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
