RESPA: Preamble

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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1024

[Docket No. CFPB-2012-0034]

RIN 3170-AA14

2012 Real Estate Settlement Procedures Act (Regulation X) Mortgage Servicing Proposal

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Proposed rule with request for public comment.

SUMMARY: The Bureau of Consumer Financial Protection (the Bureau) is proposing to amend Regulation X, which implements the Real Estate Settlement Procedures Act of 1974 (RESPA) and the official interpretation of the regulation. The proposed amendments implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) provisions regarding mortgage loan servicing. Specifically, this proposal requests comment regarding proposed additions to Regulation X to address seven servicer obligations: to correct errors asserted by mortgage loan borrowers; to provide information requested by mortgage loan borrowers; to ensure that a reasonable basis exists to obtain force-placed insurance; to establish reasonable information management policies and procedures; to provide information about mortgage loss mitigation options to delinquent borrowers; to provide delinquent borrowers access to servicer personnel with continuity of contact about the borrower’s mortgage loan account; and to evaluate borrowers’ applications for available loss mitigation options.

This proposal would also modify and streamline certain existing servicing-related provisions of Regulation X. For instance, the proposal would revise provisions relating to a mortgage servicer’s obligation to provide disclosures to borrowers in connection with a transfer of mortgage servicing, and a mortgage servicer’s obligation to manage escrow accounts, including the obligation to advance funds to an escrow account to maintain insurance coverage and to return amounts in an escrow account to a borrower upon payment in full of a mortgage loan.

Published elsewhere in today’s Federal Register, the Bureau proposes companion regulations implementing amendments to the Truth In Lending Act (TILA) in Regulation Z (the 2012 TILA Servicing Proposal).

DATES: Comments must be received on or before October 9, 2012, except that comments on the Paperwork Reduction Act analysis in part IX of this Federal Register notice must be received on or before November 16, 2012.

ADDRESSES: You may submit comments, identified by Docket No. CFPB-2012-0034 or RIN 3170-AA14, by any of the following methods:

  • Electronic: http://www.regulations.gov. Follow the instructions for submitting comments.
  • Mail/Hand Delivery/Courier: Monica Jackson, Office of the Executive Secretary, Consumer Financial Protection Bureau, 1700 G Street, NW, Washington, D.C. 20552.

Instructions: All submissions must include the agency name and docket number or Regulatory Information Number (RIN) for this rulemaking. In general, all comments received will be posted without change to http://www.regulations.gov. In addition, comments will be available for public inspection and copying at 1700 G Street, NW, Washington, D.C. 20552, on official business days between the hours of 10 a.m. and 5 p.m. Eastern Time. You can make an appointment to inspect the documents by telephoning (202) 435-7275.

All comments, including attachments and other supporting materials, will become part of the public record and subject to public disclosure. Sensitive personal information, such as account numbers or Social Security numbers, should not be included. Comments will not be edited to remove any identifying or contact information.

e-Rulemaking Initiative

The Bureau is working with the Cornell e-Rulemaking Initiative (CeRI) on a pilot project, Regulation Room, to use different web technologies and approaches to enhance public understanding and participation in Bureau rulemakings and to evaluate the advantages and disadvantages of these techniques. The TILA and RESPA proposed rulemakings on mortgage servicing are the subject of the project. The Bureau has undertaken this project to increase effective public involvement in the rulemaking process and strongly encourages all parties interested in this rulemaking to visit the Regulation Room website, http://www.archive.regulationroom.org, to learn about the Bureau’s proposed mortgage servicing rules and the rulemaking process, to discuss the issues in the rules with other persons and groups, and to participate in drafting a summary of that discussion that CeRI will submit to the Bureau.

Note that Regulation Room is sponsored by CeRI, and is not an official United States Government website. Participating in the discussion on that site will not result in individual formal comments that will be included in the Bureau’s rulemaking record. If you would like to add a formal comment, please do so through the means identified above. The Bureau anticipates that CeRI will submit to the Bureau’s rulemaking docket a summary of the discussion that occurs on the Regulation Room site and that participants will have a chance to review a draft and suggest changes before the summary is submitted. For questions about this project, please contact Whitney Patross, Attorney, Office of Regulations, at (202) 435-7700.

FOR FURTHER INFORMATION CONTACT:

Regulation X (RESPA): Jane Gao, Mitchell E. Hochberg, and Michael Scherzer, Counsels at (202) 435-7700; Office of Regulations, Division of Research, Markets, and Regulations, Bureau of Consumer Financial Protection; 1700 G Street, NW, Washington, DC 20552.

Regulation Z (TILA): Whitney Patross, Attorney and Marta Tanenhaus, Senior Counsel at (202) 435-7700; Office of Regulations, Division of Research, Markets, and Regulations, Bureau of Consumer Financial Protection; 1700 G Street, NW, Washington, DC 20552.

Table of Contents

Supplementary Information

I. Overview

A. Background
B. Scope of Coverage
C. Summary
D. Small Servicers
E. Effective Date

II. Background

A. Overview of the Mortgage Servicing Market and Market Failures
B. Mortgage Servicing Consumer Protection Regulation Before the Recent Crisis
C. The National Mortgage Settlement and Other Regulatory Actions
D. The Statutory Requirements and Additional Proposals

III. Summary of Statute and Rulemaking Process

A. Overview of the Statute
B. Outreach and Consumer Testing
C. Other Dodd-Frank Act Mortgage-Related Rulemakings
D. Small Servicers
E. Request for Comment on Effective Date

IV. Summary of Proposed Rule

V. Legal Authority

VI. Section-by-Section Analysis

Subpart A—General

Subpart B—Mortgage Settlement and Escrow Accounts

Section 1024.17 Escrow Accounts

17(k) Timely Payments
17(l) System of Recordkeeping

Subpart C—Mortgage Servicing

Section 1024.21 Mortgage Servicing Transfers

Section 1024.30 Scope

Section 1024.31 Definitions

Section 1024.32 General Disclosure Requirements

Section 1024.33 Mortgage Servicing Transfers

Section 1024.34 Timely Payments by Servicer

Section 1024.35 Error Resolution Procedures

35(a) Notice of Error

35(b) Scope of error resolution

Paragraph 35(b)(1)
Paragraph 35(b)(2)
Paragraph 35(b)(3)
Paragraph 35(b)(4)
Paragraph 35(b)(5)
Paragraph 35(b)(6)
Paragraph 35(b)(7)
Paragraph 35(b)(8)
Paragraph 35(b)(9)

35(c) Contact information for borrowers to assert errors

35(d) Acknowledgment of receipt

35(e) Response to Notice of Error

35(e)(1) Investigation and Response Requirements
35(e)(2) Requesting documentation from borrower
35(e)(3) Time Limits

Paragraph 35(e)(3)(i)

35(f) Alternative Compliance

35(g) Requirements not applicable

35(g)(1) In general

35(g)(1)(i)
35(g)(1)(ii)
35(g)(1)(iii)

35(g)(3) Notice to borrower

35(h) Payment requirements prohibited

35(i) Effect on servicer remedies

Section 1024.36 Requests for Information

36(a) Information requests

36(b) Contact information for borrowers to request information

36(c) Acknowledgment of receipt

36(d) Response to information request

36(d)(1) Investigation and response requirements
36(d)(2) Time limits – Paragraph 36(d)(2)(i)

36(e) Alternative compliance

36(f) Requirements not applicable

36(f)(1) In general

Paragraph 36(f)(1)(i)
Paragraph 36(f)(1)(ii)
Paragraph 36(f)(1)(iii)
Paragraph 36(f)(1)(iv)
Paragraph 36(f)(1)(v)

36(f)(2) Notice to borrower

36(g) Payment Requirement Limitations

36(h) Servicer remedies

Section 1024.37 Force-Placed Insurance

37(a) Definitions

37(a)(1) Force-Placed Insurance

37(a)(2) Types of Insurance not Considered Force-Placed Insurance

Paragraph 37(a)(2)(i)
Paragraph 37(a)(2)(ii)

37(b) Basis for Obtaining Force-Placed Insurance

37(c) Requirements for Charging Borrower Force-Placed Insurance

37(c)(1) In general
37(c)(2) Content of notice
37(c)(3) Format

37(d) Reminder notice

37(d)(1) In general

37(d)(2) Content of reminder notice

37(d)(2)(i) Servicer Receiving No Insurance Information
37(d)(2)(ii) Servicer not Receiving Verification of Continuous Coverage

37(d)(3) Format

37(d)(4) Updating notice with borrower information

37(e) Renewal or replacement of force-placed insurance

37(e)(1) In general

37(e)(2) Content of renewal notice

Paragraph 37(e)(2)(vii)

37(e)(3) Format

37(e)(4) Compliance

37(f) Mailing the Notices

37(g) Cancellation of force-placed insurance

37(h) Limitation on Force-Placed Insurance Charges

37(i) Relationship to Flood Disaster Protection Act of 1973

Section 1024.38 Reasonable Information Management Policies and Procedures

Background

38(a) In General

38(b) Objectives

38(b)(1) Accessing and Providing Accurate Information
38(b)(2) Evaluating Loss Mitigation Options
38(b)(3) Facilitating oversight of, and compliance by, third-party service providers
38(b)(4) Facilitating Servicing Transfers

38(c) Standard Requirements

Section 1024.39 Early Intervention Requirements for Certain Borrowers

Background

39(a) Oral notice

39(b) Written notice

39(b)(1) In General
39(b)(2) Content of the Written Notice
39(b)(3) Model Clauses

Section 1024.40 Continuity of Contact

40(a)(1) In General
40(a)(2) Access to Assigned Personnel

40(b) Functions of Servicer Personnel

40(b)(1) In General
40(b)(2) Safe Harbor

40(c) Duration of Continuity of Contact

40(d) Conditions Beyond a Servicer’s Control

Section 1024.41 Loss Mitigation

41(a) Scope
41(b) Loss Mitigation Application
41(c) Review of Loss Mitigation applications
41(d) Denial of loan modification options
41(e) Borrower Response and Performance
41(f) Deadline for Loss Mitigation Applications
41(g) Prohibition on Foreclosure Sale
41(h) Appeal Process
41(i) Duplicative Requests
41(j) Other Liens

Appendix MS

Appendix MS-2—Model Form for Mortgage Servicing Transfer Disclosure

Appendix MS-3—Model Force-Placed Insurance Notice Forms

Appendix MS-4—Model Clauses for the Written Early Intervention Notice

SUPPLEMENTARY INFORMATION:

I. Overview

A. Background

The recent financial crisis exposed pervasive consumer protection problems across major segments of the mortgage servicing industry. As millions of borrowers fell behind on their loans, many servicers failed to provide the level of service necessary to serve the needs of those borrowers. Many servicers simply had not made the investments in resources and infrastructure necessary to service large numbers of delinquent loans. Existing weaknesses in servicer practices, including inadequate recordkeeping and document management and lack of oversight of service providers, made it harder to sort out borrower problems to achieve optimal results. In addition, many servicers took short cuts that made things even worse. As one review of fourteen major servicers found, companies “emphasize[d] speed and cost efficiency over quality and accuracy” in their foreclosure processes.[1]The Dodd-Frank Act (Public Law 111-203, July 21, 2010) adopts several new servicing protections.[2] The Bureau has the authority to promulgate regulations to implement the new servicing protections. These changes will significantly improve disclosures to make it easier for consumers to monitor their mortgage loans and servicers’ activities. The changes also address critical servicer practices, including error resolution, prompt crediting of payments, and “force-placing” insurance where borrowers have allowed their hazard insurance policies to lapse.

The Dodd-Frank Act also gives the Bureau discretionary authority to develop additional servicing rules. The Bureau proposes to use this authority to adopt requirements relating to reasonable information management policies and procedures, early intervention with delinquent borrowers, continuity of contact, and procedures for evaluating and responding to loss mitigation applications when the servicer makes loss mitigation options available in the ordinary course of business. These proposals address fundamental problems that underlie many consumer complaints and recent regulatory and enforcement actions. The Bureau believes these changes will reduce avoidable foreclosures and improve general customer service. The proposals cover nine major topics, as summarized below.

The Bureau’s proposal is split into two parts because Congress imposed some requirements under TILA and some under RESPA.[3] This proposed rule would amend Regulation X, which implements RESPA, to implement section 1463 of the Dodd-Frank Act concerning error resolution and force-placed insurance and to impose additional requirements concerning reasonable information management policies and procedures, early intervention with delinquent borrowers, continuity of contact, and procedures for evaluating and responding to loss mitigation applications.

B. Scope of coverage

The proposed rules generally apply to closed-end mortgage loans, with certain exceptions. Under the proposed amendments to Regulation X, open-end lines of credit and certain other loans, such as construction loans and business-purpose loans, are excluded. Under the proposed amendments to Regulation Z, the periodic statement and adjustable-rate mortgage (ARM), disclosure provisions apply only to closed-end mortgage loans, but the prompt crediting and payoff statement provisions apply both to open-end and closed-end mortgage loans. In addition, reverse mortgages and timeshares are excluded from the periodic statement requirement, and certain construction loans are excluded from the ARM disclosure requirements. As discussed below, the Bureau is seeking comment on whether to exempt small servicers from certain requirements or modify certain requirements for small servicers.

C. Summary

The proposals cover nine major topics, summarized below. More details can be found in the proposed rules, which are split into two notices issued under the Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA), respectively.

1. Periodic billing statements. The Dodd-Frank Act generally mandates that servicers of closed-end residential mortgage loans (other than reverse mortgages) must send a periodic statement for each billing cycle. These statements must meet the timing, form, and content requirements provided for in the rule. The proposal contains sample forms that servicers could use. The periodic statement requirement generally would not apply for fixed-rate loans if the servicer provides a coupon book, so long as the coupon book contains certain information specified in the rule and certain other information is made available to the consumer. The proposal also includes an exception for small servicers that service 1000 or fewer mortgage loans and service only mortgage loans that they originated or own.

2. Adjustable-rate mortgage interest-rate adjustment notices. Servicers would have to provide a consumer whose mortgage has an adjustable rate with a notice 60 to 120 days before an adjustment which causes the payment to change. The servicer would also have to provide an earlier notice 210 to 240 days prior to the first rate adjustment. This first notice may contain an estimate of the rate and payment change. Other than this initial notice, servicers would no longer be required to provide an annual notice if a rate adjustment does not result in an increase in the monthly payment. The proposal contains model and sample forms that servicers could use.

3. Prompt payment crediting and payoff payments. As required by the Dodd-Frank Act, servicers must promptly credit payments from borrowers, generally on the day of receipt. If a servicer receives a payment that is less than a full contractual payment, the payment may be held in a suspense account. When the amount in the suspense account covers a full installment of principal, interest, and escrow (if applicable), the proposal would require the servicer to apply the funds to the oldest outstanding payment owed. A servicer also would be required to send an accurate payoff balance to a consumer no later than seven business days after receipt of a written request from the borrower for such information.

4. Force-placed insurance. As required by the Dodd-Frank Act, servicers would not be permitted to charge a borrower for force-placed insurance coverage unless the servicer has a reasonable basis to believe the borrower has failed to maintain hazard insurance and has provided required notices. One notice to the borrower would be required at least 45 days before charging for forced-place insurance coverage, and a second notice would be required no earlier than 30 days after the first notice. The proposal contains model forms that servicers could use. If a borrower provides proof of hazard insurance coverage, then the servicer would be required to cancel any force-placed insurance policy and refund any premiums paid for periods in which the borrower’s policy was in place. In addition, if a servicer makes payments for hazard insurance from a borrower’s escrow account, a servicer would be required to continue those payments rather than force-placing a separate policy, even if there is insufficient money in the escrow account. The rule would also provide that charges related to forced place insurance (other than those subject to State regulation as the business of insurance or authorized by Federal law for flood insurance) must relate to a service that was actually performed. Additionally, such charges would have to bear a reasonable relationship to the servicer’s cost of providing the service.

5. Error resolution and information requests. Pursuant to the Dodd-Frank Act, servicers would be required to meet certain procedural requirements for responding to information requests or complaints of errors. The proposal defines specific types of claims which constitute an error, such as a claim that the servicer misapplied a payment or assessed an improper fee. A borrower could assert an error either orally or in writing. Servicers could designate a specific phone number and address for borrowers to use. Servicers would be required to acknowledge the request or complaint within five days. Servicers would have to correct or respond to the borrower with the results of the investigation, generally within 30 to 45 days. Further, servicers generally would be required to acknowledge borrower requests for information and either provide the information or explain why the information is not available within a similar amount of time. A servicer would not be required to delay a scheduled foreclosure sale to consider a notice of error unless the error relates to the servicer’s improperly proceeding with a foreclosure sale during a borrower’s evaluation for alternatives to foreclosure.

6. Information management policies and procedure. Servicers would be required to establish reasonable information management policies and procedures. The reasonableness of a servicer’s policies and procedures would take into account the servicer’s size, scope, and nature of its operations. A servicer’s policies and procedures would satisfy the rule if the servicer regularly achieves the document retention and servicing file requirements, as well as certain objectives specified in the rule. Examples of such objectives include providing accurate and timely information to borrowers and the courts or enabling servicer personnel to have prompt access to documents and information submitted in connection with loss mitigation applications. In addition, a servicer must retain records relating to each mortgage until one year after the mortgage is discharged or servicing is transferred and must create a mortgage servicing file for each loan containing certain specified documents and information.

7. Early intervention with delinquent borrowers. Servicers would be required to make good faith efforts to notify delinquent borrowers of loss mitigation options. If a borrower is 30 days late, the proposal would require servicers to make a good faith effort to notify the borrower orally and to let the borrower know that loss mitigations options may be available. If the borrower is 40 days late, the servicer would be required to provide the borrower with a written notice with certain specific information, including examples of loss mitigation options available, if applicable, and information on how to obtain more information about loss mitigation options. The notice would also provide information to the borrower about the foreclosure process. The rule contains model language servicers could use for these notices.

8. Continuity of contact with delinquent borrowers. Servicers would be required to provide delinquent borrowers with access to personnel to assist them with loss mitigation options where applicable. The proposal would require servicers to assign dedicated contact personnel for a borrower no later than five days after providing the early intervention notice. Servicers would be required to establish reasonable policies and procedures designed to ensure that the servicer personnel perform certain specified functions where applicable, such as access the borrower’s records and provide the borrower with information about how and when to apply for a loss mitigation option and about the status of the application.

9. Loss mitigation procedures. Servicers that offer loss mitigation options to borrowers would be required to implement procedures to ensure that complete loss mitigation applications are reasonably evaluated before proceeding with a scheduled foreclosure sale. The proposal would require servicers to exercise reasonable diligence to secure information or documents required to make an incomplete loss mitigation application complete. In certain circumstances, this could include notifying the borrower within five days of receiving an incomplete application. Within 30 days of receiving a borrower’s complete application, the servicer would be required to evaluate the borrower for all available options, and, if the denial pertains to a requested loan modification, notify the borrower of the reasons for the servicer’s decision, and provide the borrower with at least a 14-day period within which to appeal the decision. The proposal would require that appeals be decided within 30 days by different personnel than those responsible for the initial decision. A servicer that receives a complete application for a loss mitigation option could not proceed with a foreclosure sale unless (i) the servicer had denied the borrower’s application and the time for any appeal had expired; (ii) the servicer had offered a loss mitigation option which the borrower declined or failed to accept within 14 days of the offer; or (iii) the borrower failed to comply with the terms of a loss mitigation agreement. The proposal would require that deadlines for submitting an application for a loss mitigation option be no earlier than 90 days before a scheduled foreclosure sale.

D. Small Servicers

As discussed below, the Bureau convened a Small Business Regulatory Enforcement Fairness Act (SBREFA) panel to assess the impact of the possible rules on small servicers and to help the Bureau determine to what extent it may be appropriate to consider adjusting these standards for small servicers, to the extent permitted by law. Informed by this process, the 2012 TILA Servicing Proposal contains an exemption from the periodic statement requirement for certain small servicers. The Bureau seeks comment on whether other exemptions might be appropriate for small servicers.

E. Effective Date

As discussed below, the Bureau is seeking comment on when this final rule should be effective. Because the final rule will provide important benefits to consumers, the Bureau seeks to make it effective as soon as possible. However, the Bureau understands that the final rules will require servicers to make revisions to their software and to retrain their staff. In addition, some entities will be required to implement other Dodd-Frank Act provisions, which are subject to separate rulemaking deadlines under the statute and will have separate effective dates. Therefore, the Bureau is seeking comment on how much time industry needs to make these changes.

II. Background

A. Overview of the Mortgage Servicing Market and Market Failures

The mortgage market is the single largest market for consumer financial products and services in the United States, with approximately $10.3 trillion in loans outstanding.[4] Mortgage servicers play a vital role within the broader market by undertaking the day-to-day management of mortgage loans on behalf of lenders who hold the loans in their portfolios or (where a loan has been securitized) investors who are entitled to the loan proceeds.[5] Over 60% of mortgage loans are serviced by mortgage servicers for investors.

Servicers’ duties typically include billing borrowers for amounts due, collecting and allocating payments, maintaining and disbursing funds from escrow accounts, reporting to creditors or investors, and pursuing collection and loss mitigation activities (including foreclosures and loan modifications) with respect to delinquent borrowers. Indeed, without dedicated companies to perform these activities, it is questionable whether a secondary market for mortgage-backed securities would exist in this country.[6]

Several aspects of the mortgage servicing business make it uniquely challenging for consumer protection purposes. Given the nature of their activities, servicers can have a direct and profound impact on borrowers. However, industry compensation practices and the structure of the mortgage servicing industry create wide variations in servicers’ incentives to provide effective customer service to borrowers. Also, because borrowers cannot choose their own servicers, it is particularly difficult for them to protect themselves from shoddy service or harmful practices.

