QUESTION
We have used your servicing quality control group for many years. We like how we can have direct contact with the auditors. Recently, we asked one of your auditors for feedback about the adverse findings they see happening among the many servicers you audit.
The response was very helpful because your servicing compliance group provides servicing quality control to servicers in many states. We have virtually eliminated “confirmation bias” by getting your wide-ranging information across the servicing spectrum.
We’re hoping you would share with others a few of these findings.
What are some recurring violations in your servicing quality control findings concerning servicing transfers, payment posting, loss mitigation, and UDAAP?
ANSWER
Thank you for the opportunity to provide our servicing compliance solutions. Most of our servicing clients retain us for servicing quality control and monthly or hourly servicing compliance support.
Because we work with servicers of differing sizes, complexity, and risk profiles, we constantly update our review criteria to reflect the range of audit findings. One of the aims of servicing quality control is to anticipate examiners’ regulatory compliance expectations.
Contact us for information regarding our servicing quality control.
Active subscribers receive a 10% discount per loan file.
Contact us HERE.
I will provide an outline of recurring adverse findings along with remedial recommendations. Of course, the potential list of adverse results is formidable. Since 2006, when we first began servicing quality control, we have identified numerous recurring regulatory violations.
Interestingly, as noted in its reports, the Consumer Financial Protection Bureau has picked up on similar violations.[i] Clearly, anticipating adverse findings is critical to quality control auditing.
Servicing Transfers
Policies and Procedures
Regulation X[ii], implementing the Real Estate Settlement Procedures Act (RESPA), requires servicers to maintain policies and procedures reasonably designed to achieve specific objectives.[iii] By “procedures,” Regulation X refers to the actual practices the servicer follows.[iv]
Under Regulation X[v], transferee servicers must maintain policies and procedures to identify necessary documents and information not included in a servicing transfer and obtain such information from the transferor servicer.
But we have found that some servicers violated Regulation X when they failed to maintain policies and procedures reasonably designed to achieve the objective of facilitating the transfer of information during servicing transfers.
For instance, servicers’ policies and procedures were not reasonably designed because they failed to obtain copies of the security instruments or, in fact, any documents reestablishing the security instrument, to establish the lien securing the mortgage loans after servicing transfers.
Recommendation: Update policies and procedures; implement new training.
Payment Posting
After a transfer of servicing, Regulation X requires that, during the 60-day period beginning on the effective date of transfer, servicers not treat payments sent to the transferor servicer as late if the transferor servicer receives them on or before the due date.[vi] We’ve found that servicers treated payments received by the transferor servicer during the 60-day period as late when not transmitted by the transferor to the transferee until after the 60-day period.
This violates Regulation X because the transferor had received the payment within the 60-day period beginning on the effective date of the transfer.
Recommendation: Remediate consumers; update policies and procedures; implement training; and revise internal controls.
Contact us for information regarding our servicing quality control.
Active subscribers receive a 10% discount per loan file.
Contact us HERE.
Loss Mitigation
Disclosure Violations
We have issued adverse findings when servicers violated Regulation X and Regulation Z by failing to provide the specific required information in several circumstances:
- Specific reasons for denial when they sent notices that included vague denial reasons, such as informing consumers that they did not meet the eligibility requirements for the program; that is, If a servicer denies a borrower’s complete loss mitigation application for any loan modification option available to the borrower, then its evaluation notice[vii] must include the specific reason or reasons for the denial.[viii]
- Correct payment and duration information for forbearance: When a servicer offers a short-term loss mitigation option, such as a forbearance plan, it must promptly provide a written notice that includes the specific payment terms and duration of the program.[ix] and
- Information in periodic statements about loss mitigation programs, such as forbearance, to which consumers had agreed. Regulation Z requires servicers to include delinquency information on the periodic statement or in a separate letter if a consumer is more than 45 days delinquent.[x] This includes a requirement to provide a notice of any loss mitigation program to which the consumer has agreed.[xi]
Recommendation: Update letter templates; implement enhanced monitoring.
Timing and UDAAP Violations
Suppose a servicer receives a complete application more than 37 days before a scheduled foreclosure sale. In that case, Regulation X[xii] requires servicers to evaluate the complete loss mitigation application within 30 days of receipt and provide written notices to borrowers stating which loss mitigation options, if any, are available. We have found that some servicers violated Regulation X when they failed to evaluate complete applications within 30 days of receipt.[xiii]
Indeed, examiners often find that some servicers evaluate the application within 30 days but fail to provide the required notice to borrowers within 30 days as required.[xiv]
Recommendation: Improve policies; implement additional training.
