Servicing Quality Control: Subservicer Scrutiny

QUESTION 

We are a lender that subservices our loans through a reputable servicer. We originate Fannie Mae, Freddie Mac, USDA, FHA, VA, HECM, and Non-QM loan products. Our internal audit identified that we should have monitoring and control procedures in place for our subservicer. 

We already have a Loan Servicing Quality Control Plan. However, we do not have a separate policy for monitoring and controlling the subservicer function. Our internal auditor recommends that we establish such a policy immediately. 

As the General Counsel and Compliance Officer, I am responsible for ensuring that we meet all regulatory and legal requirements in our loan originating and servicing activities. I would like your view on whether we should have a separate policy for monitoring the subservicer. 

SOLUTIONS 

Subservicing Quality Control Audits

Loan Servicing Quality Control Plan

Monitoring & Control of Subservicer Policy 

RESPONSE 

Based on your question, you appear to be a master servicer. A master servicer is responsible for overseeing and auditing the activities of its subservicer. This responsibility arises from the fact that the master servicer remains liable for the performance of all servicing obligations, even when they are delegated to a subservicer. 

A master servicer is an entity responsible for overseeing the administration and management of a pool of loans, often in mortgage-backed securities (MBS) and other structured finance products. It ensures proper loan management and that investors receive their returns on time. 

Master Servicer 

In particular, a master servicer's role includes the following: 

Their role and responsibilities include: 

·       Loan administration and management 

Handling day-to-day operations like payment collection, managing escrow accounts, and distributing payments to investors. 

·       Oversight of other servicers 

Appointing and coordinating with sub-servicers while remaining liable to bondholders for their performance. 

·       Ensuring compliance

Ensuring that servicing practices comply with regulatory and contractual requirements. 

·       Monitoring and reporting 

Tracking portfolio performance and reporting to the trustee and investors. 

·       Handling borrower communication and requests 

Serving as a point of contact for borrowers. 

·       Coordination with special servicers 

Working with special servicers for distressed or defaulted loans. 

You should have a separate policy for monitoring and control of the subservicer. Usually, the policy complements the Loan Servicing Quality Control Plan that you mentioned. Both the CFPB (Consumer Financial Protection Bureau) and GSEs (Government-Sponsored Enterprises, such as Fannie Mae and Freddie Mac) mandate that lenders (master servicers) proactively oversee and regularly audit their subservicer relationships and operations.[i] 

The master servicer is responsible for ensuring that the subservicer complies with all applicable regulations and contractual obligations, as required by Fannie Mae and other investors. Failing to oversee or audit a subservicer exposes the master servicer to significant business risks, including potential lawsuits, fines, and reputational damage if the subservicer fails to meet compliance guidelines or operational standards. 

Second Line of Defense 

The audit of a subservicer's servicing files falls under the Second Line of Defense for the originating institution that outsourced the servicing, with the possibility that the Third Line of Defense (viz., internal audits) may also perform independent audits to ensure effectiveness. 

As the Second Line of Defense, the originating institution has the ultimate responsibility for the subservicer's actions; therefore, it must oversee the subservicer's compliance with regulations and its own servicing standards. The act of reviewing the subservicer's servicing files and operations to ensure adherence to contractual obligations and regulatory requirements is considered a core function of the Second Line of Defense, which involves monitoring and oversight functions, such as risk management and compliance departments. 

Thus, the Second Line of Defense provides expertise, support, and monitoring regarding risk-related matters. I would break those features into the following activities: 

·       Developing and implementing policies and procedures for subservicer oversight. 

·       Conducting regular reviews of the subservicer's performance and compliance. 

·       Assessing the subservicer's internal controls and risk management framework. 

·       Monitoring the subservicer for compliance with regulatory requirements (CFPB, OCC, GSEs). 

·       Developing and implementing corrective actions to address any identified issues. 

Essentially, the Second Line of Defense is actively involved in ensuring the subservicer is compliant and performing as expected, while the Third Line of Defense audits the effectiveness of that oversight and the subservicer's operations to ensure the entire risk management framework is sound. I think your internal auditor was correct in recommending a separate policy for monitoring and controlling the subservicer. Use it in conjunction with your overall Loan Servicing Quality Control Plan. 

Oversight and Auditing 

There are five components of subservicer oversight and auditing. A robust subservicer oversight program should include regular audits of servicing files and operations. Implementing the program is not merely a recommended Best Practice but a crucial aspect of a master servicer's responsibility to manage risk and ensure compliance within the mortgage industry.

1. Establishing an Oversight and Surveillance Program 

The program should monitor the subservicer's compliance with servicing requirements outlined in the master servicer's contracts and applicable guidelines. 

These three elements must be included in oversight: 

·       Periodic audits and quality control (QC) reviews: These reviews help verify that the subservicer is adhering to contractual obligations and regulatory requirements. 