Mortgage servicing is performed by banks, thrifts, credit unions, and non-bank servicers under a variety of business models. In some cases, creditors service mortgage loans that they originate or purchase and hold in portfolio. Other creditors sell the ownership of the underlying mortgage loan, but retain the mortgage servicing rights in order to retain the relationship with the borrower, as well as the servicing fee and other ancillary income. In still other cases, servicers have no role at all in origination or loan ownership, but rather purchase mortgage servicing rights on securitized loans or are hired to service a portfolio lender’s loans.[7]

These different servicing structures can create difficulties for borrowers if a servicer makes mistakes, fails to invest sufficient resources in its servicing operations, or does not properly service the borrower’s loan. Although the mortgage servicing industry has numerous participants, the industry is highly concentrated, with the five largest servicers servicing approximately 55% percent of outstanding mortgage loans in this country.[8] Small servicers generally operate in discrete segments of the market, for example, by specializing in servicing delinquent loans, or by servicing loans that they originate.[9]

Contracts between the servicer and the mortgage loan owner specify the rights and responsibilities of each party. In the context of securitized loans, the contracts may require the servicer to balance the competing interests of different classes of investors when borrowers become delinquent. Certain provisions in servicing contracts may limit the servicer’s ability to offer certain types of loan modifications to borrowers. Such contracts also may limit the circumstances under which investors can transfer servicing rights to a different servicer.

Compensation structures vary somewhat for loans held in portfolio and securitized loans,[10] but have tended to make pure mortgage servicing (where the servicer has no role in origination) a high-volume, low-margin business in which servicers have little incentive to invest in customer service. A servicer will expect to recoup its investment in purchasing mortgage servicing rights and earn a profit through a net servicing fee (which is expressed as a constant rate assessed on unpaid mortgage balances),[11] fees assessed on borrowers, interest float on payment accounts between receipt and disbursement, and cross-marketing other products and services to borrowers. Under this business model, servicers act primarily as payment collectors and processors, and provide minimal customer service to ensure profitability. Servicers also have an incentive to look for opportunities to impose fees on borrowers to enhance revenues and are generally not subject to market discipline because consumers have no opportunity to switch providers. Additionally, servicers may have financial incentives to foreclose rather than engage in loss mitigation.[12]

These attributes of the servicing market created problems for certain borrowers even prior to the national mortgage crisis. For example, borrowers experienced problems with mortgage servicers even during regional mortgage market downturns that preceded the mortgage crisis.[13] Borrowers were subjected to improper fees that servicers had no reasonable basis to impose on borrowers, improper force-placed insurance practices, and improper foreclosure and bankruptcy practices.[14]

When the mortgage crisis erupted, many servicers were ill-equipped to handle the high volumes of delinquent mortgages, loan modification requests, and foreclosures they were required to process. These servicers lacked the infrastructure, trained staff, controls, and procedures needed to manage effectively the flood of delinquent mortgages they were forced to handle. Consumer harm has manifested in many different areas. Major servicers have violated applicable laws (including State foreclosure laws), ignored investor loss mitigation requirements, and breached investor servicing agreements.[15] For example, Bank of America, Citibank, HSBC Bank, JPMorgan Chase Bank, N.A., MetLife Bank, N.A., PNC Bank, N.A., U.S. Bank N.A., and Wells Fargo Bank, N.A., which together account for almost 57% of all mortgage servicing have admitted that they (1) filed foreclosure documents that failed to comply with applicable law, (2) failed to devote sufficient financial, staffing and managerial resources to proper administration of foreclosures processes, (3) failed to devote to its foreclosure processes adequate oversight, internal controls, policies and procedures, compliance risk management, internal audit, third party management, and training, and (4) failed to sufficiently oversee outside counsel and other third-party providers handling foreclosure-related services.[16] Congress has held significant detailed hearings on the issue of servicer “robo-signing” of foreclosure related documentation.[17]

Servicers have also misled, or failed to communicate with, borrowers, lost or mishandled borrower-provided documents supporting loan modification requests, and generally provided inadequate service to delinquent borrowers. These problems became pervasive in broad segments of the mortgage servicing industry and had profound impacts on borrowers, particularly delinquent borrowers.[18]

The Bureau further understands from mortgage investors that there is a pervasive belief that servicers are making discretionary decisions based on the best interests of the servicer rather than to achieve results that will benefit owners or assignees of mortgages loans. When servicers hold a second lien that is behind a first lien owned by a different owner or assignee, one study has found a lower likelihood of liquidation and modification, and a higher likelihood of inaction by a servicer.[19] Specifically, “liquidation and modification of securitized first mortgages are 60% [to] 70% less likely respectively and no action is 13% more likely when the servicer of that securitized first mortgage holds on its portfolio the second lien attached to the first mortgage.”[20] These failures to take actions that may benefit both consumers and owners or assignees of first lien mortgage loans harm consumers.

The mortgage servicing industry, however, is not monolithic. Some servicers provide high levels of customer service. Some of these servicers may be compensated by investors in a way that incentivizes them to provide high levels of customer service in order to optimize investor outcomes. Other servicers provide high levels of customer service because they rely on providing other products and services to consumers and thus have an interest in preserving their reputations and relationships with their consumers. For example, as discussed further below, small servicers that the Bureau consulted as part of a process required under SBREFA described their businesses as requiring a “high touch” model of customer service both to ensure loan performance and maintain a strong reputation in their local communities.[21]

B. Mortgage Servicing Consumer Protection Regulation Before the Recent Crisis

Prior to the adoption of the Dodd-Frank Act, the mortgage servicing industry was subject to limited Federal consumer financial protection regulation. RESPA set forth basic protections with respect to mortgage servicing that were implemented by the U.S. Department of Housing and Urban Development (HUD). These included required disclosures at application concerning whether the lender intended to service the mortgage loan and disclosures upon an actual transfer of servicing rights.[22] RESPA further imposed substantive and disclosure requirements for escrow account management and required servicers to respond to “qualified written requests” – written error resolution or information requests relating to a restricted definition of the “servicing” of the borrower’s mortgage loan.[23]

TILA set forth requirements on creditors that were implemented by servicers, including disclosures regarding interest rate adjustments on adjustable rate mortgage loans. Regulation Z, which implements TILA, was amended by the Board of Governors of the Federal Reserve System (the Board) to include certain limited requirements directly on servicers, such as requirements to timely credit payments, provide payoff balances and prohibit pyramiding of late fees.[24] Servicers also had some obligations under other Federal laws, including, for example, the Servicemembers Civil Relief Act.[25]

Although TILA and RESPA did not impose many requirements on servicers, servicers were still required to navigate overlapping requirements governing their servicing responsibilities. In addition to Federal law, servicers were required to consider the impact of State and even local regulation on mortgage servicing. Servicers also had to comply with investor requirements to the extent they serviced loans owned or guaranteed by various types of entities. These include (1) servicing guidelines required by Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), together known as the government-sponsored enterprises (GSEs), as well as servicing guidelines required by the Government National Mortgage Association (Ginnie Mae); (2) government insured program guidelines issued by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and the Rural Housing Service; (3) contractual agreements with investors (such as pooling and servicing agreements and subservicing contracts); and (4) bank or institution policies. All those requirements remain in effect today and going forward.

C. The National Mortgage Settlement and Other Regulatory Actions

In response to the unprecedented mortgage crisis and pervasive problems in mortgage servicing, including the systemic violation of State foreclosure laws by many of the largest servicers, State and Federal regulators have engaged in a number of individual servicing related enforcement and regulatory actions over the last few years and have begun discussions about comprehensive national standards.

For example, 49 State attorneys general,[26] joined by numerous Federal agencies including the Bureau, entered into a National Mortgage Settlement (National Mortgage Settlement) with the nation’s five largest servicers in February 2012.[27] The National Mortgage Settlement applies to loans held in portfolio and serviced by the five largest servicers. Loans owned by GSEs, private investors, or smaller servicers are not covered by the settlement.

Exhibit A to each of the settlements is a Settlement Term Sheet, which sets forth standards that each of the five largest servicers must follow to comply with the terms of the settlement.[28] The settlement standards contained in the Settlement Term Sheet are sub-divided into the following eight categories: (1) foreclosure and bankruptcy information and documentation; (2) third-party provider oversight; (3) bankruptcy; (4) loss mitigation; (5) protections for military personnel; (6) restrictions on servicing fees; (7) force-placed insurance; and (8) general servicer duties and prohibitions.

In addition to the settlement, other Federal regulatory agencies have issued guidance on mortgage servicing and loan modifications,[29] conducted coordinated reviews of the nation’s largest servicers,[30] and taken enforcement actions against individual companies.[31] The Bureau and other Federal agencies have also engaged since spring 2011 in informal discussions about the potential development of national mortgage servicing standards through regulations and guidance.

The Bureau’s proposed rules under Regulation Z and X represent another important step towards establishing uniform minimum national standards. When adopted in final form, the Bureau’s rules will apply to all mortgage servicers, whether depository institutions or non-depository institutions, and to all segments of the mortgage market, regardless of the ownership of the loan. The proposals focus both on implementing the specific mortgage servicing requirements of the Dodd-Frank Act and on addressing broader systemic problems that the Bureau believes are critical to ensure that the mortgage servicing market functions to serve consumer needs. To that end, the proposed TILA and RESPA mortgage servicing rules incorporate elements from four categories of the National Mortgage Settlement—(1) foreclosure and bankruptcy information and documentation, (4) loss mitigation, (6) restrictions on servicing fees, and (7) force-placed insurance. In addition, the proposed requirement to maintain reasonable information management policies and procedures addresses oversight of service providers, which impacts category (2) of the settlement.

The Bureau continues to consider whether to incorporate other settlement standards into rules or guidance, either alone or in conjunction with other Federal regulatory agencies; certain requests for comment in this proposal reflect these considerations. The Bureau is also continuing ongoing discussions with other regulators to ensure appropriate coordination of rulemaking and other initiatives relating to mortgage servicing issues.

D. The Statutory Requirements and Additional Proposals

The Dodd-Frank Act mandates several protections for homeowners in the servicing of their loans. The Act requires new disclosures, specifically periodic statements (unless coupon books are provided in certain circumstances), notices prior to the reset of adjustable-rate mortgages, and force-placed insurance notices. These disclosures are designed to provide consumers with comprehensive and comprehensible information when they need it and in a form they can use, so they can better manage their obligations and avoid unnecessary problems.

The Dodd-Frank Act also imposes new requirements on servicers to respond in a timely way to borrowers who assert that their servicer made an error. The statute also requires servicers to respond in a timely way to borrower requests for information.

The Dodd-Frank Act contains requirements relating to the prompt crediting of payments, so that consumers are not wrongly penalized with late fees or other fees because servicers did not credit their payments quickly. The statute also requires servicers to provide timely responses to consumer requests for payoff amounts, so consumers can get this information when they need it, such as when refinancing.

The Bureau is proposing additional standards to improve the way servicers treat all borrowers, including delinquent borrowers. Some servicers have made it very difficult for delinquent borrowers to explore and take advantage of potential alternatives to foreclosure. For example, servicers have frequently neglected to reach out or respond to such borrowers to discuss alternatives to foreclosure, lost or misplaced the documents of borrowers who have sought modifications or other relief, failed to keep track of borrower communications, and forced borrowers who have invested substantial time communicating with an employee of the servicer to repeat the process with a different employee.[32]

To address these concerns, the Bureau is proposing new servicing standards in four areas. First, servicers would have to establish and maintain information management policies and procedures that would have to be reasonably designed to achieve certain objectives and address certain obligations, including accessing and providing accurate information, evaluating borrowers for loss mitigation options, facilitating oversight of, and compliance by, service providers, and facilitating servicing transfers. Second, servicers would have to intervene early with delinquent borrowers to provide them with information about, and encourage them to explore, available alternatives to foreclosure. Third, servicers would have to provide delinquent borrowers with a point of contact on the servicer’s staff that provides continuity in the borrowers’ dealings with the servicer. At such point of contact, staff must have access to complete records about that borrower, including records of prior communications with the borrower, and be able to assist the borrower in pursuing loss mitigation options.

Fourth, servicers that offer loss mitigation options in the ordinary course of business would be required to follow certain procedures to ensure that borrowers’ completed loss mitigation applications are evaluated in a timely manner, that borrowers are notified of the results, and that borrowers have a right to appeal the denial of a loan modification option. Servicers would also be required to provide borrowers who submit incomplete loss mitigation applications with timely notice about the additional documents or information needed to make a loss mitigation application complete.

The Bureau recognizes that a one-size-fits-all approach may not be optimal with regard to either the mandated or additional requirements. As discussed below, the Bureau seeks comment on to what extent it may be appropriate to adjust these standards for small servicers.

III. Summary of Statute and Rulemaking Process

A. Overview of the Statute

The Dodd-Frank Act imposes certain new requirements related to mortgage servicing. Some of these new requirements are amendments to RESPA addressed in this proposal and others are amendments to TILA.

RESPA amendments. Section 1463 of the Dodd-Frank Act imposes a number of new servicing related requirements under RESPA that broadly relate to force-placed insurance and error resolution/responses to requests for information. First, the statute prohibits a servicer from obtaining force-placed hazard insurance, unless there is a reasonable basis to believe the borrower has failed to comply with the loan contract’s requirement to maintain property insurance. A servicer may not impose any charge on any borrower for force-placed insurance with respect to any property secured by a federally related mortgage, unless the servicer sends, by first-class mail, two written notices to the borrower, at least 30 days apart. The notices must remind borrowers of their obligation to maintain hazard insurance on the property, alert borrowers to the servicer’s lack of evidence of insurance coverage, tell borrowers what they must do to demonstrate that they have coverage, and state that the servicer may obtain coverage at the borrower’s expense if the borrower fails to provide evidence of coverage. Servicers must terminate force-placed insurance coverage and refund to borrowers any premiums charged during any period when the borrower had private insurance coverage. The statute also provides that all charges imposed on the borrower related to force-placed insurance, apart from charges subject to State regulation as the business of insurance, must be bona fide and reasonable.

Second, the statute prohibits certain acts and practices by servicers of federally related mortgages with regard to resolving errors and responding to requests for information. Specifically, the statute prohibits servicers of federally related mortgages from charging fees for responding to valid qualified written requests. The statute also provides that a servicer of a federally related mortgage must not fail to take timely action to respond to a borrower’s requests to correct errors relating to: allocation of payments, final balances for purposes of paying off the loan, avoiding foreclosure, or other standard servicer duties.

Finally, the statue requires a servicer of a federally related mortgage to respond within ten business days to a request from a borrower to provide the identity, address, and other relevant contact information about the owner or assignee of the loan. The statue also reduces the amount of time that servicers of federally related mortgages have to correct errors and respond to inquiries generally, as well as refund escrow accounts upon payoff.[33]

In addition, the statute provides that a servicer of a federally related mortgage must “comply with any other obligation found by the Consumer Financial Protection Bureau, by regulation, to be appropriate to carry out the consumer protection purposes of this Act.”[34] This provision gives the Bureau broad authority to adopt additional regulations to govern the conduct of servicers of federally related mortgage loans. In light of the systemic problems in the mortgage servicing industry, the Bureau is proposing to exercise this authority to require servicers of federally related mortgages to: establish reasonable information management policies and procedures; undertake early intervention with delinquent borrowers; provide delinquent borrowers with continuity of contact with staff equipped to assist them; and require servicers that offer loss mitigation options in the ordinary course of business to follow certain procedures when evaluating loss mitigation applications.

TILA amendments. There are three new mortgage servicing requirements under TILA. First, for closed-end credit transactions secured by a consumer’s principal residence, section 1418 of the Dodd-Frank Act adds a new section 128A to TILA. TILA section 128A states that, for hybrid ARMs with a fixed interest rate for an introductory period that adjusts or resets to a variable interest rate at the end of such period, a notice must be provided six months prior to the initial adjustment of the interest rate for closed-end credit transactions secured by a consumer’s principal residence. Section 1418 of the Dodd-Frank Act permits the Bureau to extend this requirement to ARMs that are not hybrid ARMs.

Second, section 1420 of the Dodd-Frank Act, which adds section 128(f) to TILA, requires the creditor, assignee, or servicer of any residential mortgage loan to transmit to the borrower, for each billing cycle, a periodic statement that sets forth certain specified information in a conspicuous and prominent manner. The statute also gives the Bureau the authority to require additional content to be included in the periodic statement. The statute provides an exception to the periodic statement requirement for fixed-rate loans where the borrower is given a coupon book containing substantially the same information as the statement.

Third, section 1464 of the Dodd-Frank Act adds sections 129F and 129G to TILA, which generally codify existing Regulation Z requirements for the prompt crediting of mortgage payments received by servicers in connection with consumer credit transactions secured by a consumer’s dwelling. The statute also requires a creditor or servicer to send accurate and timely responses to borrower requests for payoff amounts for home loans.

The statutory provisions with enumerated mortgage servicing requirements become effective on January 21, 2013, unless final rules are issued on or before that date.

B. Outreach and Consumer Testing

The Bureau has conducted extensive outreach in developing the mortgage servicing proposals. Bureau staff met with mortgage servicers, force-placed insurance carriers, industry trade associations, consumer advocates, other Federal regulatory agencies, and other interested parties to discuss various aspects of the statute and the servicing industry.

In preparing this proposed rule, the Bureau solicited input from small servicers through a Small Business Review Panel (Small Business Review Panel) with the Chief Counsel for Advocacy of the Small Business Administration (SBA) and the Administrator of the Office of Information and Regulatory Affairs within the Office of Management and Budget (OMB).[35] The Small Business Review Panel’s findings and recommendations are contained in the Final Report of the Small Business Review Panel on CFPB’s Proposals Under Consideration for Mortgage Servicing Rulemaking (Small Business Review Panel Report).[36]

The Bureau also engaged in other meetings and roundtables with a variety of other stakeholders to gather factual information about the servicing industry and to discuss various elements of the Bureau’s proposals as they were being developed. As discussed above and in connection with section 1022 of the Dodd-Frank Act below, the Bureau has also consulted with relevant Federal regulators both regarding the Bureau’s specific proposals and the need for and potential contents of national mortgage servicing standards in general. As it considers public comment and works to develop final rules on mortgage servicing, the Bureau will continue to seek input from all interested parties.

In addition, the Bureau engaged ICF Macro (Macro), a research and consulting firm that specializes in designing disclosures and consumer testing, to conduct one-on-one cognitive interviews regarding disclosures connected with mortgage servicing. During the first quarter of 2012, the Bureau and Macro worked closely to develop and test disclosures that would satisfy the requirements of the Dodd-Frank Act and provide information to consumers in a manner that would be understandable and useful. These disclosures related to the ARM notices, the force-placed insurance notices, and the periodic statements. Macro conducted three rounds of one-on-one cognitive interviews with a total of 31 participants in the Baltimore, Maryland metro area (Towson, Maryland), Memphis, Tennessee, and Los Angeles, California. Participants were all consumers who held a mortgage loan and represented a range of ages and education levels. Efforts were made to recruit a significant number of participants who had trouble making mortgage payments in the last two years. During the interviews, participants were shown disclosure forms for periodic statements, ARM interest rate adjustment notices for the new disclosures required by Dodd-Frank Act section 1418, and force-placed insurance notices. Participants were asked specific questions to test their understanding of the information presented in each of the disclosures, how easily they could find various pieces of information presented in each of the disclosures, as well as to learn about how they would use the information presented in each of the disclosures. The disclosures were revised after each round of testing. Specific findings from the consumer testing are discussed in detail throughout the SUPPLEMENTARY INFORMATION where relevant.[37]

C. Other Dodd-Frank Act Mortgage-Related Rulemakings

Including this proposal, the Bureau currently is engaged in seven rulemakings relating to mortgage credit to implement requirements of the Dodd-Frank Act:

  • TILA-RESPA Integration: On July 9, 2012, the Bureau released proposed rules and forms combining the TILA mortgage loan disclosures with the Good Faith Estimate (GFE) and settlement statement required under RESPA, pursuant to Dodd-Frank Act section 1032(f) as well as sections 4(a) of RESPA and 105(b) of TILA, as amended by Dodd-Frank Act sections 1098 and 1100A, respectively. 12 U.S.C. 2603(a); 15 U.S.C. 1604(b) (the 2012 TILA-RESPA Proposal).[38]
  • HOEPA: On July 9, 2012, the Bureau released proposed rules to implement Dodd-Frank Act requirements expanding protections for “high-cost” mortgage loans under HOEPA, pursuant to TILA sections 103(bb) and 129, as amended by Dodd-Frank Act sections 1431 through 1433. 15 U.S.C. 1602(bb) and 1639.[39] Such loans have requirements on servicers of “high-cost” mortgage loans related to payoff statements, late fees, prepayment penalties, and fees for loan modifications or deferrals.
  • Loan Originator Compensation: The Bureau is in the process of developing a proposal to implement provisions of the Dodd-Frank Act requiring certain creditors and mortgage loan originators to meet duty of care qualifications and prohibiting mortgage loan originators, creditors, and the affiliates of both from receiving compensation in various forms (including based on the terms of the transaction) and from sources other than the consumer, with specified exceptions, pursuant to TILA section 129B as established by Dodd-Frank Act sections 1402 through 1405. 15 U.S.C. 1639b.
  • Appraisals: The Bureau, jointly with Federal prudential regulators and other Federal agencies, is in the process of developing a proposal to implement Dodd-Frank Act requirements concerning appraisals for higher-risk mortgages, appraisal management companies, and automated valuation models, pursuant to TILA section 129H as established by Dodd-Frank Act section 1471, 15 U.S.C. 1639h, and sections 1124 and 1125 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) as established by Dodd-Frank Act sections 1473(f), 12 U.S.C. 3353, and 1473(q), 12 U.S.C. 3354, respectively. In addition, the Bureau is developing rules to implement section 701(e) of the Equal Credit Opportunity Act (ECOA), as amended by Dodd-Frank Act section 1474, to require that creditors provide applicants with a free copy of written appraisals and valuations developed in connection with applications for loans secured by a first lien on a dwelling (collectively, Appraisals Rulemaking). 15 U.S.C. 1691(e).
  • Ability to Repay: The Bureau is in the process of finalizing a proposal issued by the Board to implement provisions of the Dodd-Frank Act requiring creditors to determine that a consumer can repay a mortgage loan and establishing standards for compliance, such as by making a “qualified mortgage,” pursuant to TILA section 129C as established by Dodd-Frank Act sections 1411 and 1412 (ATR Rulemaking). 15 U.S.C. 1639c.
  • Escrows: The Bureau is in the process of finalizing a proposal issued by the Board to implement provisions of the Dodd-Frank Act requiring certain escrow account disclosures and exempting from the higher-priced mortgage loan escrow requirement loans made by certain small creditors, among other provisions, pursuant to TILA section 129D as established by Dodd-Frank Act sections 1461 and 1462 (Escrows Rulemaking). 15 U.S.C. 1639d.

