct such reviews and would like to know some of the primary regulations involving human resources compliance. There are experts in this kind of compliance; however, they seem to be mostly interested in handling litigation issues, while we are looking for a way to draft policies and procedures. What are some important federal regulations involving human resources? What review issues should we consider in our policy statements?

ANSWER

Human Resources (“HR”) compliance is a specialization that very few risk management firms offer. Ours does! Unfortunately, the legal community tends to focus on the litigation arising from compliance failures involving human resources, rather than providing reasonably-priced, compliance reviews of the HR function. Our firm actually has a Director of Human Resources Compliance, an expert in the regulatory requirements of human resources. We focus on guidance and reviews that seek to prevent litigation!

HR is the term that describes individuals who comprise the workforce of an organization. Human resources compliance, or "HR compliance," or sometimes colloquially referred to as "HR," is the term that applies to the department and functions within an organization, the administrative responsibility of which is charged with implementing strategies and policies relating to the management of individuals associated with the organization.

In many ways, human resources compliance is a central feature of a financial institution’s overall compliance function. This is intuitively obvious, given that local, state, and federal employment laws all play a role in human resources. Indeed, HR must be familiar with a wide array of different statutory and regulatory authorities to effectively and lawfully deal with company personnel.

Here are just two of the many federal regulations that affect HR compliance. Local and state statutes should also be included in any HR policy statement. 

• Fair Labor Standards Act (FLSA): This is a federal statute that applies to employees engaged in interstate commerce or employed by an enterprise engaged in commerce or in the production of goods for commerce (unless the employer can claim an exemption from coverage).
• National Labor Relations Act (NLRA), sometimes called the Wagner Act, which, as amended, is known as the Labor Management Relations Act (LMRA).

The foregoing regulations are but two of the vast array of regulations, at all levels of government, that involve HR.

HR compliance takes into consideration virtually all work functions amongst an institution’s rank and file. For instance, HR’s responsibilities in an institution include overseeing and managing duties related to hiring, firing, employee benefits, wages, paychecks, and overtime. 

A compliance review of the HR function should include how its many authorities extend to the oversight of workplace safety, privacy, preventing discrimination, prohibiting harassment, minimizing legal liability in the hiring and firing process, worker complaints, job protection, compensation, benefits, pensions, employee training, and labor relations.

Jonathan Foxx

Managing Director 

Lenders Compliance Group

Providing a Copy of Appraisal: Policy and Procedures

QUESTION

We are drafting a new policy and procedures for providing a copy of an appraisal to the consumer. Would you please outline the most important requirements that we should include in it?

ANSWER

Under Regulation B, the implementing regulation of the Equal Credit Opportunity Act (ECOA), there are specific requirements for providing a copy of an appraisal and other written valuations developed in connection with certain mortgage transactions. [See § 1002.14, Regulation B]

There are four requirements that should be outlined in a policy sections with respect to providing a copy of an appraisal to the consumer.

As a creditor, the procedures sections should: 

1. Require creditors to notify applicants within three business days of receiving an application of their right to receive a copy of appraisals developed.
2. Require creditors to provide applicants a copy of each appraisal and other written valuation promptly upon its completion or three business days before consummation (for closed-end credit) or account opening (for open-end credit), whichever is earlier.
3. Permit applicants to waive the timing requirement for providing these copies. However, applicants who waive the timing requirement must be given a copy of all appraisals and other written valuations at or prior to consummation or account opening, or, if the transaction is not consummated or the account is not opened, no later than 30 days after the creditor determines the transaction will not be consummated or the account will not be opened.
4. Prohibit creditors from charging for the copy of appraisals and other written valuations, but permit creditors to charge applicants reasonable fees for the cost of the appraisals or other written valuations unless applicable law provides otherwise. 

Jonathan Foxx

Managing Director 

Lenders Compliance Group

Ability to Repay on Interest-Only Loans

QUESTION

What steps are necessary to minimize the risk of "rebuttable presumption" of Ability to Repay (ATR) on Interest-Only (I-O) loans?

ANSWER

Let's put on our risk management hats. 10 questions to ask yourself!

1. Product Parameters? Fixed rate and/or standard hybrid arms (5/1, 7/1, & 10/1). Amortizing ARMs increases risk of foreclosure by 150-200%. Benchmark the GSE Hybrid ARMs. Managing layering of risk (Q's 2-10) will address the "ARM" risk. [Moody’s Analytics, March 11, 2011]
2. Index, Margin, & Caps? 1 year CMT (Treasury) index (1.03% as of 3/4/17), 275 BPS margin, 2% periodic cap & 6% life cap. Prime index (4% today) adjusted monthly/quarterly does not work. Again, mimic the GSE Hybrid ARM parameters. Exceeding the GSE parameters will increase your ATR risk substantially.
3. Loan purpose? Purchase & No Cash Out refinance only. Cash-out refinances increase risk of foreclosure by 150%.
4. Occupancy? Owner Occupied only. Non-owner Occupancy increases foreclosure risk by 200-300%.
5. Loan Term? Maximum 30 years. 40, 45, & 50 year terms increase interest costs and risks of mortgage debt in retirement. This will increase the future rebuttable position at a yet to be quantified cost into the future. Probably a minimum cost of $200,000-$300,000.
6. FICO/LTV/CLTV? 700+ FICO, 90% LTV/CLTV, with MI; 680-699 FICO, 80% LTV/CLTV. Subprime increases default risk by 200-300%. 90% LTV has a foreclosure rate 150% higher than at 80% LTV. Historically, the LTV breakeven at foreclosure is 65% LTV. 20% MI only covers you down to 72% LTV.
7. Max DTI? 38%. I-O's are not a first-time homebuyer product. 38% supports ATR. DTI > 45% increases foreclosure risk by 150%.
8. Document Level? Full Doc and 1040/4506T for all self-employed. Reduced Doc increases risk of foreclosure by 300%.
9. U/W Methodology? U/W @ maximum interest rate over the life of the loan (i.e., initial rate = 3.75, index + margin rounded to the nearest 1/8^th). Max rate = 9.75%. Run the loan thru DU, LP AUS, or use Residual U/W Analysis to further support your ATR position.
10. How do you define your I-O market niche? Your market niche is the "well qualified" borrower who has a good (steady) base income, good credit and wants to pre-pay the loan over 10-15 years with periodic income from commissions or bonuses.

If you sell the I-O loan instead of holding it in portfolio, make sure you are not making Representations and Warrants to the investor for the for ATR for life of loan: 3-4 years is reasonable. If you do Representations and Warrants ATR fully, set up a loan loss reserve (minimum 10 BPS) to cover this repurchase and make whole the risk.

Congratulations, you have managed layering of risk and minimized the risk of rebuttable presumption from the borrower, investor (if sold), regulators, and the plaintiff bar!

Ben Niles

Director/Compliance Training 

Lenders Compliance Group