·       Operational audits: These audits delve deeper and can assess areas such as customer service reviews, escrow administration, collections, and loss mitigation procedures. 

·       Evaluation of training programs, financial strength, and overall experience: These evaluations help ensure that the subservicer has the resources and expertise to perform its duties effectively. 

2. Maintaining Policies and Procedures 

Master servicers must have established procedures for selecting and assessing subservicers, encompassing their experience, training programs, financial stability, quality control, and capacity to handle the portfolio. 

3. Operational Audits 

These audits should encompass customer service reviews, escrow administration oversight, procedural assessments of collection and loss mitigation, and examinations of bankruptcy, foreclosure, and REO management, among other areas. 

4. Ongoing Monitoring and Review 

This type of monitor involves continuously evaluating subservicer performance data, including loan-level data, customer satisfaction scores, response times, and error rates. 

5. On-Site Audits and Reviews

Regularly conducting on-site audits and reviews ensures compliance with contractual requirements and regulatory standards. 

Jonathan Foxx, PhD, MBA
Chairman & Managing Director
Lenders Compliance Group 

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[i] Both the Consumer Financial Protection Bureau (CFPB) and government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac require master servicers to maintain oversight of their subservicers. Fannie Mae, for example, requires the master servicer to ensure that the subservicer is complying with all Fannie Mae requirements.

Debt Collection: Notice to Cease Communications

QUESTION 

We are facing a potential class action suit for violating the Fair Debt Collection Practices Act. Our company originates and services residential loans. I am the company’s General Counsel. My colleague is Of Counsel. Together, we are writing for some guidance. We already have retained outside counsel to fight the suit; however, we seek some understanding for revising our policies and procedures by outlining the written notice requirements to cease communications. 

Here’s what happened, in part. For a period of approximately six months, we did not cease communications upon receiving the borrowers’ written requests to terminate communications with them. We learned about it due to a servicing quality control review. The servicing quality control reviews should never have been stopped. These audits were only reactivated after receiving consumer complaints, which thereafter led to the lawsuit. 

What are the salient guidelines for a debt collector to cease communications with a debtor upon a written request? 

ANSWER 

I have written and spoken at length about the importance of implementing servicing quality control. Here are just a few of the articles on this subject. For some reason, some servicers – and lenders who use subservicers! – do not conduct servicing quality control. Then lawsuits or regulators come knocking on their door, and they suddenly scramble to do it. 

Our highly credentialed experts provide the servicing quality control audit if you (or anyone else) want it. Regulators and investors know the excellent reliability of our work. So contact us, and we’ll send you information about our servicing quality control. 

It seems like your firm understands the importance of servicing quality control, but somewhere along the line, let the ball drop. Benjamin Franklin’s warning applies: “A little neglect may breed great mischief.” Missing one servicing QC period is a red flag; miss six of them, as in your case, and get ready for a lawsuit! 

Now, let’s zero in on your question. 

The Fair Debt Collection Practices Act (FDCPA)[i] provides that debt collectors must cease to send communications to the consumer upon the consumer’s written request. The term “consumer” is defined under FDCPA[ii]  to include both

(1) the “natural person obligated to pay the subject debt” and

 

(2) certain persons “close to the consumer-debtor,” specifically the consumer’s spouse, parent (if the debtor is a minor under applicable state law), guardian, executor, and administrator. However, other relatives, such as the consumer’s children, parents (if the consumer is not a minor), grandparents, and relatives not included in the special FDCPA definition do not constitute “consumers” under FDCPA.[iii] 

Taking into account this expanded FDCPA[iv] definition of consumer, the FDCPA decrees[v] that whenever a Debtor, et al., (“Debtor”) notifies a debt collector in writing that the consumer

 

(1) refuses to pay the debt sought to be collected or

 

(2) wishes the debt collector to cease further communication with the Debtor, the debt collector must not communicate further with the Debtor regarding the subject debt, except for the following purposes:

 

·       To advise the Debtor that the debt collector’s further collection efforts are being terminated.

 

·       To notify the Debtor that the debt collector or the creditor may invoke specified remedies that are ordinarily invoked by the debt collector or the creditor.

 

·       Where applicable, notify the Debtor that the debt collector or the creditor intends to invoke a specified remedy. 

Furthermore, the FDCPA further provides[vi] that if the notice to the debt collector to cease communications with the Debtor is sent by mail, the notification is complete upon receipt by the debt collector. 