With the exception of the requirements being implemented in the 2012 TILA-RESPA Proposal, the Dodd-Frank Act requirements referenced above generally will take effect on January 21, 2013, unless final rules implementing those requirements are issued on or before that date and provide for a different effective date. To provide an orderly, coordinated, and efficient comment process, the Bureau is generally setting the deadlines for comments on this and other proposed mortgage rules based on the date the proposal is issued, instead of the date this notice is published in the Federal Register. Therefore, the Bureau is providing 60 days for comment on those proposals, which will ensure that the Bureau receives comments with sufficient time remaining to issue final rules by January 21, 2013. Because the precise date this notice will be published cannot be predicted in advance, setting the deadlines based on the date of issuance will allow interested parties that intend to comment on multiple proposals to plan accordingly.

The Bureau regards the foregoing rulemakings as components of a larger undertaking; many of them intersect with one or more of the others. Accordingly, the Bureau is coordinating carefully the development of the proposals and final rules identified above. Each rulemaking will adopt new regulatory provisions to implement the various Dodd-Frank Act mandates described above. In addition, each of them may include other provisions the Bureau considers necessary or appropriate to ensure that the overall undertaking is accomplished efficiently and that it ultimately yields a regulatory scheme for mortgage credit that achieves the statutory purposes set forth by Congress, while avoiding unnecessary burdens on industry.

Thus, many of the rulemakings listed above involve issues that extend across two or more rulemakings. In this context, each rulemaking may raise concerns that might appear unaddressed if that rulemaking were viewed in isolation. For efficiency’s sake, however, the Bureau is publishing and soliciting comment on a proposed approach to certain issues raised by two or more of its mortgage rulemakings in whichever rulemaking is most appropriate, in the Bureau’s judgment, for addressing each specific issue. Accordingly, the Bureau urges the public to review this and the other mortgage proposals identified above, including those previously published by the Board, together. Such a review will ensure a more complete understanding of the Bureau’s overall approach and will foster more comprehensive and informed public comment on the Bureau’s several proposals, including provisions that may have some relation to more than one rulemaking but are being proposed for comment in only one of them.

D. Small Servicers

The small entity representatives (SERs) who provided feedback to the SBREFA panel generally emphasized that their business models required a “high touch” approach to customer service and that they did not engage in many of the practices that contributed to the mortgage market process. The SERs indicated that they take a proactive approach to providing consumer information, resolving errors and working with delinquent borrowers to find alternatives to foreclosure. Nevertheless, they indicated that some elements of the proposals under consideration were not consistent with their current business practices and expressed concern about the need to begin providing extensive documentation to prove compliance with the proposed standards. The SERs urged the Bureau to adopt standards that would allow small servicers to stay in the market and provide choices to consumers.[40] The SERs were particularly concerned about the costs and burdens of complying with the periodic statement requirements, as well as certain aspects of the process for resolving errors and responding to inquiries.[41]

Informed by this process, the Bureau is proposing in the 2012 TILA Servicing Proposal to exempt certain small servicers from the periodic statement requirement. The Bureau is also proposing that certain requirements, such as the requirement to maintain reasonable information management policies and procedures under Regulation X, should be applied in light of the scale of the servicer’s operations as well as other contextual factors. The Bureau does not believe that these provisions, described more fully in the section-by-section analysis of the applicable proposal, would impair consumer protection. The Bureau is also seeking comment more broadly on whether other exemptions or adjustments for small servicers would be warranted to reduce regulatory burden while appropriately balancing consumer protections.

E. Request for Comment on Effective Date

The Bureau specifically requests comment on the appropriate effective date for each of the servicing-related rules contained in this proposal and the 2012 TILA Servicing Proposed Rule. As discussed above, the Dodd-Frank Act servicing requirements take effect automatically on January 21, 2013, unless final rules are issued on or before that date.[42] Where rules are required to be issued, the Dodd-Frank Act permits the Bureau to provide up to 12 months for implementation. For all other rules, the implementation period is left to the discretion of the Bureau.

Given the significant consumer benefits offered by the proposals and the challenges faced by delinquent borrowers in dealing with their servicers, the Bureau generally believes that the final rules should be made effective as soon as possible. However, the Bureau understands that various elements of the final rules would require servicers to adopt or revise existing software to generate compliant disclosures, retrain staff, assess and revise policies and procedures, and/or take other implementation measures. The Bureau therefore seeks detailed comment on the nature and length of implementation process for each individual servicing rule and in light of interactions between the rules. The Bureau is particularly interested in analyzing the impacts on both consumers and servicers of a staggered implementation sequence as compared to imposing a single date by which all rules must be implemented.

The Bureau also notes that some companies may also need to implement other new requirements under other parts of the Dodd-Frank Act, as described above. The Bureau believes based on conversations and analysis to date that there is more overlap and interaction among the various proposals relating to mortgage origination than there is between the servicing proposals and the origination proposals. However, the Bureau seeks comment specifically on this issue and on whether the general cumulative burden on entities that are subject to both sets of rules will complicate implementation.

Finally, the Bureau seeks comment on any particular implementation challenges faced by small servicers, and on whether an extended implementation period would be appropriate or useful. For instance, to the extent that small servicers rely heavily on outside software vendors, the Bureau seeks comment on whether a delayed effective date would provide significant relief if the vendors will have to develop software solutions for larger servicers on a shorter timeline anyway. The Bureau also seeks comment on the impacts of delayed implementation on consumers and on other market participants.

IV. Summary of Proposed Rule

The proposal contains a number of significant revisions to Regulation X. As a preliminary matter, the Bureau proposes to reorganize Regulation X to include three distinct subparts. Subpart A (General) would include general provisions of Regulation X, including provisions that apply to both subpart B and subpart C. Subpart B (Mortgage settlement and escrow accounts) would include provisions relating to settlement services and escrow accounts, including disclosures provided to borrowers relating to settlement services. Subpart C (Mortgage servicing) would include provisions relating to obligations of mortgage servicers. The Bureau also proposes to set forth a commentary that includes official Bureau interpretations of Regulation X.

With respect to mortgage servicing-related provisions, the proposed rule would amend existing provisions currently published in 12 CFR 1024.21, which relate to disclosures of mortgage servicing transfers and servicer obligations to borrowers. The Bureau is proposing to include these provisions within the proposed subpart C as proposed §§ 1024.33-1024.34. The Bureau also proposes to move certain clarifications in these provisions that were previously published in 12 CFR 1024.21 to the commentary to conform the organization of these provisions with the proposed additions to Regulation X.

The proposed rule would establish procedures for investigating and resolving alleged errors and responding to requests for information. The requirements would be set forth in proposed §§ 1024.35-1024.36. As proposed, these sections would require servicers to respond to errors and information requests from borrowers, which would include qualified written requests. The Bureau’s goal is to conform and consolidate the pre-existing procedures applicable to qualified written requests with the new requirements imposed by the Dodd-Frank Act to respond to errors and information requests under section 6(k)(1)(C) and 6(k)(1)(D) of RESPA. The Bureau proposes to create a unified requirement for servicers to respond to errors and information requests provided by borrowers, without regard to whether the request constitutes a qualified written request.[43] To that end, the proposed rule would implement the Dodd-Frank Act amendments to RESPA section 6(e) by adjusting the timeframes applicable to respond to qualified written requests, as well as errors and information requests generally, to conform to the new requirements.

The proposed rule would implement limitations on servicers obtaining force-placed insurance in § 1024.37. The proposed rule would require servicers to provide notices to borrowers at certain timeframes before a servicer could impose a charge on a borrower. See proposed § 1024.37. Further, the proposed rule would require that charges related to force-placed insurance, other than charges subject to State regulation as the business of insurance or authorized by Federal flood laws must be bona fide and reasonable. Finally, and as set forth in more detail below, the proposed rule would also reduce the instances in which force-placed insurance would be needed by amending current § 1024.17 to require that where a borrower has escrowed for hazard insurance, servicers must generally advance funds to maintain the borrowers’ own hazard insurance policies even if the loan is delinquent.

The proposed rule would also implement the Dodd-Frank Act amendment to RESPA section 6(g) in proposed § 1024.34(b) by proposing requirements on servicers for the refund or transfer of funds in an escrow account when a mortgage loan is paid in full.

The proposed rule would also impose obligations on servicers in four additional areas not specifically required by the Dodd-Frank Act: reasonable information management policies and procedures, early intervention for delinquent borrowers, continuity of contact, and loss mitigation procedures. See proposed §§ 1024.38-1024.41. The Bureau is proposing rules in these areas to address significant problems in the mortgage servicing industry and the difficulties that borrowers, particularly delinquent borrowers, have encountered when dealing with servicers. The early intervention for delinquent borrower provisions would require servicers to contact borrowers at an early stage of delinquency and provide information to borrowers about available loss mitigation options and the foreclosure process. The continuity of contact provisions would require servicers to make available to borrowers direct phone access to personnel who could assist borrowers in pursuing loss mitigation options. The reasonable information management policies and procedures would require servicers to implement policies and procedures to manage documents and information to achieve defined objectives that ensure borrowers are not harmed by servicers’ information management operations. These objectives include providing accurate information to borrowers, correcting errors on borrower accounts, providing oversight of service providers, protecting borrowers from lost information during servicing transfers, and ensuring that servicers have access to all information necessary to evaluate loss mitigation options, as appropriate. The information management policies and procedures would also have to include standard requirements. Policies and procedures would satisfy the requirements if they do not result in a pattern or practice of failing to comply with the standard requirements or achieving the objectives. The loss mitigation procedures would require servicers that offer loss mitigation options to borrowers to evaluate complete and timely applications for loss mitigation options. Servicers would be required to permit borrowers to appeal denials of loss mitigation applications for loan modification programs. A servicer that receives a complete application for a loss mitigation option may not proceed with a foreclosure sale unless (i) the servicer has denied the borrower’s application and the time for any appeal has expired; (ii) the servicer has offered a loss mitigation option which the borrower has declined or failed to accept within 14 days of the offer; or (iii) the borrower fails to comply with the terms of a loss mitigation agreement.

The proposed new protections would significantly improve the transparency of mortgage servicing operations, provide substantive protections, enhance borrowers’ ability to obtain information from and assert errors to servicers, and provide borrowers, particularly delinquent borrowers, with information and options necessary to undertake informed actions with respect to mortgage loan obligations.

V. Legal Authority

Section 1463 of the Dodd-Frank Act creates statutory mandates under new sections 6(k), 6(l) and 6(m) of RESPA. Section 1463 of the Dodd-Frank Act also amends certain consumer protection provisions set forth in sections 6(e), 6(f) and 6(g) of RESPA.

Regarding the statutory mandates, section 6(k) of RESPA contains prohibitions on servicers for servicing of federally related mortgage loans. Pursuant to section 6(k) of RESPA, servicers are prohibited from: (i) obtaining force-placed insurance unless there is a reasonable basis to believe the borrower has failed to comply with the loan contract’s requirements to maintain property insurance; (ii) charging fees for responding to valid qualified written requests; (iii) failing to take timely action to respond to correct certain types of errors; (iv) failing to respond within ten business days to a request from a borrower to provide certain information about the owner or assignee of a mortgage loan; or (v) failing to comply with any other obligation found by the Bureau to be appropriate to carry out the consumer protection purposes of RESPA. See RESPA section 6(k).

Section 6(l) of RESPA sets forth specific requirements for determining if a servicer has a reasonable basis to obtain force-placed insurance coverage. Section 6(l) of RESPA requires servicers to provide written notices to a borrower before a charge for a force-placed insurance policy may be imposed on the borrower. Section 6(l) of RESPA also requires a servicer to accept any reasonable form of written confirmation from a borrower of existing insurance coverage. Section 6(l) of RESPA further requires a servicer, within 15 days of the receipt of such confirmation, to terminate force-placed insurance and refund any premiums and fees paid during the period of overlapping coverage. See RESPA section 6(l).

Section 6(m) of RESPA requires that charges related to force-placed insurance, other than charges subject to State regulation as the business of insurance, must be bona fide and reasonable. See RESPA section 6(m).

The Dodd-Frank Act also amends sections 6(e), 6(f), and 6(g) of RESPA. Section 6(e) is amended by decreasing the response times currently applicable to a servicer’s obligation to respond to a qualified written request. Section 6(f) is amended to increase the penalty amounts servicers may incur for violations of section 6 of RESPA. Further, section 6(g) is amended to protect borrowers by obligating servicers to refund escrow balances to borrowers when a mortgage loan is paid in full or to transfer the escrow balance in certain refinancing related situations.

In addition to the statutory mandates and amendments, RESPA section 6(k) authorizes the Bureau to prescribe regulations that are appropriate to carry out the consumer protection purposes of the title. RESPA is a remedial consumer protection statute and imposes obligations upon servicers for servicing federally related mortgage loans that are intended to protect borrowers. RESPA has established a consumer protection paradigm of requiring disclosures to consumers, and establishing servicer obligations, all of which are intended to protect consumers regarding servicer actions. The disclosures include, for example, disclosures regarding escrow account balances and disbursements, transfers of mortgage servicing among mortgage servicers, and force-placed insurance. Obligations limiting servicer actions include obligations for servicers to respond to qualified written requests from borrowers and obligations with respect to escrow account payments. Servicers incur liability for failure to comply with such requirements.

Considered as a whole, RESPA, as amended by the Dodd-Frank Act, reflects at least two significant consumer protection purposes: (1) to establish requirements that ensure that servicers have a reasonable basis for undertaking actions that may harm borrowers and (2) to establish servicers’ duties to borrowers with respect to the servicing of federally related mortgage loans. Each of the provisions proposed in this rulemaking address these purposes. RESPA section 19(a) authorizes the Bureau to prescribe such rules and regulations, to make such interpretations, and to grant such reasonable exemptions for classes of transactions, as may be necessary to achieve the purposes of RESPA, which includes the consumer protection purposes laid out above. In addition, RESPA section 6(j)(3) authorizes the Bureau to establish any requirements necessary to carry out the purposes of section 6 of RESPA.

The Bureau uses the specific statutory authorities set forth above, as well as the broader authorities set forth in sections 6(j)(3), 6(k), and 19(a) of RESPA in issuing this proposal. As described in more detail elsewhere in the SUPPLEMENTARY INFORMATION, the provisions proposed in part or in whole pursuant to the Bureau’s authority in RESPA sections 6(j)(3), 6(k) and 19(a) include: §§ 1024.17(k)(5), 1024.30 – 1024.41. [44]

The Bureau’s proposal also includes official Bureau interpretations in a supplement to Regulation X. RESPA section 19(a) authorizes the Bureau to make such reasonable interpretations of RESPA as may be necessary to achieve the consumer protection purposes of RESPA. Good faith compliance with the interpretations would afford servicers protection from liability under section 19(b) of RESPA. The Bureau’s proposed practice of setting forth official Bureau interpretations in the supplement substitutes for the prior practice of the HUD of publishing Statements of Policy with respect to interpretations of RESPA.[45]

Dodd-Frank Act Section 1032(a)

As discussed in the section-by-section analysis for proposed § 1024.37, the Bureau is proposing disclosures and model forms for force-placed insurance notices pursuant to its authority under RESPA sections 6(k), 6(j)(3), 19(a), as well as its authority under Dodd-Frank Act section 1032. Section 1032(a) of the Dodd-Frank Act provides that the Bureau “may prescribe rules to ensure that the features of any consumer financial product or service, both initially and over the term of the product or service, are fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks associated with the product or service, in light of the facts and circumstances.” 12 U.S.C. 5532(a). The authority granted to the Bureau in section 1032(a) is broad, and empowers the Bureau to prescribe rules regarding the disclosure of the “features” of consumer financial products and services generally. Accordingly, the Bureau may prescribe rules containing disclosure requirements even if other Federal consumer financial laws do not specifically require disclosure of such features.

Dodd-Frank Act section 1032(c) provides that, in prescribing rules pursuant to section 1032, the Bureau “shall consider available evidence about consumer awareness, understanding of, and responses to disclosures or communications about the risks, costs, and benefits of consumer financial products or services.” 12 U.S.C. 5532(c). In developing proposed rules under Dodd-Frank Act section 1032(a) for this proposal, the Bureau has considered available studies, reports, and other evidence about consumer awareness, understanding of, and responses to disclosures or communications about the risks, costs, and benefits of consumer financial products or services. The Bureau has considered the evidence developed through its consumer testing of the force-placed insurance notices.

In addition, Dodd-Frank Act section 1032(b)(1) provides that “any final rule prescribed by the Bureau under this [section 1032] requiring disclosures may include a model form that may be used at the option of the covered person for provision of the required disclosures.” 12 U.S.C. 5532(b)(1). Any model form issued pursuant to that authority shall contain a clear and conspicuous disclosure that, at a minimum, uses plain language that is comprehensible to consumers, using a clear format and design, such as readable type font, and succinctly explains the information that must be communicated to the consumer. Dodd-Frank Act 1032(b)(2); 12 U.S.C. 5532(b)(2). As discussed in the section-by-section analysis for proposed § 1024.37, the Bureau is proposing model forms for force-placed insurance notices. As discussed in this notice, the Bureau is proposing these model forms pursuant to its authority under Dodd-Frank Act section 1032(b)(1).

VI. Section-by-Section Analysis

Subpart A—General

The Bureau proposes to create three distinct subparts within Regulation X. Subpart A titled “General” would include general provisions as well as provisions that are applicable to both subpart B and subpart C of Regulation X. Subpart B titled “Mortgage settlement and escrow accounts” would include provisions relating to settlement services and escrow accounts, including disclosures required to be provided to borrowers with respect to settlement service providers. Subpart C titled “Mortgage servicing” would include provisions relating to mortgage servicing and would include most of the provisions in this proposal.

In order to organize the general provisions of Regulation X, as well as the provisions that would be applicable to both subpart B and subpart C, the Bureau proposes placing §§ 1024.1 through 1024.5 in subpart A.

Current § 1024.1 sets forth the designation and applicability of Regulation X and would be republished without change. Current § 1024.2 sets forth definitions that are applicable to transactions covered by this regulation, including the definition of federally related mortgage loan that is referenced in the proposed definition of the term “mortgage loan” in subpart C. See proposed § 1024.31. Current § 1024.2 would generally be republished without changed, except for a deletion from the definitions of “Federally related mortgage loan” and “Mortgage broker” and additions to the definitions of “Public Guidance Documents” and “Servicer.”

The deletion to the definition of “Federally related mortgage loan” eliminates the use of the short term “mortgage loan” as a substitute for “Federally related mortgage loan” in light of the definition of the term “mortgage loan” in proposed § 1024.31. Conforming edits have also been proposed for the definitions of “Origination service,” “Servicer,” and “Servicing.” Conforming edits have also been proposed for current §§ 1024.7(f)(3), 1024.17(c)(8), 1024.17(f)(2)(ii), 1024.17(f)(4)(iii), 1024.17(i)(2), and 1024.17(i)(4)(iii).

The deletion to the definition of “Mortgage broker” removes a reference to loan correspondents that are approved under 24 CFR 202.8. HUD amended 24 CFR 202.8 on April 20, 2010 to eliminate the FHA approval process for loan correspondents and determined that loan correspondents would no longer be approved participants in FHA programs.[46] The deletion of the reference to FHA approved loan correspondents in the definition of “Mortgage broker” removes the now obsolete reference.

The addition to the definition of “Public Guidance Documents” provides that such documents are available from the Bureau upon request and provides an address that could be used to request the “Public Guidance Documents.”

The addition to the definition of “Servicer” is intended to clarify the treatment of the National Credit Union Administration (NCUA) as conservator or liquidating agent of a servicer or in its role of providing special assistance to an insured credit union. The definition of “Servicer” currently provides that the Federal Deposit Insurance Corporation (FDIC) is not a servicer (1) with respect to assets acquired, assigned, sold, or transferred pursuant to section 13(c) of the Federal Deposit Insurance Act or as receiver or conservator of an insured depository institution or (2) in any case in which the assignment, sale, or transfer of the servicing of the mortgage loan is preceded by commencement of proceedings by the FDIC for conservatorship or receivership of a servicer (or an entity by which the servicer is owned or controlled). The addition to the definition of “servicer” clarifies similarly that the NCUA is not a servicer (1) with respect to assets acquired, assigned, sold, or transferred, pursuant to section 208 of the Federal Credit Union Act or as conservator or liquidating agent of an insured credit union or (2) in any case in which the assignment, sale, or transfer of the servicing of the mortgage loan is preceded by commencement of proceedings by the NCUA for appointment of a conservator or liquidating agent of a servicer (or an entity by which the servicer is owned or controlled). The definition of “servicer” also has been edited to clarify that it relates to servicers of federally related mortgage loans.

With respect to the additions to the definition of “Servicer,” the Bureau relies on its authority in section 19(a) of RESPA to make such interpretations and to grant such reasonable exemptions for classes of transactions as may be necessary to achieve the consumer protection purposes of the Act. The Bureau does not believe there is a basis to impose on the NCUA, when it is providing assistance to an insured credit union or in its role as conservator or liquidating agent of an insured credit union, the obligations of a servicer in light of the fact that Congress has specifically stated that the FDIC, when it is providing assistance to an insured depository institution or in its role as conservator or receiver of an insured deposition institution, should not be considered a servicer.