Also, there is a UDAAP issue involved in this determination since examiners have found that servicers engage in an unfair act or practice when they delay processing borrower requests to enroll in loss mitigation options (including COVID-19 pandemic-related forbearance extensions) based on incomplete applications.
Generally, servicers must not evade the requirement to evaluate a complete loss mitigation application by offering a loss mitigation option based on the evaluation of an incomplete application.[xv] But servicers may provide certain types of loss mitigation options based on incomplete applications, such as short-term loss mitigation options or certain loss mitigation options made available to borrowers experiencing a COVID-19-related hardship as specified by Regulation X.[xvi]When consumers apply for these options, the Regulation X mandate that servicers must evaluate applications within 30 days frequently does not apply because the consumer has not submitted a complete application.[xvii] Sometimes, consumers applying for these options will submit a complete application, and the Regulation X 30-day evaluation requirement certainly applies.
These delays varied in length, including delays of up to six months. Borrowers may be substantially injured because they suffered one or more of the following harms: prolonged delinquency, late fees, default notices, and lost time and resources addressing servicer delays. Borrowers also may experience negative credit reporting because of the servicers’ delays, resulting in a risk of damage to their credit that may have materialized into financial injury.
Borrowers could not reasonably avoid injury because servicers controlled the processing of applications, and borrowers reasonably expected servicers to enroll them in the options they applied for. Note: the injury to consumers is not outweighed by benefits to consumers or competition.
Recommendation: cease the practice; develop improved policies and procedures.
UDAAP Violation
LCG’s auditors have found that servicers engage in deceptive acts or practices when they inform consumers, orally and in written notices, that they would evaluate their complete loss mitigation applications within 30 days but then move toward foreclosure without completing the evaluations. This misrepresents loss mitigation application response times. CFPB’s examiners see this occurring repeatedly.
Because the servicers received the complete loss mitigation applications 37 days or less before foreclosure, Regulation X did not require the servicers to evaluate the application within 30 days.[xviii] But the servicers informed consumers in written and oral communications that they would evaluate the borrowers’ complete loss mitigation applications within 30 days, and these representations created the impression that foreclosure would not occur until the servicers rendered decisions on the applications.
The borrowers reasonably interpreted these representations to mean that they would receive decisions on their applications – and potentially some time to take other actions if the applications were denied – before foreclosure. This misrepresentation would be considered material since it prompts the borrowers to wait for notification concerning a possible loan modification and discourages them from taking additional steps to prepare for foreclosure.
Recommendation: Cease the practice; develop improved policies and procedures.
Contact
us for information regarding our servicing quality control.
Active subscribers receive a 10% discount per loan file.
Contact us HERE.
[i] See the “Supervisory Highlights” series issued by the Consumer Financial Protection Bureau. Each issue identifies recent supervisory findings of abusive acts or practices, regulatory violations, and various adverse findings that supervised institutions engaged in across multiple product lines. Issue 30 (Summer 2023) is the most recent report, which contains some findings similar to ours.
[ii] 12 CFR 1024.38(a)
[iii] 12 CFR 1024.38(b)
[iv] 12 CFR 1024.38(a)-Comment 2
[v] 12 CFR 1024.38(b)(4)(ii)
[vi] 12 CFR 1024.33(c)(1)
[vii] Required by 12 CFR 1024.41(c)(1)(ii)
[viii] See 12 CFR 1024.41(d)
[ix] 12 CFR 1024.41(c)(2)(iii)
[x] 12 CFR 1026.41(d)(8)
[xi] 12 CFR 1026.41(d)(8)(iv)
[xii] 12 CFR 1024.41(c)(1)
[xiii] 12 CFR 1024.41(c)(1)(i)
[xiv] 12 CFR 1024.41(c)(1)(ii)
[xv] 12 CFR 1024.41(c)(2)(i)
[xvi] 12 CFR 1024.41(c)(2)(iii), (v), & (vi)
[xvii] 12 CFR 1024.41(c)(1)
[xviii] 12 CFR 1024.41(c)(3)(ii)(B)