The term “communication” is defined as the conveying of information regarding a debt, orally or in writing, either directly or indirectly, and through any medium. This term includes both oral and written transmissions of messages that refer to a debt.[vii] 

Indeed, the FDCPA expands the definition of “communication,” by stating that “the term ‘communicate’ is given its commonly accepted meaning.”[viii] Thus, “communication” means any contact with the consumer related to the collection of the debt, whether or not the debt is specifically mentioned.”[ix]  

Taking this into account, upon receipt of the notification to cease further communications, debt collectors must cease all oral and written contact with the consumer, their spouse, parent (if a minor), guardian, executor, or administrator, except for the three express exceptions previously discussed. 

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FEATURED SOLUTION

SERVICING QUALITY CONTROL

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In effect, the FDCPA requires that the debt collection show some good manners. Most of our servicing clients adopt the Golden Rule. That principle encourages us to ‘do unto others as you want them to do unto you.’ Of course, the negative reciprocal is not doing unto others as you do not want them to do unto you. Good manners are just a way of being courteous, respectful, and polite. The FDCPA enacts requirements that effectively ensure that the Golden Rule will be enforced, like it or not! 

Put simply, there is a time when further communications between a debt collector and the Debtor should halt. According to the statute establishing legal protection from abusive debt collection practices, published all the way back in 1977, consumer witnesses who related their personal experiences at the congressional hearings testified that they had been innocent third parties wrongly assumed to be the consumer merely because of a slight similarity of names. Also, stories reportedly were presented of abnormally rude and persistent collectors who refused to listen to the consumers’ valid reasons for nonpayment.[x] 

The FDCPA is intended to give relief to consumers being ‘harassed cruelly and relentlessly’ by a few independent debt collectors; it does not, however, enable consumers to avoid payment of just and honest debts. 

Thus, the mandate to debt collectors could not be more clear. 

To draft your policy, I suggest you include a section given to your employees involved in debt collection. Importantly, you must monitor their actions regularly. The section should be in the form of written instructions on implementing the FDCPA requirements. You may want them to sign a receipt for it and require periodic training. 

We are now ready to discuss the salient guidelines to cease communications with a debtor upon a written request. 

Collection procedures manuals should emphasize the following salient points:

 

·       Written Notice Required

In order for the notice requiring the debt collector to cease communications with the Debtor to be enforceable, it must be furnished to the debt collector in writing. Thus, an oral request made by a Debtor in person or over the telephone does not trigger the requirement to terminate all communications.

 

·       No Formal Notice Required

The FDCPA does not require that the written notice be signed. Since the FDCPA does not indicate how formal the notice must be, debt collection employees should be alerted to watch for written notations on returned dunning letters, envelopes, bills, and scraps of paper stating that

 

(1) The consumer refuses to pay the debt, or

 

(2) The consumer wants the debt collector to cease making any further contacts. Upon receipt of any such written messages, a proper cease communications notice is deemed to have been received by the debt collector.

 

·       Notices Permissible from Multiple Persons

The notice to cease communications may be sent to the debt collector not only by the individual who actually or allegedly owes the debt but also by the consumer’s spouse; parent if the consumer is a minor under applicable state law (viz., each state law must be examined on point); legal guardian; and the executor or administrator if the consumer is deceased.

 

·       Effective Date of Notices

Whether the notice to cease communications is delivered by hand or by mail to the collector, it becomes binding on the debt collector and all of the collector’s employees upon receipt in the collection agency’s office.

 

·       All Contact Halted

Upon receipt of the notice to cease communications, the debt collector must cease all contact with the individual consumer and the consumer’s spouse, parent (if the consumer is a minor), or legal guardian. If the notice is received from the executor or the administrator of a deceased consumer’s estate, no further communications may be sent to those officials or the family members of the deceased consumer.

 

·       Some Disputes Not “Notices” 

Debt collectors are not required to cease communicating with the Debtor simply because the consumer disputes the amount or character of the debt or the quality of goods purchased or financed. A cease communications notice is received only when the Debtor writes a note to the debt collector stating either that the consumer

 

(1) refuses to pay the subject bill or

 

(2) wishes the debt collector to cease all further communications. Written statements such as (a) “I won’t pay your bill” or (b) “I don’t want you to call or write me any more letters” would each serve as the requisite cease communications notice.

 

·       Notice as to Multiple Accounts

Debt collectors who handle multiple claims against an individual must cease their communications with the Debtor solely regarding the particular debts or accounts referred to in the notice to cease communications. If the notice relates exclusively to one particular delinquent account, the debt collector may continue debt collection efforts on the other claims. However, if the notice states that the Debtor wants the debt collector to cease future communications concerning all claims the collector is handling or that the consumer refuses to pay all of the debts that the debt collector is seeking to collect, all contacts should be terminated concerning all claims being handled.