Current § 1024.3 would be removed and the substance of § 1024.23 would be moved to proposed § 1024.3. Current § 1024.3 sets forth the process for the public to submit questions or suggestions regarding RESPA or to receive copies of Public Guidance Documents. Although the Bureau welcomes questions and suggestions from the public regarding Regulation X, the Bureau does not believe a provision of Regulation X must be specifically designated for that purpose. The public may contact the Bureau to request documents, suggest changes to Regulation X, or submit questions, including questions concerning the interpretation of RESPA by mail to the Associate Director, Research, Markets, and Regulations, Bureau of Consumer Financial Protection, 1700 G St. NW, Washington, DC 20552 or by email to CFPB_RESPAInquiries@cfpb.gov. Further, the Bureau has proposed including contact information to request copies of Public Guidance Documents in the definition of Public Guidance Documents in proposed § 1024.2 as discussed above.

Current § 1024.23 states that provisions of the Electronic Signatures in Global and National Commerce Act (E-Sign Act), which permits electronic disclosures to consumers if certain conditions are met, apply to Regulation X. The Bureau believes that the E-Sign Act provisions are applicable to all provisions in the regulation, and, therefore, should be moved to subpart A. The Bureau has made technical edits to the language of the provision to conform to the language of other similar Bureau regulations.

Current § 1024.4 sets forth provisions relating to reliance upon rules, regulations, or interpretations by the Bureau. The Bureau proposes to remove current § 1024.4(b) and redesignate current § 1024.4(c) as proposed § 1024.4(b). Current § 1024.4(b) provides that the Bureau may, in its discretion, provide unofficial staff interpretations but that such interpretations do not provide protection under section 19(b) of RESPA and that staff will not ordinarily provide such interpretations on matters adequately covered by Regulation X, official interpretations or commentaries. The Bureau’s policy is to assist the public in understanding the Bureau’s regulations, including, but not limited to, Regulation X. The Bureau believes that this provision, which states Bureau policy, is more appropriate for the commentary and, accordingly, proposes to include the substance of this provision in the introduction to the commentary.

Current § 1024.5 sets forth exemptions with respect to the applicability of Regulation X. The Bureau proposes to make a technical correction to current § 1024.5(b)(7) to reflect that mortgage servicing related provisions of Regulation X will be included in the new subpart C and will no longer be placed in current § 1024.21.

The Bureau further proposes to remove current § 1024.22. Current § 1024.22 states that if any particular provision of Regulation X, or its application to any particular person or circumstance is held invalid, the remainder of Regulation X or the application of such provision to any other person or circumstance shall not be affected. The Bureau is proposing removing current § 1024.22 because the section is unnecessary and the inclusion of the current section in Regulation X is inconsistent with the drafting of other Bureau regulations. A court reviewing Regulation X should presume that provisions of Regulation X are severable in the absence of an indication that the Bureau intended the provisions to be non-severable.[47] The Bureau intends that the provisions of Regulation X are severable and believes that if any particular provision of Regulation X, or its application to any particular person or circumstance is held invalid, the remainder of Regulation X or the application of such provision to any other provision or circumstance should not be affected. The Bureau’s proposal to remove current § 1024.22 should not be construed to indicate a contrary position.

Subpart B—Mortgage Settlement and Escrow Accounts

The Bureau proposes to establish the provisions of Regulation X relating to settlement services and escrow accounts within subpart B of Regulation X. These provisions include §§ 1024.6 through 1024.21.

Section 1024.17 Escrow Accounts

17(k) Timely Payments

The Bureau proposes to modify § 1024.17(k), which, pursuant to proposed § 1024.34(a) discussed below, sets forth requirements a servicer must follow when making payments from a borrower’s escrow account. The Bureau proposes to add a new § 1024.17(k)(5) to Regulation X to address circumstances in which servicers are required to make payments from a borrower’s escrow account to continue a borrower’s hazard insurance policy. The Bureau has reviewed a number of issues concerning force-placed insurance in order to implement the new Dodd-Frank Act requirements on force-placed insurance discussed below. During that process, for reasons set forth below, the Bureau concluded that if a borrower has escrowed for hazard insurance (i.e. established an escrow account for the payment of hazard insurance premiums), it would be appropriate to require servicers to continue paying for the borrower’s existing hazard insurance when practicable. The Bureau understands that it is practicable for a servicer to pay the hazard insurance premium of such borrower unless the borrower’s hazard insurance has been canceled or not renewed for reasons other than nonpayment of premium charges. Under proposed § 1024.37(a)(2)(ii) discussed below, the Bureau is proposing that hazard insurance obtained by a borrower but renewed by the borrower’s servicer as required by § 1024.17(k)(1), (k)(2), or (k)(5) is not considered to be force-placed insurance under § 1024.37.

Current § 1024.17(k)(1) and (k)(2) require servicers to make timely disbursements from a borrower’s escrow account, and to advance funds if necessary, as long as the borrower’s mortgage payment is not more than 30 days past due. Proposed § 1024.17(k)(5) would amend the requirements of § 1024.17(k)(1) and (k)(2) with respect to the timely payment of hazard insurance premiums. Proposed § 1024.17(k)(5) provides that notwithstanding § 1024.17(k)(1) and (k)(2), a servicer must make payments from a borrower’s escrow account in a timely manner to pay the premium charge on a borrower’s hazard insurance, as defined in § 1024.31, unless the servicer has a reasonable basis to believe that such insurance has been canceled or not renewed for reasons other than nonpayment of premium charges. The proposal would require the servicer to advance funds to pay the premium charge if the borrower’s escrow account does not contain sufficient funds.

Proposed comment 17(k)(5)-1 clarifies that the receipt by a servicer of a notice of cancellation or non-renewal from the borrower’s insurance company before the insurance premium is due provides a servicer with a reasonable basis to believe that the borrower’s hazard insurance has been canceled or not renewed for reasons other than nonpayment of premium charges.

Proposed comment 17(k)(5)-2 contains three examples of a borrower’s hazard insurance being canceled or not renewed for reasons other than the nonpayment of premium charges, to the extent permitted by State or other applicable law. Proposed comment 17(k)(5)-2.i describes a situation in which the borrower cancels the hazard insurance before its expiration date or chooses to not renew the insurance. Proposed comment 17(k)(5)-2.ii describes a situation in which the insurance company cancels the hazard insurance before its expiration date or chooses not to renew the insurance because it decides to stop writing insurance for all properties in the community where the borrower’s property is located. Proposed comment 17(k)(5)-2.iii describes a situation in which the insurance company cancels or chooses not to renew the borrower’s hazard insurance based on its underwriting criteria, which may include, for example, a borrower’s claim history, a change in the occupancy status of the property, or a change in the probability of the property being exposed to loss caused by certain hazards (e.g., a change in the property’s exposure to loss caused by wind).

Proposed comment 17(k)(5)-3 clarifies that a servicer that advances the premium payment as required by § 1024.17(k)(5) may advance the payment on a month-to-month basis, if permitted by State or other applicable law and accepted by the borrower’s hazard insurance company.

As discussed above, the Bureau’s review of issues concerning force-placed insurance has led the Bureau to conclude that it would be appropriate to require servicers to continue paying for a borrower’s existing hazard insurance when practicable if the borrower has an escrow account established to pay for hazard insurance. As discussed in greater detail in the discussion of the Bureau’s proposed definition of “force-placed insurance” in proposed § 1024.37(a)(1), a servicer is already contractually required to obtain alternative hazard insurance to protect the interest that the owner or assignee of a mortgage loan has in the property securing such loan if the servicer is unable to obtain evidence of acceptable borrower-purchased hazard insurance for such property. Additionally, a servicer typically makes payments for force-placed insurance with its own funds.[48] Because the servicer would have to obtain some type of hazard insurance to protect the interest of the mortgage loan owner or assignee (and to advance payment with its own funds, if necessary), requiring servicers to continue paying for an escrowed borrower’s existing hazard insurance when practicable would provide borrowers with greater protection than a servicer obtaining force-placed insurance. For reasons discussed in greater detail in the Bureau’s proposed definition of force-placed insurance, servicer’s purchase of force-placed insurance under certain circumstances could harm borrowers. The Bureau also believes that the approach the Bureau is proposing would be generally more cost-effective for the owner or assignee of the mortgage loan.[49] As discussed above, when servicers obtain force-placed insurance, they typically advance the force-placed insurance premium charges, which are then added to the amount of the loan. If a borrower cannot reimburse a servicer for the advancement of force-placed insurance charges, then when a loan is liquidated, the servicer will mostly likely be paid for the unreimbursed force-placed insurance charges before the owner or assignee of the mortgage loan gets paid.[50]

Additionally, the Bureau understands that servicers currently advance hazard insurance premiums for a borrower with an escrow account established to pay for hazard insurance even if they are not required by Regulation X to do so. The Bureau notes that when it solicited input from small servicers through the Small Business Review Panel, most SERs did not raise specific concerns with the Bureau’s proposal to require servicers to advance funds to pay a borrower’s hazard insurance. There were two SERs who expressed concern about advancing funds to renew a borrower’s hazard insurance because the borrower could cancel the hazard insurance and keep the refund.[51] The Small Business Review Panel recommended that the Bureau reduce the incentives for borrowers to take such action by allowing servicers to advance premium payment in 30-day installments. Proposed comment 17(k)(5)-3, discussed above, reflects the panel’s recommendation. The Bureau also notes that to the extent that the servicer is permitted by applicable law to seek reimbursement for advancing a borrower’s hazard insurance premium payment, the Bureau’s proposal would not prohibit a servicer from seeking such reimbursement.

The Bureau, however, invites comment on an alternative to the requirement in proposed § 1024.17(k)(5) that servicers must advance funds to pay a borrower’s hazard insurance premium. The alternative approach would be in § 1024.37 and would simply make it a condition of charging a borrower who has an escrow account established to pay hazard insurance, that the force-placed insurance be less expensive to the borrower than the servicer advancing funds to continue the borrower’s hazard insurance policy. The Bureau further requests whether the condition should be adjusted to require that the force-placed insurance policy protect the borrower’s interest.

Borrower’s insurance canceled for reasons other than nonpayment of premiums. As discussed above, the Bureau understands that for a borrower who has escrowed for hazard insurance, it is practicable for a servicer to pay such borrower’s hazard insurance premium unless the borrower’s hazard insurance has been canceled or not renewed for reasons other than nonpayment of premium charges. In other words, the Bureau recognizes that there could be situations where it would not be practicable for a servicer to continue paying for a borrower’s existing hazard insurance even though the borrower has escrowed for hazard insurance because the borrower’s hazard insurance has been canceled or not renewed for reasons other than nonpayment of premium charges. Accordingly, as discussed above, proposed § 1024.17(k)(5) clarifies that a servicer’s obligation to make payments from a borrower’s escrow account in a timely manner to pay the premium charge on a borrower’s hazard insurance rests on whether the servicer has a reasonable basis to believe that a borrower’s hazard insurance has been canceled or not renewed for reasons other than nonpayment of premium charges. If the servicer has such basis, then the servicer would not be required to make such payments. The Bureau notes that for such servicer, the servicer is subject to proposed § 1024.37’s consumer protections with respect to servicer’s purchase of force-placed insurance. The Bureau believes that “reasonable basis” rather than actual knowledge should be the standard for determining whether the servicer is required to make timely payments. The Bureau understands that notices of cancellation or non-renewal vary in the level of detail. Hence a servicer may not be able to determine why a borrower’s hazard insurance was canceled or not renewed based on information provided in a notice of cancellation or non-renewal. Additionally, the Bureau notes that the new Dodd-Frank requirements, discussed below, only require a servicer to have a “reasonable basis” to believe a borrower has failed to maintain hazard insurance pursuant to the terms of the borrower’s mortgage loan contract before the servicer obtains force-placed insurance.

Proposed comment 17(k)(5)-1, discussed above, clarifies what constitutes a “reasonable basis” for the purposes of proposed § 1024.17(k)(5). The Bureau believes that providing an illustration of what constitutes “a reasonable basis” to believe that a borrower’s hazard insurance has been canceled or not renewed for reasons other than nonpayment of premium charges facilitates compliance. The Bureau invites comment on whether additional circumstances may provide a servicer with a “reasonable basis” to believe that a borrower’s hazard insurance has been canceled or not renewed for reasons other than nonpayment of premium charges. Proposed comment 17(k)(5)-2, discussed above, contains three examples of a borrower’s hazard insurance being canceled or not renewed for reasons other than the nonpayment of premium charges.

Legal authority. Section 6(k)(1)(E) of RESPA authorizes the Bureau to prescribe regulations that are appropriate to carry out the consumer protection purposes of RESPA. As previously discussed in part V above, RESPA has established a consumer protection paradigm of establishing servicer obligations intended to protect consumers regarding servicer actions. As noted, servicers are contractually required to obtain alternative hazard insurance—advancing their own funds as necessary—if they do not have evidence that the borrower has hazard insurance in place. The Bureau has determined that requiring servicers to continue paying for escrowed borrowers’ existing hazard insurance, when practicable, is more protective of the borrower’s interest than providing servicers with the opportunity to obtain force-placed insurance. Accordingly, the Bureau proposes § 1024.17(k)(5) pursuant to its authority under RESPA section 6(k)(1)(E) of RESPA. The Bureau has additional authority pursuant to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of REPSA and has authority pursuant to section 19(a) of RESPA to prescribe such rules and regulations, and to make such interpretations, and to grant such reasonable exemptions for classes of transactions, as may be necessary to achieve the consumer protection purposes of RESPA.

To the extent proposed § 1024.17(k)(5) would require servicers to make timely payments for a borrower whose mortgage payment is more than 30 days past due, but whose escrow account contains sufficient funds to pay the hazard insurance premium, the Bureau additionally relies on its authority under RESPA section 6(g). RESPA section 6(g) provides that when a borrower is required by the terms of a federally related mortgage loan to pay into an escrow account to assure payment of taxes, insurance premiums, and other charges with respect to the property, the borrower’s servicer must make timely payments out of the borrower’s escrow account for such taxes, insurance premiums, and other charges. As discussed above, the Bureau recognizes that under certain circumstances, it may not be practicable for a servicer to continue paying a borrower’s existing hazard insurance. Pursuant to its interpretive authority under RESPA section 19(a), discussed above, the Bureau believes it is appropriate to clarify that a servicer’s obligation to make timely payment from a borrower’s escrow account to pay for the borrower’s hazard insurance premium does not apply when a servicer has a reasonable basis to believe that the borrower’s existing hazard insurance has been canceled or not renewed for reasons other than nonpayment of premium charges. The Bureau notes that for such servicer, the servicer would have to comply with proposed § 1024.37’s consumer protections if the servicer obtains force-placed insurance. Additionally, the Bureau notes that RESPA section 19(a) provides the Bureau with authority to grant reasonable exemptions for classes of transactions as may be necessary to achieve the consumer protection purposes of RESPA.

Borrowers not escrowed for hazard insurance. Proposed § 1024.17(k)(5) would apply in situations where a borrower has established an escrow account for the payment of hazard insurance premiums. Where a borrower has not done so, whether because the borrower has not established an escrow account at all, or has established an escrow account to pay for other items but not for hazard insurance premiums, the Bureau is proposing to set forth that hazard insurance obtained by a borrower but renewed at the servicer’s discretion is not force-placed insurance under proposed § 1024.37 in proposed § 1024.37(a)(2)(iii) discussed below. The Bureau notes that there is an on-going debate among consumer advocates, servicers, the GSEs, and regulators on whether it is practicable to require servicers to pay insurance premiums for borrowers who have not escrowed for hazard insurance. Consumer advocates have urged the Bureau to require servicers to advance funds to pay insurance premiums for such borrowers.[52] But servicers have testified that requiring servicers to pay insurance premiums for borrowers who have not escrowed for hazard insurance is often not possible.[53]

The National Mortgage Settlement, discussed in part II.C above, requires servicers to “continue to advance payments for the homeowner’s existing policy [for borrowers who have escrowed for hazard insurance], unless the borrower or insurance company cancels the existing policy.”[54] On the other hand, Fannie Mae has revised its servicing guide to require servicers to pay a borrower’s hazard insurance premium even if the borrower has not escrowed for hazard insurance, stating:

When a mortgage loan payment includes escrows, they must advance funds for the timely payment of the borrower’s property insurance premiums. Additionally, when the servicer has waived the escrow deposit account for a specific borrower, it remains responsible for the timely payment of the insurance premiums. Therefore, if a borrower fails to pay a premium, the servicer must advance its own funds to pay the past-due premium and reinstate the borrower insurance coverage, revoke the waiver and begin escrow deposit collections to pay further premiums.[55]

With respect to a borrower who has not escrowed for hazard insurance, the National Mortgage Settlement only requires a servicer to disclose in the notices it sends to such borrower that the servicer would establish an escrow account for the borrower to pay the borrower’s hazard insurance premium with the borrower’s consent. Furthermore, the Bureau notes that in contrast to Fannie Mae, Freddie Mac only requires a servicer that services loans for Freddie Mac to obtain insurance if a borrower fails to maintain insurance coverage required by Freddie Mac. Freddie Mac does not require the servicer to advance funds to maintain a borrower’s hazard insurance coverage. The guidelines state, “[if] the borrower does not or cannot obtain such coverage, then the servicer must do so. The servicer must then adjust the Borrower’s escrow payment accordingly or bill the borrower to recover the advance if the servicer does not maintain an escrow account for the borrower.”[56] In light of the existence of competing views about: (1) A servicer’s obligation to a borrower who has not escrowed for hazard insurance with respect to paying the borrower’s hazard insurance premium on the borrower’s behalf; and (2) the practicality of a servicer being able to pay the hazard insurance premium of such a borrower, the Bureau seeks comment on whether it should require servicers to pay the hazard insurance premiums of borrowers who have not escrowed for hazard insurance. The Bureau also seeks comment on whether servicers should be required to ask borrowers who have not escrowed for hazard insurance whether they would consent to servicers renewing the borrower-obtained hazard insurance, and then be required to pay the hazard insurance premiums if the borrowers give consent.

17(l) System of Recordkeeping

The Bureau proposes to remove current § 1024.17(l). Current § 1024.17(l) generally requires that a servicer maintain for five years records regarding the payment of amounts into and from an escrow account and escrow account statements provided to borrowers. Current § 1024.17(l) further mandates that the Bureau may request information contained in the servicer’s records for an escrow account and a servicer’s failure to provide such information may be deemed to be evidence of the servicer’s failure to comply with its obligations with respect to providing escrow account statements to borrowers.

The Bureau believes that, in light of this proposal, and the substantially different authorities available to the Bureau, as opposed to HUD, the obligations set forth in current § 1024.17(l) are no longer required. HUD proposed adding current § 1024.17(l) to Regulation X in 1993 and finalized the rule in 1994.[57] Current § 1024.17(l) reflects requirements relating to HUD’s authority to require information from mortgage servicers and compel compliance with the requirements of Regulation X at the time it was implemented.

Proposed § 1024.38(a) would require servicers to establish policies and procedures that include a standard requirement to retain records that document actions taken by a servicer with respect to a borrower’s mortgage loan account until one year after the date a mortgage loan is discharged or servicing of a mortgage loan is transferred by the servicer to a transferee servicer. Such documents include those relating to escrow accounts. Further, proposed §§ 1024.35-1024.36 provide tools available to borrowers to require the correction of misapplied escrow account payments or to request information regarding a borrower’s escrow account. Moreover, the Bureau has authority to supervise mortgage servicers and determine whether mortgage servicers are complying with their obligations under Regulation X with respect to escrow accounts. For these reasons, the Bureau proposes to remove current § 1024.17(l). The Bureau requests comment regarding whether current § 1024.17(l) should be removed from Regulation X.

Subpart C—Mortgage Servicing

Currently, section 6 of RESPA sets forth protections for borrowers with respect to the servicing of federally related mortgage loans. These protections include disclosures to borrowers about whether servicing for a mortgage loan may be transferred, as well as disclosures regarding the prior and new servicers in the event of a transfer. See RESPA section 6(a) – 6(c). Section 6 of RESPA further provides protections regarding misdirected payments during a servicing transfer. See RESPA section 6(d).

Section 6 of RESPA also currently requires a servicer to respond to qualified written requests asserting errors or requesting information regarding the servicing of a mortgage loan and sets forth obligations on servicers regarding the administration of escrow accounts. See RESPA sections 6(e), 6(g). Servicers are liable to borrowers for violations of section 6 of RESPA. See RESPA section 6(f).

Section 1463 of the Dodd-Frank Act created new sections 6(k), 6(l), and 6(m) of RESPA, which set forth new obligations on servicers for federally related mortgage loans. Section 6(k) of RESPA prohibits servicers from: (i) obtaining force-placed insurance unless there is a reasonable basis to believe the borrower has failed to comply with the loan contract’s requirements to maintain property insurance; (ii) charging fees for responding to valid qualified written requests; (iii) failing to take timely action to respond to correct certain types of errors; (iv) failing to respond within ten business days to a request from a borrower to provide certain information about the owner or assignee of a mortgage loan; or (v) failing to comply with any other obligation found by the Bureau to be appropriate to carry out the consumer protection purposes of RESPA. See RESPA section 6(k). Further, section 6(l) of RESPA requires servicers: (i) to provide written notices to a borrower before a charge for a force-placed insurance policy may be imposed on the borrower; (ii) to accept any reasonable form of written confirmation from a borrower of existing insurance coverage; and (iii) within 15 days of the receipt of such confirmation, to terminate force-placed insurance and refund any premiums and fees paid during the period of overlapping coverage. See RESPA section 6(l).

Section 6(m) of RESPA requires that charges related to force-placed insurance, other than charges subject to State regulation as the business of insurance, must be bona fide and reasonable. See RESPA section 6(m).

Section 1463 of the Dodd-Frank Act also amends sections 6(e) and 6(g) of RESPA with respect to a servicer’s obligation to respond to qualified written requests and a servicer’s administration of an escrow account. Further, section 1463 of the Dodd-Frank Act amended section 6(f) of RESPA to increase the dollar amounts of damages for which a servicer may be liable for violations of section 6 of RESPA. See RESPA section 6(e)-(g); Dodd-Frank Act sections 1463(b)-(d).

In order to implement these provisions in a consistent and clear manner, the Bureau proposes to reorganize Regulation X to include provisions relating to mortgage servicing within a new subpart C.

Section 1024.21 Mortgage Servicing Transfers

To incorporate mortgage servicing-related provisions within subpart C, the proposed rule would remove § 1024.21 and would implement the provisions of § 1024.21, subject to proposed changes as discussed below, in proposed §§ 1024.31-1024.34 within subpart C. Compare § 1024.21 with proposed §§ 1024.31-1024.34.

