QUESTION
We are a mortgage servicer. We subservice about $8 billion. I am on the staff of the compliance department. Our servicing quality control audits have been picking up compliance issues, particularly overcharging late fees and charging consumers fees that should have been waived per the CARES Act.
The CFPB's recent Supervisory Highlights specifically mention these two issues in their examination audits. We have no wish to have CFPB examiners identify such findings in their audits.
We have been through three audit firms for servicing quality control. But only the current one picked up on these issues. Little good it does us since we've been making these mistakes for years! And our clients are going through MORA reviews. Some did not do servicing quality control, so they did not pick up on the problem. Others have, and now they are threatening to leave us.
We know you offer servicing quality control, so you have expertise in this area. We read your article on servicing QC and found it very helpful. Our concern now is to get a description of the implications of these process issues.
What are the compliance implications of overcharging late fees in loan servicing?
What regulatory issues arise when we charge consumers fees that should have been waived per the CARES Act?
ANSWER
The article you refer to is Servicing Quality Control: Why's and Wherefore's. That article dealt with a mortgage lender that did not conduct servicing quality control of the subservicer. Interestingly, like some of your clients, that lender seemed to indulge in the philosophy of "unknown knowns;" that is, because it did not do the audits, it was unaware of the risks. Being unaware of known risks – certainly when the risk are knowable – is a recipe for failure.
Your clients should be conducting servicing quality control of their portfolio being serviced by you.[i] This is an oversight function. They cannot evade liability by pushing it to the servicer. If you are a Fannie Seller/Servicer, it is a relationship mandate that the Fannie's MORA team will check. The MORA team evaluates how well a mortgage company meets Fannie Mae's guidelines and gauges operational risks.
Lenders who use subservicers retain my firm to conduct Servicing Quality Control. A high level of expertise is needed; not just any quality control auditor can do these reviews, and most do not. Interested lenders and servicers can download our Servicing QC presentation HERE. Or contact me HERE, and we'll arrange a call.
I think you will have a hard time holding onto clients, not only the clients who did the servicing QC audits but also those who did not do them. Especially those clients that did not conduct servicing quality control audits and are involved in Fannie Mae MORA audits,[ii] as they now face a double-barreled issue: (1) they did not do the oversight requirement of servicing quality control, so MORA will write them up for not doing so, and (2) as their subservicer, you are going to give them servicing QC reports that show ostensible compliance issues that the CFPB has identified to be regulatory violations.
The compliance issues that the CPFB has found pervasive come under the regulatory categories of violations of UDAAP and Regulation Z, the latter triggering violations related to junk fees.
Overall, the Bureau's examiners found that servicers overcharged junk fees that were unlawful, repeatedly charged for unnecessary property inspection visits, misrepresented that consumers owed PMI premiums, charged consumers fees that should have been waived, charged consumers for PMI after it should have been removed, and charged late fees after sending periodic statements listing a $0 late fee.
I will address the two you mention, referencing the Supervisory Highlights[iii] you've noted. The CFPB's examiners found multiple servicing compliance failures relating to UDAAP and Regulation Z violations.
What are the compliance
implications of overcharging late fees in loan servicing?
Overcharging late fees is assessing late fees in excess of the amounts allowed by their loan agreements. It is an unfair acts or practices violation. Specifically, where loan agreements included a maximum permitted late fee amount, the servicers failed to input these late fee caps into their systems.
The servicers charged the maximum allowable late fees under the relevant state laws, which frequently exceeded the specific caps in the loan agreements. This happened because the systems did not reflect the maximum late fee amounts permitted by their loan agreements. Servicers cause substantial injury to consumers when they impose these excessive late fees.
Consumers can not reasonably avoid injury because they do not control how servicers calculate late fees; indeed, they have no reason to anticipate that servicers would impose excessive late fees. The CFPB's position is that charging exorbitant late fees does not benefit consumers or the competition. Consequently, examiners concluded that servicers also violated Regulation Z by issuing periodic statements that included inaccurate late payment fees, since they exceeded the amounts allowed by the loan agreements.[iv] In general, if this is your situation, you can expect the CFPB to require you to waive or refund late fee overcharges to consumers and correct the periodic statements.
What regulatory issues arise when
we charge consumers fees that should have been waived per the CARES Act?
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) directs servicers of federally backed mortgages to grant consumers a forbearance from monthly mortgage payments if the consumer is experiencing financial hardship resulting from the COVID-19 emergency.
During the time a consumer is in forbearance, no fees, penalties, or additional interest beyond scheduled amounts are to be assessed. While the CARES Act prohibits fees, penalties, or additional interest beyond scheduled amounts during a forbearance period, consumers sometimes accrue these amounts during periods when they are not in forbearance.
For instance, a servicer is permitted to charge a late fee if a consumer was delinquent in May 2020 and then entered a forbearance in June 2020.
In the case of FHA loans, when consumers exit CARES Act forbearance and enter certain permanent loss mitigation options, the HUD (Department of Housing and Urban Development) requires servicers in certain circumstances to waive late charges, fees, and penalties accrued outside of forbearance periods.
The CFPB's examiners found that servicers engage in unfair acts or practices when they fail to waive certain late charges, fees, and penalties accrued outside forbearance periods, where required by HUD, upon a consumer entering a permanent COVID-19 loss mitigation option.
This is not the first time the CFPB has cited UDAAP violations relating to charging fees to consumers during a CARES Act forbearance.[v] The CFPB's position is that the failure to waive the late charges, fees, and penalties constitutes a substantial injury to consumers. This injury is not reasonably avoidable by consumers because they have no reason to anticipate that their servicer would fail to follow HUD requirements, and consumers lacked reasonable means to avoid the charges. This harm outweighed any benefit to consumers or competition. You can expect the CFPB to require proof that you have improved your system controls. In addition, you'll need to waive all improper charges and provide refunds to consumers.
Jonathan Foxx, Ph.D., MBAChairman & Managing Director
[i] Fannie
Mae’s Quality Control Review, Chapter A2-4 Fannie Mae, Single Family,
Servicing Guide, March 8, 2023
[ii] The Fannie
Mae Mortgage Origination Risk Assessment (MORA) team conducts a comprehensive
review, which includes an assessment of the operational capabilities,
governance and compliance with Fannie Mae's Selling Guide requirements.
[iii] Supervisory
Highlights – Junk Fees Special Edition, Consumer Financial Protection
Bureau, March 2023, Issue 29, Winter 2023, pp 9-12; FR, Vol. 88, No. 54, March
21, 2023, Notices, pp 16945-16951
[iv] 12 CFR. § 1026.41(d)(1)(ii)
https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-25_2021-12.pdf.