I have not discussed here the actions the debt collector should take in response to a cease communications notice; however, the FDCPA allows but does not require the collector to send one final letter or notice that advises the consumer of the following:

·       The debt collector is terminating further efforts to collect the debt from the consumer;

 

·       The debt collector or the creditor may invoke certain clearly specified remedies that are ordinarily invoked by either the debt collector or the creditor; and/or

 

·       Where a clearly specified remedy is available to the debt collector or the creditor and applicable to the debt and the consumer, the debt collector or the creditor actually intends to invoke this remedy. 

The FDCPA states that the debt collector’s response to a written notice to cease communication from a consumer is limited to the three statutory exemptions, as noted above. The response specifically may not contain a demand for payment. 

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director 

Lenders Compliance Group

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[i] Fair Debt Collection Practices Act (FDCPA) § 805(c), 15 USC § 1692c(c)

[ii] § 805(d),15 USC § 1692c(d); for all portions of FDCPA § 805

[iii]  See § 805(d)

[iv] Idem

[v] § 805(c), 15 USC § 1692c(c)

[vi] Idem

[vii] Comment 803(2)-1

[viii] Comment 805(c)-1, for purposes of implementing § 805(c)

[ix] Op. cit. i

[x] Public Law 95-109, 91 Stat. 874, approved September 20, 1977, and subsequently amended, the statute is a consumer protection amendment that establishes legal protection from abusive debt collection practices; it is in the Consumer Credit Protection Act, as Title VIII thereof.

Servicing Quality Control: System and Procedures

QUESTION 

We are a mortgage lender in the Midwest. We were doing portfolio retention through a servicer, but now we are bringing servicing in-house and doing our own servicing. 

The plan is to launch the new servicing department in the next ninety days. We need a full complement of servicing policies and procedures. 

In addition, we need to know about the system requirements for servicing quality control and the basic servicing quality control procedures. 

Your firm provides a servicing policies and procedures library, so we hoped you could provide the information we need. Please note we contacted your office recently for assistance. 

What are the system requirements for quality control servicing? 

What are some quality control procedures involved in servicing? 

ANSWER 

We provide a policies and procedures compliance library for servicing (as well as one for mortgage loan originations). The compliance library is customized to your servicing platform. And we’ll maintain it for you. 

As a servicer, you must have fully documented, written policies and procedures that address all aspects of mortgage servicing. If you want to contact me directly, I would be glad to discuss your needs in detail. Contact me here. 

With respect to system requirements, I advise thinking ahead about the quality control system needs because how your system operates will determine its effectiveness and flexibility. 

There are numerous investor and legal requirements in each jurisdiction where you operate as a servicer. These must be well-documented and provide for a review of the following:

 

·       aspects of the delinquent mortgage loan servicing system;

 

·       the system to control and monitor bankruptcy proceedings; and

 

·       the foreclosure monitoring system.

The servicer must develop a quality control program addressing delinquency management and default prevention. Proper staffing and training are mandatory. And you must implement a strong business continuity and disaster recovery program. 

The servicer must audit quality control regularly at the loan level. (If you are subservicing, you must audit the servicer’s process at the loan level.) For loan level servicing quality control audits, contact us here. 

The servicer must implement certain primary system requirements for servicing quality control, as follows:

 

1.   Conduct regular testing of compliance with applicable laws in all jurisdictions in which it operates;

 

2.   Regularly review and assess the adequacy of internal controls;

 

3.   Keep a record of any activity under the applicable internal systems;

 

4.   Report comprehensive results of all testing to the senior management;

 

5.   Promptly take appropriate corrective action if these systems identify a problem area; and

 

6.   Make comprehensive testing results and any evidence of corrections available for review upon the investor’s request. 

With respect to servicing quality control procedures, there are a few themes that run throughout the written policies and procedures. As a servicer, you must monitor your compliance with the investor’s requirements and federal and state mandates through regular quality control procedures that are ratified, established, conducted, and monitored. 

The servicer must maintain adequate quality control procedures and systems. Implementing a self-assessment for various operational functions should be considered. At a high level, the servicer must be able to:

 

·      ensure that the mortgage loans are serviced under sound mortgage banking and accounting principles and in compliance with investor guidelines;

 

·      guard against misrepresentation and dishonest, fraudulent, or negligent acts by any parties involved in the mortgage loan servicing process;

 

·      protect against errors and omissions by officers, employees, or other authorized persons;

 

·      verify and audit the accuracy of the loan adjustment (i.e., ARM adjustments) and facilitation of timely responses to errors identified by the borrower, the servicer’s regulatory agency, or the investor; and

 

·      protect the investor’s investment in the security properties. 

Failure to maintain adequate servicing quality control standards may result in a servicer being in breach of its contact with investors. 

Furthermore, I urge you to perform annual quality control tests to ensure that all outsourcing firms and third-party vendors fully comply with investor guidelines and federal and state requirements. 

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

Servicing Quality Control: Recurring Adverse Findings

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.