Section 1024.30 Scope

Proposed § 1024.30 sets forth the scope of proposed subpart C. Currently, § 1024.21, which implements section 6 of RESPA, applies to a “mortgage servicing loan” as that term is defined in current § 1024.21(a). The term “mortgage servicing loan” means a federally related mortgage loan, as that term is defined in § 1024.2, subject to the exemptions in § 1024.5, when the mortgage loan is secured by a first lien. The term “mortgage servicing loan” does not include subordinate-lien loans or open-end lines of credit (home equity plans) covered by TILA and Regulation Z, including open-end lines of credit secured by a first lien. See § 1024.21(a) (defining mortgage servicing loan).

Proposed § 1024.30 would eliminate the term “mortgage servicing loan” from Regulation X and would set forth the scope of subpart C. Subpart C would apply to any mortgage loan, as that term is defined in proposed § 1024.31. “Mortgage loan” in § 1024.31 would mean a federally related mortgage loan, as that term is defined in § 1024.2, subject to the exemptions in § 1024.5. Unlike the previous term “mortgage servicing loan,” the term “mortgage loan” would include subordinate-lien closed-end mortgage loans. The term “mortgage loan” would maintain the exclusion for open-end lines of credit (home-equity plans) covered by TILA and Regulation Z, including open-end lines of credit secured by a first lien, currently set forth in the definition of “mortgage servicing loan.” As a result, the elimination of the term “mortgage servicing loan,” the proposed definition of “mortgage loan” in proposed § 1024.31, and the proposed scope of subpart C in proposed § 1024.30 would create new servicer obligations with respect to subordinate-lien closed-end mortgage loans under Regulation X.

The Bureau believes that borrowers of subordinate lien closed-end mortgage loans should be entitled to the protections that would be set forth in subpart C.

The use of subordinate-lien closed-end mortgage loans grew substantially during the housing boom. Subordinate-lien closed-end mortgage loans were commonly originated as “piggyback loans”—that is, a subordinate-lien mortgage loan originated concurrently with a first-lien mortgage loan to finance a home purchase in excess of an 80% loan-to-value ratio.[58] By taking “piggyback loans,” a borrower could avoid a requirement to purchase a mortgage insurance policy. During 2006, subordinate-lien closed-end mortgage loans were used as “piggyback loans” for 22% of one-to-four family owner-occupied home purchases, with higher percentages reported in high-cost housing areas.[59] Because borrowers with simultaneously-originated subordinate-lien closed-end mortgage loans are more highly levered, such borrowers are at a greater risk of having negative equity when home prices decline and may be more susceptible to default (depending on the credit quality of the borrower).[60] Further, such loans complicate loss mitigation processes if the first-lien and subordinate-lien loans are owned by separate entities or serviced by separate servicers.

There are no unique characteristics of subordinate-lien closed-end mortgage loans that should require servicers to treat a borrower of such a mortgage loan differently than a first-lien mortgage loan borrower with respect to protections for mortgage servicing transfers, error resolution, information requests, force-placed insurance, reasonable information management policies and procedures, early intervention for delinquent borrowers, continuity of contact, or loss mitigation procedures. To the contrary, because of the difficulty of achieving loss mitigation options when a borrower has a subordinate-lien closed-end mortgage loan, such borrower may be more likely to benefit from certain protections in proposed subpart C.

Accordingly, the Bureau’s proposal would remove the exclusion for subordinate-lien closed-end mortgage loans that was previously included in Regulation X but which was not required by RESPA. The Bureau has not identified any countervailing reasons why borrowers of subordinate-lien closed-end mortgage loans should not benefit from the protections afforded by the provisions of proposed subpart C. However, the Bureau requests comment regarding whether subordinate-lien closed-end mortgage loans should be included within the scope of proposed subpart C.

The Bureau proposes to maintain the exclusion for open-end lines of credit (home-equity plans) covered by TILA and Regulation Z, including open-end lines of credit secured by a first lien, from the servicer requirements of Regulation X. Home equity lines of credit (HELOCs) tend to reflect better credit quality than subordinate-lien closed-end mortgage loans and share risk characteristics more similar to other open-end consumer financial products, such as credit cards, because of the access to additional unutilized credit provided by a HELOC.[61] The Bureau understands from discussions with servicers and industry representatives that the servicing of HELOCs tends to differ significantly from closed-end mortgage loans, including with respect to information systems used, lender remedies (including restricting access to the line of credit), and borrower behavior. Further, the Bureau understands that although a household may finance a property solely with an open-end line of credit, the proportion that do so is very small.[62]

Open-end lines of credit have been historically excluded from regulations applicable to mortgage servicing under Regulation X. See current § 1024.21(a) (defining “mortgage servicing loan”). Further, open-end lines of credit are already regulated under Regulation Z. Certain provisions of Regulation Z would duplicate the servicer obligations that would be set forth in subpart C, including, for example, billing error resolution procedures. See 12 CFR 1026.13.

In addition, the protections proposed in Regulation X may not necessarily be appropriate for open-end lines of credit. A borrower is in control of an open-end line of credit and can draw from that line as necessary to meet financial obligations. Many borrowers that have become delinquent on a first lien closed end mortgage loan keep current on payments for subordinate lien open-end lines of credit in order to maintain their access to the line of credit.[63] Conversely, when borrowers experience difficulty meeting their obligations, lenders have the ability to cut off access to unutilized draws from the open-end line of credit. These features of open-end lines of credit may weigh against imposing the requirements set forth for early intervention with delinquent borrowers, continuity of contact, and loss mitigation procedures on servicers for open-end lines of credit. Further, open-end lines of credit tend to differ from closed-end mortgage loans with respect to servicing information systems utilized and servicer processes, such that information management policies and procedures may be better targeted toward different objectives for open-end lines of credit than those set forth in proposed § 1024.38(b) with respect to closed-end mortgage loans. Finally, and as discussed below, the Bureau has learned that servicers generally do not obtain force-placed insurance on behalf of open-end lines of credit because such lines of credit are typically secured by a subordinate lien. Accordingly, the Bureau believes that exempting open-end lines of credit (home-equity plans) from the Bureau’s proposed force-placed insurance regulations is appropriate.

Although the Bureau believes that maintaining the current exclusion of open-end lines of credit (home-equity plans) covered by TILA and Regulation Z, from the servicer requirements of Regulation X is consistent with consumer protection purposes of RESPA, the Bureau requests comment regarding whether open-end lines of credit (home-equity plans) should be excluded from any of the provisions of proposed subpart C.

The Bureau proposes to interpret the application of the servicer obligations and prohibitions in section 6 of RESPA pursuant to its authority in section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations, and to grant such reasonable exemptions for classes of transactions as may be necessary to achieve the consumer protection purposes of RESPA. The Bureau further relies on its authority in section 6(j)(3) of RESPA to set forth requirements necessary to carry out section 6 of RESPA and in section 6(k)(1)(E) of RESPA to set forth obligations appropriate to carry out the consumer protection purposes of RESPA.

Section 1024.31 Definitions

Proposed § 1024.31 contains definitions for the following terms: consumer reporting agency, day, hazard insurance, loss mitigation application, loss mitigation options, master servicer, mortgage loan, qualified written request, reverse mortgage transaction, subservicer, service provider, transferee servicer, and transferor servicer.

Consumer reporting agency. The Bureau proposes to define the term “consumer reporting agency” to have the same meaning set forth in section 603 of the Fair Credit Reporting Act, 15 U.S.C. 1681a. This proposed definition is the same as the definition of the term “consumer reporting agency” set forth in the relevant provisions of RESPA that would be implemented by this proposed rulemaking. See RESPA section 6(e)(3).

Day. The Bureau proposes to define the term “day” for purposes of subpart C to mean calendar day. “Day” is not defined by RESPA. RESPA generally uses the terms “day” and “day (excluding legal public holidays, Saturdays, and Sundays).” Because Congress excluded legal public holidays, Saturdays, and Sundays in certain circumstances, the Bureau believes that Congress intended the term “day” by itself to include these days, and therefore, believes a definition of “day” as a calendar day reflects Congress’s intent.

The Dodd-Frank Act, however, amended section 6(g) and added section 6(k)(1)(D) to RESPA and, in these provisions, used the term “business day.” The term “business day” is not defined by RESPA and does not otherwise appear in section 6 of RESPA.[64] Rather, section 6 of RESPA uses the terms “day” and “day (excluding legal public holidays, Saturdays, and Sundays).” Accordingly, the Bureau proposes to interpret the term “business day” in sections 6(g) and 6(k)(1)(D) of RESPA to mean “day (excluding legal public holidays, Saturdays, and Sundays)” consistent with other usage of the term “day” within section 6 of RESPA and RESPA generally. The Bureau believes that a consistent interpretation of the definition of the term “day” will provide certainty that benefits borrowers by clarifying their rights under subpart C and benefits servicers by easing compliance burden associated with different understandings of the meaning of the term “day.”

The Bureau relies on its authority in section 6(j)(3) of RESPA to set forth requirements necessary to carry out section 6 of RESPA and in section 19(a) of RESPA to make such interpretations necessary to achieve the consumer protection purposes of RESPA.

Hazard insurance. The Bureau proposes to define “hazard insurance” to mean insurance on the property securing a mortgage loan that protects the property against losses caused by fire, wind, flood, earthquake, theft, falling objects, freezing, and other similar hazards for which the owner or assignee of such loan requires insurance. The Bureau believes that defining “hazard insurance” is necessary to implement the new Dodd-Frank requirements on force-placed insurance, set forth in new RESPA section 6(k)-(m). Accordingly, the Bureau proposes to define “hazard insurance” pursuant to its authority under section 6(j)(3) of RESPA, which authorizes the Bureau to establish any requirements necessary to carry out the purposes of RESPA. The Bureau additionally relies on its authority pursuant to sections 6(k)(1)(E) and 19(a) of RESPA. Section 6(k)(1)(E) of RESPA authorizes the Bureau to prescribe regulations that are appropriate to carry out the consumer protection purposes of RESPA, and section 19(a) of RESPA gives the Bureau the authority to prescribe such rules and regulations and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

As discussed below in the Bureau’s discussion of proposed § 1024.37(a)(1), Dodd-Frank Act section 1463 defines “force-placed insurance” for the purposes of RESPA section 6(k)-(m) as a type of hazard insurance. Although Dodd-Frank Act section 1463 does not define “hazard insurance,” it provides that a servicer of a federally related mortgage must not obtain “force-placed hazard insurance unless there is a reasonable basis to believe the borrower has failed to comply with the loan contract’s requirements to maintain property insurance.” In other words, force-placedhazard insurance” simply refers to “property insurance” the borrower has failed to maintain. Under the typical mortgage loan contract, property insurance is defined broadly to mean insurance that protects a mortgaged property against loss by “fire, hazards included within the term ‘extended coverage’, and any other hazards including, but not limited to, earthquakes and floods, for which Lender requires insurance.”[65] Accordingly, the proposed definition of “hazard insurance” in proposed § 1024.31 is equally broad.

The Bureau’s proposed definition of “hazard insurance” would include, but not be limited to, homeowner’s insurance. Virtually all borrowers are required to have homeowner’s insurance in place as a condition of obtaining a mortgage loan. Homeowner’s insurance policies typically insure mortgaged properties against loss caused by all hazards other than those specifically excluded by the policies. The Bureau understands that borrowers may be required by the terms of the mortgage loan contract to obtain separate insurance policies that protect the property against loss caused by hazards specifically excluded from coverage by homeowner’s insurance policies. The Bureau understands that losses caused by earthquake or flood hazards, and in many coastal areas, losses caused by wind, are typically excluded.[66] Insurance written to cover loss caused by specifically-excluded hazards is typically narrowly written to protect a mortgaged property against loss caused by a single, specifically-excluded hazard. A single hazard insurance policy, such as a hazard insurance policy to protect against flood loss, would also be included within the Bureau’s proposed definition of “hazard insurance.”[67] The Bureau recognizes that a servicer could be required to obtain force-placed hazard insurance to protect against flood loss by the Flood Disaster Protection Act of 1973 (FDPA). As discussed in greater detail below, the Bureau proposes to exempt hazard insurance to protect against flood loss obtained by a servicer as required by the FDPA from the definition of “force-placed insurance” in proposed § 1024.37. The Bureau, however, invites comment on whether a definition of “hazard insurance” that specifically excludes hazard insurance to protect against flood loss would be more appropriate than the Bureau’s proposed definition of “hazard insurance.”

Loss mitigation application. The Bureau proposes to define a “loss mitigation application” as an application from a borrower requesting evaluation for a loss mitigation option, as that term is defined in proposed § 1024.31, in accordance with procedures established by the servicer for the submission of such requests. The Bureau has set forth a separate definition of loss mitigation application to indicate that a loss mitigation application is separate from an “application” as that term is defined in current § 1024.2(b). Proposed comment 31(loss mitigation application)-1 clarifies that a loss mitigation application may be submitted by a representative of a borrower and that a servicer may undertake reasonable procedures to determine if a purported representative actually represents a borrower.

Loss mitigation options. As defined in proposed § 1024.31, loss mitigation options” are “alternatives available from the servicer to the borrower to avoid foreclosure.” Proposed comment 31(loss mitigation options)-1 clarifies that loss mitigation options include temporary and long-term relief, and options that allow borrowers to remain in or leave their homes, such as, without limitation, refinancing, trial or permanent modification, repayment of the amount owed over an extended period of time, forbearance of future payments, short-sale, deed-in-lieu of foreclosure, and loss mitigation programs sponsored by a State or the Federal Government. Proposed comment 31(loss mitigation options)-2 clarifies that loss mitigation options “available from the servicer” include options offered by the owner or assignee of the loan that are made available through the servicer.

The Bureau’s proposed definition of “loss mitigation option” is broad to account for the wide variety of options that may be available to a borrower. The Bureau believes that borrowers are best served when they are aware of all of their options. Thus, the proposed definition sets forth examples of loss mitigation options “without limitation.” The Bureau has not defined each of the examples of loss mitigation options to account for alternatives that may vary depending on the underlying loan documents, any servicer obligations to the lender or assignee of the loan, the borrower’s particular circumstances, and the flexibility the servicer has in arranging alternatives with the borrower.

The Bureau recognizes that not every loss mitigation option will be available to each individual borrower. Thus, the Bureau has limited the proposed definition of “loss mitigation options” to alternatives “available to the borrower.” The Bureau invites comment on the appropriateness of the proposed definition of “loss mitigation options,” and whether revision or further clarification is warranted.

Mortgage loan. As set forth in the discussion above on proposed § 1024.30, the term “mortgage loan” in proposed § 1024.31 would generally mean a federally related mortgage loan, as that term is defined in § 1024.2, subject to the exemptions in § 1024.5 and an exemption for open-end lines of credit (home equity plans). For the reasons discussed above on proposed § 1024.30, the term “mortgage loan” would not exclude subordinate-lien closed-end mortgage loans but would maintain the exclusion for open-end lines of credit (home-equity plans) covered by TILA and Regulation Z, including open-end lines of credit secured by a first lien, currently set forth in the definition of “mortgage servicing loan.” As a result, the elimination of the term “mortgage servicing loan,” the proposed definition of “mortgage loan” in proposed § 1024.31, and the proposed scope of subpart C in proposed § 1024.30 would create new servicer obligations with respect to subordinate-lien closed-end mortgage loans under Regulation X.

The Bureau proposes to interpret the application of the servicer obligations and prohibitions in section 6 of RESPA pursuant to its authority in section 19(a) to prescribe such rules and regulations, to make such interpretations, and to grants such reasonable exemptions for classes of transactions as may be necessary to achieve the consumer protection purposes of RESPA.

Reverse mortgage transaction. The Bureau proposes to add a definition for the term “reverse mortgage transaction.” A “reverse mortgage transaction” would have the same definition used in Regulation Z, which implements TILA, to maintain consistency with other Bureau definitions applicable to reverse mortgages. See 12 CFR 1026.33(a). The Bureau is proposing to include a definition for a “reverse mortgage transaction” in Regulation X to implement the requirements for mortgage servicing disclosure statements in proposed § 1024.33(a).

Proposed § 1024.33(a) sets forth the requirements applicable to disclosures to applicants about assignment, sale, or transfer of loan servicing that must be provided to applicants within three days (excluding legal public holidays, Saturdays, and Sundays). If the 2012 TILA-RESPA Proposal, which was published by the Bureau on July 9, 2012, is adopted as proposed with respect to implementing the disclosures required by sections 6(a) of RESPA, the only mortgage loans that would not receive the disclosure through the 2012 TILA-RESPA Proposal would be reverse mortgage transactions. Accordingly, the Bureau proposes to apply the current requirements of § 1024.21(b)-(c) only to reverse mortgage transactions, and proposed § 1024.33(a) would require the disclosure for reverse mortgage transactions.

Service provider. The Bureau proposes to add a definition for the term “service provider.” A service provider means any party retained by a servicer that interacts with a borrower or provides a service to a servicer for which a borrower may incur a fee. Proposed comment 31(service provider)-1 clarifies that service providers may include attorneys retained to represent a servicer or an owner or assignee of a mortgage loan in a foreclosure proceeding, as well as other professionals retained to provide appraisals or property inspections.

Definitions of master servicer, qualified written request, subservicer, transferee servicer, and transferor servicer. Currently, definitions of the terms “master servicer,” “subservicer,” “transferee servicer,” and “transferor servicer,” are set forth in § 1024.21(a). The proposed rule would include the definitions of these terms currently set forth in § 1024.21(a), without change, in proposed § 1024.31.

The definition of “qualified written request” would be revised to state that a qualified written request is a written correspondence from the borrower to the servicer that enables the servicer to identify the name and account of the borrower, and (1) states the reasons the borrower believes an error relating to the servicing of the loan has occurred, or (2) provides sufficient detail to the servicer regarding information relating to the servicing of the mortgage loan sought by the borrower. The definition further states that a qualified written request (i) must be in writing, (ii) must not be written on a payment coupon or other payment form from a servicer, and (iii) must be delivered less than one year after servicing of a mortgage loan is transferred or a mortgage loan is paid in full, whichever date is applicable. All of the elements of this definition are currently set forth in § 1024.21(e)(2) and the proposed definition of “qualified written request” in proposed § 1024.32 is not intended to alter the meaning of the term. Proposed comment 32(qualified written request)-1 clarifies that a qualified written request may request information without asserting an error with respect to the servicing of a mortgage loan (and vice versa).

A “qualified written request” is just one form that a written notice of error or information request may take. As set forth above, although RESPA sets forth a “qualified written request” mechanism through which a borrower can assert an error to a servicer or request information from a servicer, the Bureau’s proposal would integrate all error resolution and information request processes, including “qualified written requests.” A borrower may still submit a “qualified written request,” under the proposed rule, however a “qualified written request” would be subject to the same error resolution or information request requirements applicable to any other form of written notice of error or information request to a servicer. Further, a servicer’s liability for failure to respond to a qualified written request would be the same as for any other written notice of error or information request. Accordingly, there would be no greater benefit to a borrower, nor additional burden to a servicer, to respond to a “qualified written request” than would exist for a written notice of error or written information request pursuant to proposed §§ 1024.35-1024.36.

Section 1024.32 General Disclosure Requirements

Proposed § 1024.32 would set forth requirements applicable to disclosures required by subpart C. Specifically proposed § 1024.32(a)(1) would require that disclosures provided by servicers be clear and conspicuous, in writing, and in a form the consumer may keep. This standard is consistent with disclosure standards applicable in other regulations issued by the Bureau, including, for example, Regulation Z. See, e.g., 12 CFR 1026.17(a)(1). Proposed § 1024.32(a)(2) would permit disclosures to be provided in languages other than English, so long as disclosures are made available in English upon a borrower’s request. Further, proposed § 1024.32(b) would permit disclosures required under subpart C to be combined with disclosures required by applicable laws, including State laws, as well as disclosures required pursuant to the terms of an agreement between the servicer and a federal or state regulatory agency.

The Bureau believes this provision is appropriate to enable servicers to integrate disclosures required by subpart C with requirements imposed by other federal regulatory agencies, including through the National Mortgage Settlement, and with applicable State law. The Bureau proposes to exercise its authority under sections 6(j)(3) of RESPA to set forth requirements necessary to carry out section 6 of RESPA. The Bureau further relies on its authority in section 19(a) of RESPA to make such rules and regulations necessary to achieve the consumer protection purposes of RESPA.

Section 1024.33 Mortgage Servicing Transfers

Proposed § 1023.33 implements the mortgage servicing transfer disclosure requirements in section 6(a)-(d) of RESPA. The mortgage servicing transfer disclosure requirements are currently in § 1024.21(b)-(d) of Regulation X.

As a preliminary matter, the Bureau proposes to implement certain provisions currently set forth in § 1024.21(b)-(d) of Regulation X through commentary to proposed §1024.33 rather than as text of the regulation itself. This change is proposed to conform the organization of proposed § 1024.33 with other proposed provisions of subpart C.

Proposed § 1024.33(a) makes changes to the requirements currently set forth in § 1024.21(b)-(c). Proposed § 1024.33(a) sets forth the requirements applicable to disclosures to applicants about assignment, sale, or transfer of loan servicing that must be provided to applicants within three days (excluding legal public holidays, Saturdays, and Sundays) of application. If the 2012 TILA-RESPA Proposal, which was published by the Bureau on July 9, 2012, is adopted as proposed with respect to the implementing the disclosures required by section 6(a) of RESPA, the only mortgage loans that currently receive mortgage servicing transfer disclosures that would not receive the disclosure through the new integrated TILA/RESPA disclosure form would be closed-end reverse mortgage transactions.[68] Accordingly, the Bureau proposes to apply the current requirements of § 1024.21(b)-(c) only to reverse mortgage transactions, and proposed § 1024.33(a) reflects the limited scope of this provision.

