QUESTION
We are a credit
union in the mid-west. Recently, our annual review of our servicer found some regulatory
violations. In particular, we found that the servicer did not process some transfer
data relating to loss mitigation data in a timely and accurate manner.
Everything was corrected. However, the situation put our relationship with the
consumers at risk. It also may lead to our regulator getting involved. Our
concern is about whether we should stay with this servicer now, even if it did
correct the errors. What exposure do we have to regulatory action due to the
servicer’s failure to process the transfer of data?
ANSWER
If your
financial institution uses a servicer, it should be conducting an annual
review. If you don’t know how this is done, you can always retain a firm such
as ours to effectuate a comprehensive evaluation. Regulators expect the annual
review to be conducted and its findings made available during an examination. If
you are not conducting an annual audit of the servicer, you are going to come
under intense regulatory scrutiny.
At a minimum, regulators
require that a financial institution (or any subservicer
or third-party originator it uses) comply with all federal, state, and local laws
(i.e., statutes, regulations, ordinances, directives, codes, administrative
rules and orders that have the effect of law, and judicial rulings and
opinions) that apply to any of its origination, selling, or servicing practices, including laws
and regulations on consumer credit, equal credit opportunity and
truth-in-lending, and borrower privacy; use of any licensed technology; other business practices that may have a
material effect on the investor or consumer; and ensure that appraisals conform to the appraiser independence rules.
As to exposure, I
will offer an illustration of what can happen. Recently, the CFPB announced a
settlement with BSI Financial Services (BSI), a mortgage servicer headquartered
in Irving, Texas. BSI Financial Services is the operating name for Servis One,
Inc. BSI services approximately 48,600 loans with an aggregate unpaid principal
balance of approximately $8.5 billion. The CFPB found that BSI violated the
Consumer Financial Protection Act of 2010 (CFPA), the Real Estate Settlement
Procedures Act (Regulation X), and the Truth in Lending Act. [CFPB,
Administrative Proceeding, In the Matter of Servis One, Inc., d/b/a BSI
Financial Services (5/29/19)]
To explain
briefly, under the terms of the consent order, BSI must, among other
provisions, pay a civil money penalty of $200,000 and pay restitution estimated
to be at least $36,500. It must also establish and maintain a comprehensive
data integrity program to ensure the accuracy, integrity, and completeness of
the data for loans that it services and implement an information technology
plan to ensure that BSI’s systems are appropriate given the nature, size,
complexity, and scope of BSI’s operations.
So, what
happened? The servicer failed to acquire or transfer loss mitigation data and certain other information.
During the period
subject to review, BSI did not review loan data provided by prior servicers for
accuracy and completeness before putting the loans on its system. The servicer
also did not transfer to its system loss mitigation information from prior
servicers in a fully automated manner. Therefore, some consumers who had loan
modifications in process or were engaged in pending loss mitigation when the
servicing was transferred had incomplete information in their files, and in
some cases, their permanent loan modifications were not honored by BSI.
In other
instances, BSI failed to evaluate consumers’ pending loss mitigation
applications for loan modifications or failed to offer permanent loan
modifications upon consumers’ completion of loan modifications in process.
Furthermore,
because BSI did not transfer all of the servicing information correctly in its
system, including payments made by consumers, some consumers whose loans were transferred
out of BSI’s system experienced delays in obtaining loss mitigation with their
new servicers and accrued unnecessary interest and fees.
Let’s look at
the violations that were triggered.
Violations of
Regulation X
Regulation X
requires servicers to maintain policies and procedures that are “reasonably
designed to ensure that the servicer can:
(i) As a transferor
servicer, timely transfer all information and documents in the possession or
control of the servicer relating to a transferred mortgage loan to a transferee
servicer in a form and manner that ensures the accuracy of the information and
documents transferred and that enables a transferee servicer to comply with the
terms of the transferee servicer’s obligations to the owner or assignee of the
mortgage loan and applicable law; and
(ii) As a transferee
servicer, identify necessary documents or information that may not have been
transferred by a transferor servicer and obtain such documents from the
transferor servicer.
These policies
and procedures must be designed to ensure that the servicer can identify
documents and information that a borrower is required to submit to complete a
loss mitigation application. But BSI did not fully complete its review of loss
mitigation information from prior servicers for accuracy and completeness prior
to boarding loans. Moreover, it was BSI’s practice not to review the loan files
it received from prior servicers to ensure that necessary information was not
missing prior to boarding loans. For loans with pending loss mitigation
activity, there were instances in which BSI was also unable to identify
information that those borrowers were required to submit to complete their loss
mitigation applications without contacting the prior servicer or borrower.
Failure to
Acquire Escrow Information from Prior Servicers
During the
review period, the CFPB found that BSI did not enter complete and accurate
property tax and homeowner’s insurance policy information when putting loans
into its servicing system. BSI entered certain loans into its servicing system
with terms that required the establishment of an escrow account for payments of
property taxes and homeowner’s insurance premiums as non-escrowed loans. This
meant that these loans were excluded from BSI’s internal processes to ensure
that it made timely escrow disbursements. On a number of occasions, BSI missed
deadlines to pay property taxes and/or homeowner’s insurance premiums on behalf
of these borrowers.
Violation of the
CFPA
The CFPA
prohibits “unfair, deceptive, or abusive” acts or practices. [CFPA 1036(a)(1)(B);
12 USC 5536(a)(1)(B)] An act or practice is unfair if it causes or is likely to
cause consumers substantial injury that is not reasonably avoidable and if the
substantial injury is not outweighed by countervailing benefits to consumers or
competition. The CFPB found that the acts and practices that resulted in
incorrect escrow payments and accounts caused substantial injury to consumers
that was not reasonably avoidable or outweighed by any countervailing benefit
to consumers or competition.
Examples of
Untimely Escrow Payments
BSI did not have
procedures to ensure that it:
- Conducted adequate periodic reviews of service providers to ensure that they directed BSI to make timely escrow disbursements.
- Made timely property tax or homeowner’s insurance premium payments out of escrow accounts for many consumers whose loans were no more than 30 days past due. In fact, some consumers were subjected to penalties by local tax authorities and cancellation of homeowner’s insurance policies as a result of BSI’s failure to timely pay taxes or premiums.
- Had a practice of identifying and reimbursing consumers who obtained more expensive replacement coverage for their homeowner’s insurance policies that were cancelled for nonpayment of premiums. Nor did BSI have a practice of identifying and reimbursing consumers who had claims denied by their insurers because their policies were cancelled for nonpayment of premiums.
Other BSI
Servicing Failures
BSI failed to
adjust the interest rates on borrowers’ adjustable-rate mortgage (ARM) loans
according to the schedule of adjustments under their loan terms and sent
borrowers monthly statements that sought to collect inaccurate principal and
interest payments.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group