Further, the Bureau proposes to implement through commentary a clarification relating to providing a servicing disclosure statement for co-applicants. Regulation X currently provides that if co-applicants provide the same address on an application, one copy of the servicing disclosure statement delivered to that address is sufficient, but if different addresses are shown by co-applicants, a copy of the servicing disclosure statement should be provided to each of the co-applicants. The Bureau believes this requirement is unduly burdensome, especially in light of the reduced scope of the servicing disclosure statement to closed-end reverse mortgage transactions. The Bureau proposes instead to require that if co-applicants provide different addresses, a servicing disclosure statement need only be provided to the primary applicant. This requirement is consistent with disclosure requirements applicable to other Bureau regulations. See 12 CFR 1002.9(f).

The Bureau does not believe this change will have a meaningful impact on consumers. The only situation that would be covered by this commentary is when multiple applicants for a closed-end reverse mortgage transaction indicate separate addresses on an application. Closed-end reverse mortgage transactions typically require funds to be dispersed in a single lump-sum payment and are typically only available for borrower-occupied residences. The servicer of a closed-end reverse mortgage transaction is not responsible for making on-going payments to reverse mortgage borrowers, and borrowers of closed-end reverse mortgage transactions do not have on-going mortgage loan payment obligations during the life of the loan. The Bureau believes that removing the requirement that borrowers with different addresses receive a separate mortgage servicing disclosure statement will remove a burden for reverse mortgage lenders and will not remove any meaningful protection for consumers.

Proposed § 1024.33(b)-(c) sets forth the requirements applicable to notices of transfer of mortgage loan servicing. The Bureau proposes to remove the requirement that the transferor and transferee servicers provide collect-call telephone numbers (but retain the requirement to provide toll-free telephone numbers). The Bureau believes the collect-call telephone number requirement is obsolete. The Bureau also proposes to remove the requirement currently set forth in § 1024.21(d)(3)(vii) for a statement of the borrower’s rights in connection with complaint resolution. The expanded error resolution and information request requirements set forth in proposed §§ 1024.35-1024.36 provide tools for borrowers to assert errors and request information in connection with a servicing transfer. A transferee servicer will either identify for borrowers a phone number and address that must be used for asserting errors or requesting information pursuant to the requirements of §§ 1024.35-1024.36 when servicing is transferred or will be required to respond to a notice of error or information request received at any office of the servicer.

Further, the Bureau proposes to conform the requirements that extend the time for the disclosure to treat institutions for which the NCUA has commenced proceedings to appoint a conservator or liquidating agent similarly to those for which the FDIC has commenced proceedings to appoint a conservator or receiver. The Bureau does not believe that the timing for providing a servicing transfer disclosure should differ for an insured credit union in the process of conservatorship of liquidation by the NCUA as opposed to an insured depository institution in the process of conservatorship or receivership by the FDIC.

The Bureau also proposes to conform proposed § 1024.33(c) with the requirements in proposed § 1024.39 by clarifying that a borrower’s account may be considered late for purposes of contacting the borrower for early intervention, but may not be considered late for any other purpose, including imposing late fees.

The Bureau proposes to add a requirement in proposed § 1024.33(c)(2) that, in connection with a servicing transfer, a transferor servicer shall promptly either transfer a payment it has received incorrectly to the transferee servicer for application to a borrower’s mortgage loan account or return the payment to the person that made the payment to the transferor servicer. The Bureau understands that many servicers already transfer misdirected payments to the appropriate servicer in connection with a servicing transfer. The Bureau requests comment regarding whether servicers should be required to transfer funds received for a borrower’s mortgage loan account to the appropriate servicers. The Bureau also solicits comment on whether the Bureau should implement requirements on the timing and method by which payments are returned to consumers.

The Bureau also proposes to add comment 33(b)(3)-2 to clarify how a notice of servicing transfer should be delivered to a borrower. Proposed comment 33(b)(3)-2 clarifies that a notice of transfer should be delivered to the mailing address listed by the borrower in the mortgage loan documents, unless the borrower has notified the servicer of a new address pursuant to the servicer’s requirements for receiving a notice of a change of address. This requirement is consistent with current law.[69] Proposed comment 33(b)(3)-2 further clarifies that when a mortgage loan has more than one borrower, the notice of transfer need only be given to one borrower, but must be given to the primary borrower when one is readily apparent.

The Bureau also proposes to amend the model form set forth in appendix MS-2 to reflect the proposed requirements in proposed § 1024.33(b)(4) and to streamline the contents of the form. The Bureau believes that borrowers are best served by reducing the content of the form so that borrowers receive a form that clearly sets forth the required content regarding the transfer of servicing and the address to which the next payment should be sent.

The Bureau proposes to exercise its authority under section 6(j)(3) of RESPA to set forth requirements necessary to carry out section 6 of RESPA. The Bureau further relies on its authority in section 19(a) of RESPA to make such rules and regulations necessary to achieve the consumer protection purposes of RESPA.

Section 1024.34 Timely Payments by Servicer

Proposed § 1024.34(a) would require a servicer to pay amounts owed for taxes, insurance premiums, and other charges from an escrow account in a timely manner, pursuant to the requirements of current § 1024.17(k), including the amendments proposed in this rule. Further, proposed § 1024.34(b) would implement the Dodd-Frank Act amendment to section 6(g) of RESPA by requiring a servicer to refund to a borrower any amounts remaining in an escrow account when a mortgage loan is paid in full. Section 6(g) of RESPA also permits a servicer to credit the escrow account balance to an escrow account for a new mortgage loan to the borrower with the same lender. “Lender” is defined in Regulation X to mean, generally, the secured creditor or creditors named in the debt obligation and document creating the lien. For loans originated by a mortgage broker that closes a federally related mortgage loan in its own name in a table funding transaction, the lender is the person to whom the obligation is initially assigned at or after settlement.

The Bureau believes the purpose of the provision allowing a servicer to credit funds in an escrow account to an escrow account for a new mortgage loan is intended to allow the amounts to be smoothly transferred without the need for the borrower to expend funds to fund a new escrow account and wait for a refund of a prior escrow account. Consistent with the Bureau’s proposal to clarify that subpart C may relate to secondary market transactions, which is implemented by the amendment to current § 1024.5(b)(7), the Bureau proposes to interpret the language “account with the same lender” consistent with secondary market practices. Accordingly, for purposes of section 6(g), the Bureau believes that a servicer should be able to credit an escrow account for a prior mortgage loan to a new mortgage loan where the lender for the new mortgage loan is (i) the same as the lender for the prior mortgage loan, (ii) the same as the current owner or assignee of the prior mortgage loan, or (iii) intends to use as its agent the same servicer that services the prior mortgage loan.

Accordingly, proposed § 1024.34(b) is intended to clarify three points. First, a servicer may credit an escrow account balance to an escrow account for a new mortgage loan if the lender for the new mortgage loan is the owner or assignee of the prior mortgage loan, even if that entity was not the lender for the prior mortgage loan named in the debt obligation and document creating the lien. Second, a servicer may credit an escrow account balance to an escrow account for a new mortgage loan if the servicer for the new mortgage loan is the same as the servicer for the prior mortgage loan. Third, the 20-day allowance for section 6(g) only applies if the servicer refunds the escrow account balance to the borrower. If the servicer credits the funds in the escrow account to an escrow account for a new mortgage loan, the credit should occur as of the settlement of the new mortgage loan.

Proposed comment 34(b)(2)-1 clarifies that a servicer is not required to credit an escrow account balance to a new mortgage loan in any circumstance in which it would be permitted to do so. A servicer may determine, in all circumstances, to return funds in an escrow account to the borrower pursuant to proposed § 1024.34(a).

The Bureau requests comments regarding whether the Bureau has identified proper instances where servicers may credit funds to a new escrow account and how such crediting should occur.

The Bureau is proposing these requirements to implement section 6(g) of RESPA pursuant to its authority in section 6(j)(3) of RESPA to set forth requirements necessary to carry out section 6 of RESPA. The Bureau further relies on its authority in section 19(a) of RESPA to make such rules and regulations, to make such interpretations, and to grant such reasonable exemptions for classes of transactions as may be necessary to achieve the consumer protection purposes of RESPA.

Section 1024.35 Error Resolution Procedures

Proposed § 1024.35 states the error resolution requirements that servicers would be required to follow for a notice of error from a borrower. In general, this proposal provides an opportunity to clarify servicer obligations to correct errors and respond to information requests to provide certainty to borrowers regarding their rights and to servicers regarding their obligations.

Currently, section 6(e) of RESPA requires servicers to respond to “qualified written requests.” Qualified written requests must be in writing and must relate to the “servicing” of the mortgage loan, as that term is defined in RESPA. Although the Bureau believes that qualified written requests may be used to either assert an error or to request information, there has been confusion among courts regarding whether both types of requests are necessary to set forth a qualified written request.[70]

The Dodd-Frank Act adds another layer of complexity. Section 1463(a) of the Dodd-Frank Act amends RESPA to add section 6(k)(1)(C), which states that a servicer shall not fail to take timely action to “correct errors relating to allocation of payments, final balances for purposes of paying off the loan, or avoiding foreclosure, or other standard servicer’s duties.” Further, section 1463(a) of the Dodd-Frank Act amends RESPA to add section 6(k)(1)(D) which states that a servicer shall not fail to provide information regarding the owner or assignee of a mortgage loan within ten business days of a borrower’s request. Neither section indicates whether the request to correct an error or the request for information must be in the form of a qualified written request.

In light of these disparate obligations, the Bureau believes that both borrowers and servicers would be better served if the Bureau were to clearly define a servicer’s obligation to correct errors or respond to information requests. To that end, the Bureau proposes §§ 1024.35 (Error resolution procedures) and 1024.36 (Requests for information) to establish separate but parallel obligations for servicers to respond to notices of error and information requests. Further, the Bureau’s intention is to establish servicer procedural requirements for error resolution and information requests that are consistent with the requirements applicable to a qualified written request under RESPA. Through this, the Bureau intends to make the restrictions and circumlocutions inherent in the language of the qualified written request provisions obsolete. Any valid qualified written request is a valid notice of error or information request. An invalid qualified written request may still be a valid notice of error or information request.[71]

Proposed § 1024.35 establishes the rules implementing the servicer prohibitions set forth in section 6(k)(1)(B), (C), and (E) of RESPA. These prohibitions make it unlawful for a servicer to charge a fee for responding to valid qualified written requests, to fail to take timely action to respond to a borrower’s requests to correct errors relating to allocation of payments, final balances for purposes of paying off the loan, avoiding foreclosure, or other standard servicer’s duties, and to fail to comply with any other obligation found by the Bureau to be appropriate to carry out the consumer protection purposes of RESPA.

35(a) Notice of Error

Proposed § 1024.35(a) states that a notice of error may be made orally or in writing and must include the name of the borrower, information that enables a servicer to identify the borrower’s mortgage loan account, and the error the borrower believes has occurred.

Section 6(k)(1)(C) of RESPA, as added by section 1463(a) of the Dodd-Frank Act, refers generically to servicers’ failures to respond to requests of borrowers to correct certain errors. However, unlike section 6(e) of RESPA, which contains the statutory language regarding qualified written requests, section 6(k)(1)(C) of RESPA does not specify that borrowers’ requests to correct errors must be submitted in any particular format.

Oral notices of error. The Bureau proposes to allow a borrower to make a notice of error either orally or in writing. The Bureau believes this approach is warranted because, based on its discussions with consumers, consumer advocates, servicers, and industry trade associations, it appears that the vast majority of borrower complaints are generated orally instead of in writing. A requirement that a notice of error must be in writing generally serves as a barrier that unduly restricts the ability of a borrower to have errors resolved. The Bureau believes it is important for consumers to receive the benefit of required correction or investigation from servicers of orally asserted errors.

Servicers and servicer representatives stated that allowing a notice of error to be provided orally would create new burdens for servicers regarding tracking the notices of error and monitoring that a borrower receives written acknowledgements and responses. In addition, small entity representatives with whom the Small Business Review Panel conducted outreach reiterated these burdens on behalf of small servicers. The Small Business Review Panel recommended that the CFPB consider requiring small servicers to comply with the error resolution procedures only when borrowers provided error notices in writing.[72] The Small Business Review Panel also recommended that the Bureau consider adopting a more flexible process for tracking errors and demonstrating compliance that could be used by small servicers.[73]

The Bureau recognizes the burdens on servicers to ensure compliance with this proposed rule for notices of error received orally. In order to implement this section, servicers may adopt systems to ensure that a borrower’s notice of error is tracked and receives the required acknowledgement and response. In light of the concerns express in the Small Business Review Panel Report, the Bureau has declined to specify any particular requirement that a servicer must undertake to track notices of error. Further, ensuring that borrower assertions of errors are investigated, responded to, and, as appropriate, corrected, is an objective of the reasonable information management policies and procedures set forth below in proposed § 1024.38. The Bureau has created that proposal to provide flexibility to servicers, including small servicers, to design policies and procedures that are appropriate to the particular circumstances of each servicer. The Bureau believes this flexibility reflects that Small Business Review Panel recommendation that the Bureau create flexibility in the manner in which small servicers comply with the error resolution requirements.

The Bureau further believes that elements of the proposed rule assist in mitigating burden for all servicers. These elements include, for example, a limitation on the types of errors that servicers would be required to resolve to a finite list, as well as a proposal to allow servicers to designate a specific telephone number for receiving oral notices of error.

The Bureau believes the error resolution (as well as the information management) requirement provides appropriate flexibility for small servicers to implement policies and procedures to comply with this objective that make sense for their organizations and responds to the findings and recommendations in the Small Business Review Panel Report.[74]

The Bureau solicits comments regarding whether servicers should be required to apply the error resolution requirements to notices of error received orally. The Bureau further solicits comments regarding whether small servicers (as that term is defined in the 2012 TILA Servicing Proposal) should be exempt from a requirement to apply the error resolution procedures in proposed § 1024.35 to notices of error received orally.

Qualified written requests. Proposed § 1024.35(a) would require a servicer to treat notices of error, whether oral or written, the same way it treats a qualified written request that asserts an error. The Bureau’s intention is to propose servicer obligations applicable to a notice of error that are exactly the same as obligations applicable to a qualified written request. For example, as set forth below, a servicer may not charge a fee for responding to a notice of error, a servicer must acknowledge receipt of a notice of error within five days (excluding legal public holidays, Saturdays, and Sundays) and must respond to the notice of error within 30 days (excluding legal public holidays, Saturdays, and Sundays). Moreover, a servicer’s potential liability for failure to respond to a notice of error is the same as the potential liability for failure to respond to a qualified written request. Thus, under proposed § 1024.35(a), there is no reason for a borrower to send a qualified written request as opposed to an oral or written notice of error nor is there a reason for a servicer to reject a qualified written request because it does not meet the requirements for a qualified written request in section 6(e) of RESPA when such request constitutes a valid notice of error. Even if a borrower does not comply with all the requirements of a qualified written request, including, for instance, by asserting an error orally, or by asserting an error that is defined in § 1024.35(b) but does not constitute “servicing” as defined in RESPA, the obligations for the servicer to respond to the borrower are the same and the liability for the servicer’s failure to respond to the borrower is the same.

Proposed comment 35(a)-1 would clarify that a notice of error submitted by a person acting on behalf of the borrower is considered a notice of error pursuant to proposed § 1024.35(b). This clarification is substantially the same as the current requirement existing under section 6(e)(1)(A) of RESPA with respect to a qualified written request.[75] Servicers may undertake reasonable procedures to determine if a person that claims to be an agent of a borrower has authority from the borrower to act on the borrower’s behalf.

Proposed comment 35(a)-2 would clarify that the substance of the notice of error would determine the servicer’s obligation to comply with the error resolution requirements. No particular language (such as “qualified written request” or “notice of error”) is necessary to set forth a notice of error.

Legal authority. The Bureau relies on its authority in section 6(k)(1)(C) and 6(k)(1)(E) of RESPA to implement the notice of error requirements. Further, to the extent the requirements are also applicable to qualified written requests, the Bureau relies on its authority in sections 6(e) and 6(k)(1)(B) of RESPA. The Bureau further has authority pursuant to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA and has authority under section 19(a) of RESPA to prescribe such rules and regulations and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

35(b) Scope of error resolution

Proposed § 1024.35(b) provides a finite list of errors to which the error resolution provisions would relate (covered errors). A finite list of covered errors provides certainty to both borrowers and servicers regarding the types of errors that are subject to the error resolution process. Further, a finite list of covered errors is intended to ensure that servicer resources can be dedicated to responding to errors that are capable of correction, to the benefit of a borrower. For example, the Bureau considered whether to define as a covered error a servicer’s failure to accurately and timely provide a disclosure to a borrower as required by applicable law. The Bureau determined that such a failure was not appropriate as a covered error because the information request provisions provide the borrower the ability to obtain the underlying information. Further, the Bureau believes that a servicer’s action to attempt to correct the failure, such as by sending the untimely disclosure after the deadline, would not actually correct the timeliness error and would not be helpful or useful to borrowers. In that circumstance, the error resolution request would create burden and impose costs on servicers without offering concomitant benefit for borrowers.

The Bureau further considered the impact of the proposed error resolution requirements if the types of covered errors were not limited. The proposal expands servicer’s obligations to respond to error notices and information requests from borrowers. Borrowers may initiate an error resolution process orally, not just in writing. Further, in general, the proposal reduces the time period within which a servicer must respond to a borrower (from 60 days to 30 days), consistent with the Dodd-Frank Act amendments to section 6(e)(2) of RESPA. For certain types of covered errors, the time period to respond to the borrower is even more limited. The Bureau believes that the added costs and burden created by having an open-ended definition of an error could substantially increase the costs to servicers with limited additional benefit to consumers. The Bureau further believes that requiring servicers to respond to potentially any assertion of an error could, as a practical matter, lead to servicers using disproportionate resources to respond to every asserted error. That practice may cause servicers to expend fewer resources to address errors that may be far more significant to borrowers.

The Small Business Review Panel received feedback from SERs regarding whether the error resolution procedures should include a catch-all provision to the enumerated list of errors. In general, the SERs commented favorably on the Bureau’s proposal to include a finite list of errors. The SERs indicated that if the Bureau were to consider adding a catch-all provision, then the Bureau should request comment on whether to not include such a provision. Accordingly, for the reasons above, proposed § 1024.35(b) provides a finite list of covered errors to which the error resolution provisions would relate. The Bureau requests comment regarding whether (1) the finite list of covered errors should include any other specific types of errors that are not addressed in the list and (2) whether the list of covered errors should not be finite and should include a catch-all provision for other types of errors not set forth in the rule.

Covered errors. Paragraph 35(b) defines the types of covered errors for which the error resolution procedures apply. As discussed below, the proposed rule sets forth a finite list of nine types of covered errors based on the statutory language prohibiting servicers from failing to take timely action to respond to a borrower’s request to correct errors “relating to allocation of payments, final balances for purposes of paying off the loan, or avoiding foreclosure, or other standard servicer’s duties.” See RESPA section 6(k)(1)(C).

Proposed comment 35(b)-1 clarifies that a servicer would not be required to comply with the requirements of proposed § 1024.35(d)-(e) if a notice relates to something other than one of the types of covered errors in proposed § 1024.35(b). The proposed comment provides examples of categories of excluded errors that would not be considered covered errors pursuant to proposed § 1024.35(b). These include matters relating to the origination or underwriting of a mortgage loan, matters relating to a subsequent sale or securitization of a mortgage loan, and matters relating to a sale, assignment, or transfer of the servicing of a mortgage loan other than the transfer of information for a borrower’s mortgage loan account. The Bureau believes that a mortgage servicer is generally not in a position to investigate or resolve borrower complaints regarding potential errors that may have occurred during an origination, underwriting, sale, or securitization process. The Bureau requests comment regarding whether any errors that may fall within the examples of excluded errors should instead be included as covered errors.

Paragraph 35(b)(1)

Proposed paragraph 35(b)(1) includes as a covered error a servicer’s failure to accept a payment that conforms to the servicer’s written requirements for the borrower to follow in making payments.

Section 6(k)(1)(C) of RESPA prohibits a servicer from failing to take timely action to respond to a borrower’s request to correct errors relating to the allocation of payments for a borrower’s account. Paragraph 35(b)(1) is an example of one type of error that fits within the broad statutory prohibition. A failure to accept a proper payment will necessarily have implications for the correct application of borrower payments. Further, proper acceptance of payments is, by definition, “servicing,” as that term is defined in section 6(i)(3) of RESPA and already subject to the qualified written request procedure set forth in section 6(e) of RESPA and current § 1024.21(e) of Regulation X.

The Bureau further believes that proper acceptance of borrower payments is a standard servicer duty as set forth in section 6(k)(1)(C) of RESPA. Section 6(k)(1)(C) of RESPA states that a servicer shall not fail to take timely action to respond to a borrower’s request to correct errors relating three specific categories as well as those relating to “other standard servicer duties.” The Bureau believes that standard servicer duties are those typically undertaken by servicers in the ordinary course of business. Such duties include not only the obligations that are specifically identified in section 6(k)(1)(C), but also those duties that are defined as “servicing” by RESPA, as well as duties customarily undertaken by servicers to investors and consumers in connection with the servicing of a mortgage loan. These include duties that may not be contemplated within the definition of “servicing” in RESPA, such as duties to comply with investor agreements and servicing program guides, to advance payments to investors, to process and pursue mortgage insurance claims, to monitor coverage for insurance (e.g. hazard insurance), to monitor tax delinquencies, to respond to borrowers regarding mortgage loan problems, to report data on loan performance to investors and guarantors, and to work with investors and borrowers on options to mitigate losses for defaulted mortgage loans. Throughout this proposal, the Bureau refers to these standard servicer duties, in the parlance of section 6(k)(1)(C) of RESPA, as typical servicer duties to reflect the plain language connotation that such duties are those typically performed by servicers in the normal course of business.

As set forth above, the Bureau is proposing § 1024.35(b)(1) to implement section 6(k)(1)(C) of RESPA. The Bureau also relies on its authority in section 6(j)(3) of RESPA to set forth requirements necessary to carry out section 6 of RESPA and in section 6(k)(1)(E) of RESPA to set forth obligations appropriate to carry out the consumer protection purposes of RESPA. Further, the Bureau relies on its authority in section 19(a) of RESPA to make such rules and regulations and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

Paragraph 35(b)(2)

Proposed paragraph 35(b)(2) would include as a covered error a servicer’s failure to apply an accepted payment to the amounts due for principal, interest, escrow, or other items pursuant to the terms of the mortgage loan and applicable law.

Section 6(k)(1)(C) of RESPA prohibits a servicer from failing to take timely action to respond to a borrower’s request to correct errors relating to the allocation of payments for a borrower’s account. Paragraph 35(b)(2) implements the prohibition in section 6(k)(1)(C) of RESPA. The Bureau also relies on its authority in section 6(j)(3) of RESPA to set forth requirements necessary to carry out section 6 of RESPA and in section 6(k)(1)(E) of RESPA to set forth obligations appropriate to carry out the consumer protection purposes of RESPA. Further, the Bureau relies on its authority in section 19(a) of RESPA to make such rules and regulations and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

Paragraph 35(b)(3)

Proposed paragraph 35(b)(3) includes as an error a servicer’s failure to credit a payment to a borrower’s mortgage loan account as of the date of receipt, where such failure has resulted in a charge to the consumer or the furnishing of negative information to a consumer reporting agency.

Proper crediting of payments to consumers is required by section 129F of TILA, which was added by section 1464 of the Dodd-Frank Act and would be implemented by proposed § 1026.36(c) in the 2012 TILA Servicing Proposal. For a mortgage loan secured by a principal dwelling, TILA section 129F mandates that servicers shall not fail to credit a payment to a consumer’s loan account as of the date of receipt, except when a delay in crediting does not result in any charge to the consumer, or in the furnishing of negative information to a consumer reporting agency. See 15 U.S.C. 1639f. TILA section 129F provides a specific exception for payments that do not conform to a servicer’s written requirements, but nonetheless are accepted by the servicer, in which case the servicer shall credit the payment as of five days after receipt. See 15 U.S.C. 1639(f)(b). Servicers of mortgage loans covered by TILA section 129F have a duty to comply with that provision.

Section 6(k)(1)(C) of RESPA prohibits a servicer from failing to take timely action to respond to a borrower’s request to correct errors relating to the allocation of payments for a borrower’s account. Paragraph 35(b)(3) implements this prohibition. A failure to credit a payment will necessarily have implications for the correct application of borrower payments. A servicer’s failure to properly credit a payment will cause the servicer to report to a borrower improper information regarding the amounts owed by the borrower and may cause a servicer to misapply other payments received by the borrower. Further, a servicer’s failure to properly credit borrower payments may generate improper late fees and other charges.

The Bureau also observes that proper crediting of borrower payments is, by definition, “servicing,” as that term is defined in section 6(i)(3) of RESPA and, therefore, is subject to the qualified written request procedure set forth in section 6(e) of RESPA and current § 1024.21(e) of Regulation X.

For these reasons, the Bureau proposes to implement section 6(k)(1)(C) of RESPA by prohibiting servicers from failing to correct errors relating to proper crediting of borrower payments. The Bureau also relies on its authority in section 6(j)(3) of RESPA to set forth requirements necessary to carry out section 6 of RESPA and in section 6(k)(1)(E) of RESPA to set forth obligations appropriate to carry out the consumer protection purposes of RESPA. Further, the Bureau relies on its authority in section 19(a) of RESPA to make such rules and regulations and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

Pargraph 35(b)(4)

Proposed paragraph 35(b)(4) includes as an error a servicer’s failure to make disbursements from an escrow account for taxes, insurance premiums (including flood insurance), or other charges, including charges that the borrower and servicer have voluntarily agreed that the servicer should collect and pay, as required by current § 1024.17(k), or to refund an escrow account balance in a timely manner as required by proposed § 1024.34(b).

In the normal course of business, servicers typically engage in collecting payments from borrowers to fund escrow accounts and disburse payments from escrow accounts to pay borrower obligations for taxes, insurance premiums, and other charges. Servicers typically undertake this obligation on behalf of investors because a borrower’s maintenance of an escrow account reduces risk for investors that unpaid taxes may generate tax liens that are higher in priority than a lender’s mortgage lien and that unpaid insurance may cause lapses in insurance coverage that present risk for investors in the event of a loss. Servicers are required to make disbursements from escrow accounts in a timely manner pursuant to section 6(g) of RESPA and are required to account for the funds credited to an escrow account pursuant to section 10 of RESPA. The Bureau further observes that proper disbursement of escrow funds is, by definition, “servicing,” as that term is defined in section 6(i)(3) of RESPA and, therefore, is currently subject to the qualified written request procedure set forth in section 6(e) of RESPA and current § 1024.21(e) of Regulation X.

Proposed paragraph 35(b)(4) would require a servicer to correct errors relating to a typical servicer duty and implements section 6(k)(1)(C) of RESPA. The Bureau also relies on its authority in section 6(j)(3) of RESPA to set forth requirements necessary to carry out section 6 of RESPA and in section 6(k)(1)(E) of RESPA to set forth obligations appropriate to carry out the consumer protection purposes of RESPA. Further, the Bureau relies on its authority in section 19(a) of RESPA to make such rules and regulations and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

Paragraph 35(b)(5)

Proposed paragraph 35(b)(5) includes as an error a servicer’s imposition of a fee or charge that the servicer lacks a reasonable basis to impose upon the borrower.

Servicers should not impose fees on borrowers that are not bona fide – that is, fees that a servicer does not have a reasonable basis to impose upon a borrower. Examples of non-bona fide charges include such common sense errors as late fees for payments that were not late, default property management fees for borrowers that are not in a delinquency status that would justify the charge, charges for services from service providers that were not actually rendered with respect to a borrower’s mortgage loan account, and charges for force-placed insurance where a servicer lacks a reasonable basis to impose the charge on the borrower as set forth in proposed § 1024.37.

Improper fees harm both mortgage loan borrowers and the investors that are mortgage servicers’ principals. Improper and uncorrected fees harm borrowers by taking funds that may otherwise be used to keep a mortgage loan current. Further, improper fees reduce recovery values available to investors from foreclosures or loss mitigation activities.

Servicers that operate in good faith in the normal course of business refrain from imposing charges on borrowers that the servicer does not have a reasonable basis to impose and correct errors relating to those fees when they arise. The Bureau believes that it is a typical servicer duty, both to the borrower and to the servicer’s principal, to ensure that the servicer has a reasonable basis to impose a charge on a borrower.

Proposed paragraph 35(b)(5) would require a servicer to correct errors relating to a typical servicer duty and implements section 6(k)(1)(C) of RESPA. The Bureau also relies on its authority in section 6(j)(3) of RESPA to set forth requirements necessary to carry out section 6 of RESPA and in section 6(k)(1)(E) of RESPA to set forth obligations appropriate to carry out the consumer protection purposes of RESPA. Further, the Bureau relies on its authority in section 19(a) of RESPA to make such rules and regulations and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

Pargraph 35(b)(6)

Proposed paragraph 35(b)(6) includes as an error a servicer’s failure to provide an accurate payoff balance to a borrower upon request pursuant to 12 CFR 1026.36(c)(1)(iii).

Borrowers require accurate payoff statements to manage their mortgage loan obligations. A payoff statement is necessary anytime a borrower repays a mortgage loan and servicers routinely provide payoff statements for borrowers to refinance or pay in full mortgage loan obligations. However, consumer advocates have indicated servicers have failed, or refused, to provide payoff statements to certain borrowers or have required borrowers to make a payment on a mortgage loan as a condition of fulfilling the borrower’s request for a payoff statement.[76] Any such conduct has the perverse effect of impeding a borrower’s ability to pay a mortgage loan obligation in full.

Servicers already have an obligation to comply with the timing requirements of section 129G of TILA with respect to any mortgage loan that constitutes a “home loan” as used in section 129G of TILA. The Bureau believes that, in order to implement the prohibition set forth in section 6(k)(1)(C) of RESPA regarding a servicer’s failure to correct errors relating to final balances for purposes of paying off the loan, a servicer should be required to comply with the requirements within a reasonable time frame. Because servicers will be required to comply with the timeframes set forth in 12 CFR 1026.36(c)(1)(iii) with respect to certain mortgage loans they service, the Bureau does not believe that requiring servicers to correct errors for mortgage loans that may not constitute home loans as that term is used in section 129G of TILA within error resolution timeframes imposes additional burden on servicers.

Proposed paragraph 35(b)(6) implements section 6(k)(1)(C) of RESPA with respect to a servicer’s obligation to correct errors relating to final balance for purposes of paying of a mortgage loan. The Bureau also relies on its authority in section 6(j)(3) of RESPA to set forth requirements necessary to carry out section 6 of RESPA and in section 6(k)(1)(E) of RESPA to set forth obligations appropriate to carry out the consumer protection purposes of RESPA. Further, the Bureau relies on its authority in section 19(a) of RESPA to make such rules and regulations and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

Paragraph 35(b)(7)

Proposed paragraph 35(b)(7) includes as an error a servicer’s failure to provide accurate information to a borrower with respect to loss mitigation options available to the borrower and foreclosure timelines that may be applicable to the borrower’s mortgage loan account, as required by proposed §§ 1024.39-1024.40.

In order to pursue loss mitigation options that may benefit both the borrower and the owner or assignee of the borrower’s mortgage loan, a borrower requires accurate information about the loss mitigation options available to the borrower, the requirements for receiving an evaluation for any such loss mitigation option, and the applicable timelines relating to both the evaluation of the borrower for the loss mitigation options and any potential foreclosure process. Although the Bureau does not generally believe a failure to provide a required disclosure to a borrower should constitute an error requiring compliance with the error resolution procedures in proposed § 1024.35, borrowers may benefit from asserting errors with respect to a servicer’s failure to provide information regarding loss mitigation options that may be available to the borrower but for which the servicer has not provided information to the borrower. By correcting this error and providing the borrower with accurate information regarding loss mitigation options that may be available to the borrower, a servicer can help a borrower receive an evaluation for the loss mitigation option pursuant to proposed § 1024.41 and may be able to reach agreement with the borrower on a loss mitigation option that is mutually beneficial to the borrower and the owner or assignee of the borrower’s mortgage loan.

Proposed paragraph 35(b)(7) implements section 6(k)(1)(C) of the Dodd-Frank Act. Specifically, proposed paragraph 35(b)(7) implements a servicer’s obligation to correct errors relating to avoiding foreclosure. Further, the Bureau believes that the National Mortgage Settlement, servicer participation in Home Affordable Modification Program (HAMP) sponsored by the U.S. Department of the Treasury (Treasury) and HUD, and service participation in other loss mitigation programs required by Fannie Mae and Freddie Mac demonstrate that servicers typically provide borrowers with information regarding loss mitigation options and foreclosure and that providing such information to borrowers is a typical servicer duty.

The Bureau also relies on its authority in section 6(j)(3) of RESPA to set forth requirements necessary to carry out section 6 of RESPA and in section 6(k)(1)(E) of RESPA to set forth obligations appropriate to carry out the consumer protection purposes of RESPA. Further, the Bureau relies on its authority in section 19(a) of RESPA to make such rules and regulations and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

Paragraph 35(b)(8)

Proposed paragraph 35(b)(8) would include as an error a servicer’s failure to accurately and timely transfer information relating to a borrower’s mortgage loan account to a transferee servicer.

In the normal course of business, servicers typically anticipate that they will be required to transfer servicing for some mortgage loans they service. Owners or assignees of mortgage loans typically have rights to transfer servicing for a mortgage loan pursuant to the requirements set forth in mortgage servicing agreements. Servicers are required to develop capacity for transferring information to transferee servicers in order to comply with such obligations to owners or assignees of mortgage loans. Further, servicers are required to develop capacity to onboard data for transferred mortgage loans onto the servicer’s servicing platform.

Borrowers may be harmed, however, if information that is transferred to transferee servicers is not accurate or current. In certain circumstances, such failure may cause errors to occur relating to allocating payments, calculating final balances for purposes of paying off a mortgage loan, or avoiding foreclosure.

Pursuant to proposed § 1024.38(a), servicers would be required to have policies and procedures to achieve the objectives set forth in proposed § 1024.38(b), which includes an objective of facilitating servicing transfers. An objective of the servicer’s policies and procedures would be to timely transfer all information and documents 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 requirements of this subpart and the terms of the transferee servicer’s contractual obligations to the owner or assignee of the mortgage loan.

The Bureau believes that by defining a servicer’s failure to accurately and timely transfer information relating to a borrower’s mortgage loan account to a transferee servicer, a borrower will have a remedy to ensure that a transferor servicer will update the information transferred to provide information to a transferee servicer that accurately reflects the borrower’s account consistent with the obligations applicable to a servicer’s information management policies and procedures.

Proposed paragraph 35(b)(8) implements a servicer’s obligation to take timely action to correct errors relating to typical servicer duties pursuant to section 6(k)(1)(C) of RESPA. The Bureau also relies on its authority in section 6(j)(3) of RESPA to set forth requirements necessary to carry out section 6 of RESPA and in section 6(k)(1)(E) of RESPA to set forth obligations appropriate to carry out the consumer protection purposes of RESPA. Further, the Bureau relies on its authority in section 19(a) of RESPA to make such rules and regulations and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

Paragraph 35(b)(9)

Proposed paragraph 35(b)(9) would include as an error a servicer’s failure to suspend a scheduled foreclosure sale in the circumstances described in proposed § 1024.41(g). Pursuant to proposed § 1024.41(g), a servicer that offers loss mitigation options to borrowers in the ordinary course of business would be prohibited from proceeding with a foreclosure sale when a borrower has submitted a complete application for a loss mitigation option unless the servicer denies the borrower’s application for a loss mitigation option (including any appeal thereof), the borrower rejects the servicer’s offer of a loss mitigation option, or the borrower fails to perform an agreement on a loss mitigation option. For further information, see discussion of proposed section § 1024.41 below.

The Bureau continues to consider whether to include as an error a servicer’s evaluation of a borrower for a loss mitigation option. The Bureau observes that the manner in which a borrower is evaluated for a loss mitigation option is complex and includes factors that are subjective.[77] Further, the Bureau believes that the appeal process provided in proposed § 1024.41(h) provides an appropriate procedural means for borrowers to address issues relating to a servicer’s evaluation of a borrower for a loan modification program.

The Bureau requests comment regarding whether to include as an error a servicer’s failure to correctly evaluate a borrower for a loss mitigation option. The Bureau further requests comment regarding standards for determining if a borrower has been correctly evaluated for a loss mitigation option, including whether a servicer should be required to comply with the servicer’s own standards, standards promulgated by major investors and guarantors, and standards promulgated in connection with Federal- or State-sponsored loss mitigation options.

Proposed paragraph 35(b)(9) implements section 6(k)(1)(C) of the Dodd-Frank Act. Specifically, proposed paragraph 35(b)(9) implements a servicer’s obligation to correct errors relating to avoiding foreclosure. The Bureau also relies on its authority in section 6(j)(3) of RESPA to set forth requirements necessary to carry out section 6 of RESPA and in section 6(k)(1)(E) of RESPA to set forth obligations appropriate to carry out the consumer protection purposes of RESPA. Further, the Bureau relies on its authority in section 19(a) of RESPA to make such rules and regulations and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

35(c) Contact information for borrowers to assert errors

Proposed § 1024.35(c) permits a servicer to establish a telephone number and address that a borrower must use to assert an error. If a servicer chooses to establish a separate telephone number and address for receiving errors, a servicer must provide the borrower a written notice that states that the borrower may assert an error at the telephone number and address established by the servicer for that purpose. Proposed comment 35(c)-2 would clarify that the written notice to the borrower may be set forth in another written notice provided to the borrower, such as a notice of transfer, periodic statement, or coupon book.

The purpose of establishing a telephone number and address that a borrower must use to assert an error is to allow servicers to direct oral and written errors to appropriate personnel that have been trained to ensure that the servicer responds appropriately. At larger servicers with other consumer financial service affiliates, many personnel simply do not typically deal with mortgage servicing-related issues. For instance, at a major bank servicer, a borrower may incorrectly believe that local bank branch staff will be required to comply with error resolution requirements for mortgage servicing errors. If a servicer establishes a telephone number and address that a borrower must use, a servicer would not be required to comply with the error resolution requirements for errors that may be received by the servicer through a different method. Proposed comment 35(c)-1 clarifies, however, that if a servicer has not designated a telephone number and address that a borrower must use to assert an error, then a servicer will be required to comply with the error resolution requirements for any notice of error received by any office of the servicer.

The Bureau believes it is reasonable, especially in light of the expanded burden of requiring compliance with error resolution for oral notices of error, to allow servicers to manage the intake of notices of error to designated telephone numbers and addresses. Further, allowing a servicer to designate a specific telephone number and address is consistent with current requirements of Regulation X with respect to qualified written requests. Current § 1024.21(e)(1) permits a servicer to designate a “separate and exclusive office and address for the receipt and handling of qualified written requests.” Moreover, the Bureau believes that identifying a specific telephone number and address for receiving errors and information requests will benefit consumers as well. By providing a specific telephone number and address, servicers will identify to consumers the office capable of addressing errors identified by consumers. The Bureau is proposing in the concurrent 2012 TILA Servicing Proposal to require that any telephone number or address identified by a servicer must appear on the periodic statement or other payment form supplied by the servicer. See 2012 TILA Servicing Proposal at proposed § 1026.41(d)(6).

Multiple offices. Proposed § 1024.35(c) would require a servicer to use the same telephone number and address it designates for receiving notices of error for receiving information requests pursuant to proposed § 1024.36(b), and vice versa. The Bureau believes that if servicers designate separate telephone numbers and addresses for notices of error and information requests, borrower attempts to provide notices of error and information requests to servicers could be impeded. Further, proposed comment 35(c)-3 clarifies that any telephone numbers or address designated by a servicer for any borrower may be used by any other borrower to submit a notice of error. This clarifies that a servicer may not determine that a notice of error is invalid if it was received at any telephone number or address designated by the servicer for receipt of notices of error just because it was not received by the specific phone number or address identified to a specific borrower. Proposed comment 35(c)-5 clarifies that a servicer may use automated systems, such as an interactive voice response system, to manage the intake of borrower calls. Prompts for asserting errors must be clear and provide the borrower the option to connect to a live representative.

Internet intake of notices of error. Proposed comment 35(c)-4 would clarify that a servicer is not required to establish a process for receiving notices of error through email, website, or other online methods. If a servicer establishes a process for receiving notices of error through online methods, comment 35(c)-4 is intended to clarify that the process established is the only online intake process that a borrower can use to assert an error. Thus, a servicer would not be required to provide a written notice to a borrower in order to gain the benefit of the online process being considered the exclusive online process for receiving notices of error. Proposed comment 35(c)-4 further clarifies that a servicer’s decision to accept notices of error through an online intake method shall not have any impact on a servicer’s obligation to comply with the requirements of § 1024.35 with respect to notices of error received in writing or orally.

Legal authority. The Bureau relies on its authority in section 6(k)(1)(C) and 6(k)(1)(E) of RESPA to implement the notice of error requirements. Further, to the extent the requirements are also applicable to qualified written requests, the Bureau relies on its authority in section 6(e) and 6(k)(1)(B) of RESPA. The Bureau further has authority pursuant to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA and has authority under section 19(a) of RESPA to prescribe such rules and regulations and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

35(d) Acknowledgment of receipt

Proposed § 1024.35(d) would require a servicer to provide a borrower a written acknowledgement of a notice of error within five days (excluding legal public holidays, Saturdays, and Sundays) of receiving a notice of error. Proposed § 1024.35(d) would implement section 1463(c) of the Dodd-Frank Act which amended the current acknowledgement deadline of 20 days for qualified written requests to five days. Proposed § 1024.35(d) further applies the same timeline applicable to a qualified written request to any notice of error.

The Bureau relies on its authority in section 6(k)(1)(C) and 6(k)(1)(E) of RESPA to implement the notice of error requirements. Further, to the extent the requirements are also applicable to qualified written requests, the Bureau relies on its authority in sections 6(e) and 6(k)(1)(B) of RESPA. The Bureau further has authority pursuant to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA and has authority under section 19(a) of RESPA to prescribe such rules and regulations and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

35(e) Response to Notice of Error

Proposed § 1024.35(e) would set forth requirements on servicers for responding to notices of error.

35(e)(1) Investigation and Response Requirements

Proposed paragraph 35(e)(1) would require a servicer to correct an error within 30 days unless the servicer concludes after a reasonable investigation that no error occurred.

Notices to borrower. If a servicer corrects the error identified by the borrower, it must provide the borrower with written notification that indicates that the error was corrected, the effective date of the correction, and a telephone number the borrower can use to get further information.

If a servicer determines that no error occurred, it is required to have conducted a reasonable investigation and to provide the borrower a notice that the servicer has determined that no error has occurred, the reason(s) the servicer believes that no error has occurred, and contact information for servicer personnel that can provide further assistance. A servicer would also be required to inform the borrower in the notice that the borrower may request documents relied on by the servicer in reaching its determination and how the borrower can request such documents.

Borrower right to request documents. Proposed § 1024.35(e)(4) would require that if a servicer determines no error occurred, the servicer is required to include a statement in its response that the borrower can request documents relied upon by the servicer. A servicer must provide the documents within 15 days of the servicer’s receipt of the borrower’s request. The Bureau believes that this requirement strikes an appropriate balance that does not subject the servicer to undue paperwork burden while assuring that the borrower can access the underlying documentation if necessary. Further, in certain cases, a borrower may determine that the servicer’s response resolves an issue and that reviewing documents would be unnecessary and requiring a servicer to provide documents only upon a borrower’s request limits burden. Proposed comment 35(e)(4)-1 clarifies that a servicer need only provide documents actually relied upon by the servicer to determine that no error occurred, not all documents reviewed by a servicer. Further, the proposed comment states that where a servicer relies upon entries in its collection systems, a servicer should provide print-outs reflecting the information entered into the system.

A servicer would be required to provide information regarding the right to receive documents only if a servicer determines that no error has occurred. Proposed paragraph 35(e)(1)(i) would not require a servicer who determines that an error has occurred, and corrects the error, to provide documents to a borrower that were the basis for that determination or to provide a statement in the notice to the borrower about requesting documents. The Bureau believes that the purpose of the proposed rule is to facilitate the prompt correction of errors and borrowers likely do not need documents and information when errors are corrected per the borrower’s request. The Bureau does not believe it is necessary to require servicers to provide documents to a borrower if a servicer corrects an asserted error.

Multiple responses. Proposed comment 35(e)(1)(i)-1 clarifies that if a notice of error asserts multiple errors, a servicer may respond to those errors through a single or separate written responses that address the alleged errors. The Bureau believes that the purpose of the rule, which is to require prompt resolution of errors, is facilitated by allowing a servicer to respond to multiple errors set forth in a single notice of error through separate communications. For example, a servicer could correct one error, and send a notice regarding the correction of that error, while an investigation is in process regarding another error that is the subject of the same notice of error. Further, a servicer’s obligation to provide a borrower with documents relied upon by the servicer only relates to any asserted errors that the servicer determines are not errors. A servicer is not required to provide documents with respect to any other errors in a notice of error that the servicer corrects.

Different or additional error. Proposed paragraph 35(e)(1)(ii) would provide that if a servicer, during the course of a reasonable investigation, determines that a different or additional error has occurred, a servicer is required to correct that different or additional error and provide a borrower a written notice about the error, the corrective action taken, the effective date of the corrective action, and contact information for further assistance. Because the servicer would be correcting an error, a servicer would not be required to provide documents to the borrower regarding the error identified for the reasons discussed above.

Legal authority. The Bureau relies on its authority in section 6(k)(1)(C) and 6(k)(1)(E) of RESPA to implement the notice of error requirements. Further, to the extent the requirements are also applicable to qualified written requests, the Bureau relies on its authority in sections 6(e) and 6(k)(1)(B) of RESPA. The Bureau further has authority pursuant to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA and has authority under section 19(a) of RESPA to prescribe such rules and regulations and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

35(e)(2) Requesting documentation from borrower

Proposed § 1024.35(e)(2) states that a servicer could request that a borrower provide documentation if needed to investigate an error but may not require the borrower to provide such documentation as a condition of investigating the asserted error. Nor may the servicer determine that no error occurred because the borrower failed to provide the requested documentation. The purpose of this provision is to allow servicers to obtain information that may assist in resolving notices of error. However, the Bureau believes that the process for obtaining that information should not prejudice the ability of the borrower to seek the resolution of the error.

35(e)(3) Time Limits

Paragraph 35(e)(3)(i)

Proposed paragraph 35(e)(3)(i) would require a servicer to respond to a notice of error not later than 30 days (excluding legal public holidays, Saturdays, and Sundays) after the borrower notifies the servicer of the asserted error, with two exceptions: errors relating to accurate payoff balances and errors relating to failure to suspend a scheduled foreclosure sale where a borrower has submitted a complete application for a loss mitigation option.

Shortened time limit to correct errors relating to payoff balances. Pursuant to proposed paragraph 35(e)(3)(i)(A), if a borrower submits a notice of error asserting that a servicer has failed to provide an accurate payoff balance as set forth in proposed paragraph 35(b)(6), a servicer must respond to the notice of error not later than five days (excluding legal public holidays, Saturdays, and Sundays) after the borrower notifies the borrower of the alleged error. The Bureau believes that a 30-day deadline for responding to this type of notice of error does not provide adequate protection for a borrower because the servicer’s failure to correct the error will prevent a borrower from pursuing options that protect the borrower, including, for example, a refinancing transaction. Based on discussions with servicers, the Bureau believes that a five day timeframe is reasonable for a servicer to correct an error with respect to calculating a payoff balance.

The Bureau relies on its authority in sections 6(e) and 6(k)(1)(B) of RESPA with respect to qualified written requests, as well as its authority in sections 6(k)(1)(C) and 6(k)(1)(E) with respect to error resolution requirements to mandate a shorter time period for responding to notices that assert errors with respect to accurate payoff balances. The Bureau further has authority pursuant to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA and has authority under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations, and to make such exemptions for classes of transactions as may be necessary to achieve the consumer protection purposes of RESPA.

The Bureau requests comment regarding whether five days (excluding legal public holidays, Saturdays, and Sundays) is an appropriate timeframe for a servicer to correct an error with respect to a payoff balance.

Shortened time limit to correct certain errors relating to foreclosure. Pursuant to proposed paragraph 35(e)(3)(i)(B), if a borrower submits a notice of error asserting that a servicer has failed to suspend a scheduled foreclosure sale, a servicer would be required to investigate and respond to the notice of error by the earlier of 30 days (excluding legal public holidays, Saturdays, and Sundays) or the date of a scheduled foreclosure sale. The Bureau believes that a timeframe that allowed a servicer to investigate and respond to the notice of error after the date of a scheduled foreclosure sale would cause irreparable harm to a borrower. Proposed comment 35(e)(3)(i)(B)-1 would clarify that a servicer could maintain a 30-day timeframe to respond to the notice of error if it cancels or postpones the scheduled foreclosure sale and a subsequent sale is not scheduled before the expiration of the 30-day deadline.

Extensions of time limits. Proposed § 1024.35(e)(3)(ii) would permit a servicer to extend the time period for investigating and responding to a notice of error by 15 days (excluding legal public holidays, Saturdays, and Sundays) if, before the end of the 30-day period set forth in proposed § 1024.35(e)(3)(i)(C), the servicer notifies the borrower of the extension and the reasons for the delay in responding. Proposed comment 35(e)(3)(ii)-1 clarifies that if a notice of error asserts multiple errors, a servicer may extend the time period for investigating and responding to those errors for which extensions are permissible pursuant to proposed § 1024.35(e)(3)(ii). Section 1463(c)(3) of the Dodd-Frank Act amended section 6(e) of RESPA to provide a 15-day extension of time and proposed § 1024.35(e)(3)(ii) would implement this provision.

The Bureau proposes not to apply the extension allowance of proposed § 1024.35(e)(3)(ii) to investigate and respond to errors relating to payoff statement or to a servicer’s failure to suspend a scheduled foreclosure sale. For the reasons set forth above, the Bureau does not believe that allowing a servicer to extend the time period for investigating and responding to these types of errors will provide timely resolution of errors.

Legal authority. The Bureau relies on its authority in sections 6(e) and 6(k)(1)(B) of RESPA with respect to qualified written requests, as well as its authority in sections 6(k)(1)(C) and 6(k)(1)(E) with respect to error resolution requirements to mandate a shorter time period for responding to notices that assert errors for a servicer’s failure to suspend a scheduled foreclosure sale. The Bureau further has authority pursuant to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA and has authority under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations, and to make such exemptions for classes of transactions as may be necessary to achieve the consumer protection purposes of RESPA.

35(f) Alternative Compliance

Proposed § 1024.35(f) states that a servicer is not required to comply with paragraphs (d) and (e) of proposed § 1024.35 in two situations. First, a servicer that corrects the error identified by the borrower within five days of receiving the notice of error, and notifies the borrower of the correction in writing, is not required to comply with paragraphs (d) and (e). Because such errors are corrected, an investigation would not be required. Second, a servicer that receives a notice of error for failure to suspend a scheduled foreclosure sale, pursuant to paragraph 35(b)(9), seven days or less before a scheduled foreclosure, is not required to comply with paragraphs (d) and (e), if, within the time period set forth in paragraph (e)(3)(i)(B), the servicer responds to the borrower, orally or in writing, and corrects the error or states the reason the servicer has determined that no error has occurred.

The Bureau proposes these alternative compliance methods for two reasons. First, feedback from servicers, and especially small servicers, indicates that the majority of errors are addressed promptly after a borrower’s communication and generally within five days. SERs communicated to the Small Business Review Panel that small servicers have a high-touch customer service model, which made it very easy for borrowers to report errors or make inquiries, and to receive real-time responses.[78] The Bureau believes the alternative compliance method is appropriate to reduce unnecessary burden of an acknowledgement on servicers, and especially small servicers, that are able to correct borrower errors within five days consistent with the Small Business Review Panel recommendation that the Bureau consider requirements that provide flexibility to small servicers.

Second, the Bureau believes that reduced requirements are appropriate when servicers receive a notice of error that may impact a scheduled foreclosure scale less than five days before a scheduled foreclosure sale. Only notices of errors identified in proposed paragraph 35(b)(9) implicate this concern. Numerous entities, including other federal agencies and SERs during the Small Business Review Panel outreach, expressed concern about borrower use of error resolution requirements as a procedural tool to impede proper foreclosures and promote litigation.[79] The Bureau believes that reducing the procedural requirements for servicers to follow when a notice asserting an error identified in paragraph (b)(9) is submitted less than 5 days before a scheduled foreclosure sale mitigates this concern while maintaining protection for consumers. The Bureau believes that this alternative compliance method is also consistent with the Small Business Review Panel recommendation that the Bureau provide flexibility to small servicers and responds to SERs’ concern that error resolution procedures may be used in unwarranted litigation.[80] Further, the Bureau understands the timing to be consistent with account reviews required by the GSEs to document that all required actions have occurred permitting the servicer to proceed with a scheduled foreclosure sale.[81]

The Bureau relies on its authority in section 6(k)(1)(C) and 6(k)(1)(E) of RESPA to implement the notice of error requirements. Further, to the extent the requirements are also applicable to qualified written requests, the Bureau relies on its authority in sections 6(e) and 6(k)(1)(B) of RESPA. The Bureau further has authority pursuant to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA and has authority under section 19(a) of RESPA to prescribe such rules and regulations and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

The Bureau requests comment regarding whether the Bureau should consider other alternative compliance methods or should adjust the requirements of the proposed alternative compliance methods.

35(g) Requirements not applicable

Proposed § 1024.35(g) would state that the error resolution requirements of proposed § 1024.35 would not apply to certain types of notices of error if the servicer complies with proposed § 1024.35(g)(2). The types of notice of error to which the requirements would not apply would be set forth in § 1024.35(g)(1). The Bureau solicits comments regarding whether additional types of notices of error should be identified in proposed § 1024.35(g)(1).

35(g)(1) In general

Proposed paragraph 35(g)(1) would state that a servicer is not required to comply with the requirements of § 1024.35(d) and (e) if the servicer reasonably makes certain determinations specified in paragraphs (g)(1)(i), (ii), or (iii). A servicer may be liable to the borrower for its unreasonable determination and resulting failure to comply with proposed § 1024.35(d) and (e).

Paragraph 35(g)(1)(i)

Proposed paragraph 35(g)(1)(i) would state that a servicer is not required to comply with the notice of error requirements in proposed § 1024.35(d) and (e) with respect to a notice of error where the asserted error is substantially the same as an error previously asserted by or on behalf of the borrower for which the servicer has previously complied with its obligation to respond to the notice of error pursuant to § 1024.35(e)(1), unless the borrower provides new and material information. New and material information means information that was not reviewed by the servicer in connection with investigating the prior notice of error and is reasonably likely to change a servicer’s determination with respect to the existence of an error. The Bureau believes that both elements of this requirement are important. First, the information must not have been reviewed by the servicer. If the information was reviewed by the servicer, then such information is not new and requiring a servicer to re-open an investigation will create unwarranted burden and delay. Second, even if the information is new, it must be material to the asserted error. A servicer may not have reviewed information because the information may not have been material to the error asserted by the borrower.

The purpose of this proposed paragraph is to ensure that a servicer is not required to expend resources conducting duplicative investigations of notices of error unless there is a reasonable basis for re-opening a prior investigation because of new and material information.

Proposed comment 35(g)(1)(i)-1 clarifies that a dispute regarding a servicer’s interpretation of information previously reviewed, including the materiality of that information, does not itself constitute new and material information and, consequently, does not require a servicer to re-open a prior, resolved investigation of a notice of error.

Paragraph 35(g)(1)(ii)

Proposed paragraph 35(g)(1)(ii) provides that a servicer is not required to comply with the notice of error requirements in proposed § 1024.35(d) and (e) with respect to a notice of error that is overbroad or unduly burdensome. The rule defines “overbroad” and “unduly burdensome” for this purpose. A notice of error is overbroad if a servicer cannot reasonably determine from the notice of error the specific covered error that a borrower asserts has occurred on a borrower’s account. A notice of error is unduly burdensome if a diligent servicer could not respond to the notice of error without either exceeding the maximum timeframe permitted by paragraph (e)(3)(ii) or incurring costs (or dedicating resources) that would be unreasonably in light of the circumstances.

Consumers, consumer advocates, servicers, and servicing industry representatives have indicated to the Bureau that the current qualified written request process is not typically utilized by consumers to resolve errors. Rather, the process is more frequently used strategically to obtain documents and a servicer’s responses to claims as a preliminary form of civil litigation discovery. During the Small Business Review Panel outreach, SERs expressed that typically qualified written requests received from borrowers were vague forms found online or forms used by advocates as a form of pre-litigation discovery.[82] Servicers and servicing industry representatives indicated that these types of qualified written requests are unreasonable and unduly burdensome. SERs in the Small Business Review Panel outreach requested that the Bureau consider an exemption for abusive requests, or requests made with the intent to harass the servicer.[83]

The Bureau is likewise concerned that, in light of the expanded requirements for servicers to respond to notices of error, including adding new categories of covered errors that do not specifically relate to “servicing” as defined in RESPA as well as errors asserted orally, a requirement for servicers to respond to notices of error that are overbroad or unduly burdensome may harm consumer and frustrate servicers’ ability to comply with the new error resolution requirements. The effect of the proposed rule is to expand a servicer’s obligation to undertake the obligations similar to those currently applicable to qualified written requests to a broader universe of potential notices of error, including notices of error made orally to a servicer. Requiring servicers to respond to overbroad or unduly burdensome notices of error from some borrowers may cause servicers to expend fewer resources to address other errors that may be more clearly stated and more clearly require servicer attention. Further, the Bureau does not believe that the error resolution procedures are the appropriate forum for borrowers to prosecute wide-ranging complaints against mortgage servicers that are more appropriate for resolution through litigation.

Proposed paragraph 35(g)(1)(ii) provides that if a servicer determines that a notice of error is overbroad or unduly burdensome, the servicer is required to notify the borrower, pursuant to proposed § 1024.35(g)(2), that it is not required to comply with the requirements of proposed § 1024.35(d) and (e). Further, the notice must state that the notice of error was overbroad or unduly burdensome, but does not need to state the specific basis for such a determination. Proposed comment 35(g)(1)(ii)-1 sets forth characteristics that may indicate if a notice of error is overbroad or unduly burdensome. If a servicer can identify a proper assertion of a covered error in a notice of error that is otherwise overbroad or unduly burdensome, a servicer would be required to respond to the covered error submissions it can identify.

The Bureau requests comment regarding whether a servicer should not be required to undertake the error resolution procedures in proposed § 1024.35(d) and (e) for notices of error that are overbroad or unduly burdensome. The Bureau further requests comment on the appropriate definition of overbroad or unduly burdensome notices of error and on the appropriate indicia for identifying notices of error that should be subject to the exclusion.

Paragraph 35(g)(1)(iii)

Proposed paragraph 35(g)(1)(iii) provides that a servicer is not required to comply with the notice of error requirements in proposed § 1024.35(d) and (e) for an untimely notice of error – that is, a notice of error received by a servicer more than one year after either servicing for the mortgage loan that is the subject of the notice of error was transferred by that servicer to a transferee servicer or the mortgage loan amount was paid in full, whichever date is applicable. The purpose of this proposed paragraph is to set a specific and clear time that a servicer may be responsible for correcting errors for a mortgage loan.

The purpose of the proposed paragraph is to achieve the same goal that currently exists in Regulation X with respect to qualified written requests. Specifically, current § 1024.21(e)(2)(ii) states that “a written request does not constitute a qualified written request if it is delivered to a servicer more than one year after either the date of transfer of servicing or the date that the mortgage servicing loan amount was paid in full, whichever date is applicable.”

35(g)(3) Notice to Borrower

Proposed § 1024.35(g)(3) states that if a servicer determines it is not required to comply with the notice of error requirements in proposed § 1024.35(d) and (e) with respect to a notice of error, the servicer must provide a notice to the borrower informing the borrower of the servicer’s determination. The notice must be sent not later than five days (excluding legal public holidays, Saturdays, and Sundays) after the servicer’s determination and must set forth the basis upon which the servicer has made the determination and the applicable provision of proposed § 1024.35(g)(1).

The Bureau believes that borrowers should be notified that a servicer does not intend to take any action on the asserted error. The Bureau also believes borrowers should know the basis for the servicer’s determination. By providing borrowers with notice of the basis for the servicer’s determination, a borrower will know the servicer’s basis and will have the opportunity to bring a legal action to challenge that determination where appropriate. The Bureau requests comment regarding the requirement that servicers provide a notice to the borrower and the appropriate content for the notice.

Legal authority. The Bureau relies on its authority in section 6(k)(1)(C) and 6(k)(1)(E) of RESPA to implement the notice of error requirements in proposed § 1024.35(g). Further, to the extent the requirements are also applicable to qualified written requests, the Bureau relies on its authority in sections 6(e) and 6(k)(1)(B) of RESPA. The Bureau further has authority pursuant to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA and has authority under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations, and to grant such reasonable exemptions for classes of transactions as may be necessary to achieve the consumer protection purposes of RESPA.

35(h) Payment requirements prohibited

Proposed § 1024.35(h) would prohibit a servicer from charging a fee, or requiring a borrower to make any payment that may be owed on a borrower’s account, as a condition of investigating and responding to a notice of error. The Bureau is implementing this provision for three reasons. First, section 1463(a) of the Dodd-Frank Act added section 6(k)(1)(B) to RESPA, which prohibits a servicer from charging fees for responding to valid qualified written requests. Proposed § 1024.35(h) would implement that provision with respect to qualified written requests. Second, the Bureau believes that a servicer’s practice of charging for responding to a notice of error impedes borrowers from pursuing valid notices of error. Third, the Bureau understands that, in some instances, servicer personnel have demanded that borrowers make payments before the servicer will correct errors or provide information requested by a borrower. The Bureau believes that a servicer should be required to correct errors notwithstanding the payment status of a borrower’s account.

The Bureau relies on its authority in section 6(k)(1)(B), (C), and (E) of RESPA to implement the notice of error requirements. The Bureau further has authority pursuant to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA and has authority under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations, and to grant such reasonable exemptions for classes of transactions as may be necessary to achieve the consumer protection purposes of RESPA.

35(i) Effect on servicer remedies

Adverse Information. Proposed § 1024.35(i)(1) states that a servicer may not furnish adverse information regarding any payment that is the subject of a notice of error to any consumer reporting agency for 60 days after receipt of a notice of error. RESPA section 6(e) sets forth this prohibition on servicers with respect to a qualified written request that asserts an error. Proposed § 1024.35(i)(1) would implement Section 6(e) of RESPA with respect to qualified written requests.

The Bureau proposes to maintain the 60-day timeframe set forth in section 6(e)(3) of RESPA. Even though a notice of error may be resolved by no later than 45 days pursuant to proposed § 1024.35(e)(3)(ii), the Bureau believes that the 60-day timeframe is appropriate in the event that there are follow-up inquiries or additional information provided to the borrower.

The Bureau relies on its authority in section 6(e)(3), 6(k)(1)(C), and 6(k)(1)(E) of RESPA to implement the adverse information requirements for qualified written requests and notices of error. The Bureau further has authority pursuant to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA and has authority under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations, and to grant such reasonable exemptions for classes of transactions as may be necessary to achieve the consumer protection purposes of RESPA.

Ability to pursue foreclosure. Proposed § 1024.35(i)(2) states that a servicer’s obligation to comply with the requirements of proposed § 1024.35 would not prohibit a lender or servicer from pursuing any remedies, including proceeding with a foreclosure sale, permitted by the applicable mortgage loan instrument, with one exception. The purpose of this provision is to clarify that, in general, a notice of error could not be used to require a servicer to suspend a scheduled foreclosure sale. The purpose of requiring prompt correction of errors is not furthered by allowing a notice of error to impede a lender’s or servicer’s ability to pursue remedies permitted by the applicable mortgage loan instrument.

The Bureau is proposing one exception because it believes it is inappropriate for a servicer to proceed with a scheduled foreclosure sale in the circumstances described in proposed § 1024.41(g). Failure to suspend a potential foreclosure sale during such periods has caused borrower harm, as discussed below.

Defining as an error a servicer’s failure to suspend a scheduled foreclosure sale in the circumstances described in proposed § 1024.41(g) is consistent with section 17 of RESPA. The Bureau observes that the requirements of proposed § 1024.41 would not impede a lender’s or servicer’s ability to pursue a foreclosure action, or maintain a scheduled foreclosure sale. Rather, the requirements in proposed § 1024.41 establish procedures that servicers must follow for reviewing loss mitigation applications. Servicers are capable of complying with the requirements prior to a scheduled foreclosure sale. Nothing in this proposed requirement affects the validity or enforceability of the mortgage loan or lien. Further, a servicer has the opportunity to retain its remedies when a borrower submits a completed application for a loss mitigation option. A servicer may establish a deadline by which a borrower must submit a completed application for a loss mitigation option, and, so long as the servicer fulfills its duty to evaluate the borrower for a loss mitigation option before the date of a scheduled foreclosure sale, a servicer may comply with the requirements of § 1024.35 without suspending the scheduled foreclosure sale.

Legal authority. The Bureau relies on its authority in section 6(k)(1)(C), and 6(k)(1)(E) of RESPA to implement the error resolution requirements. To the extent the error resolution requirements relate to qualified written requests, the Bureau also relies on its authority in sections 6(e) and 6(k)(1)(B) of RESPA. The Bureau further has authority pursuant to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA and has authority under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations, and to grant such reasonable exemptions for classes of transactions as may be necessary to achieve the consumer protection purposes of RESPA.

Section 1024.36 Requests for Information

Proposed § 1024.36 contains requirements servicers would be required to follow for information requests received from borrowers. Proposed § 1024.36 implements the servicer prohibitions set forth in section 6(k)(1)(B) and 6(k)(1)(D) of RESPA, as well as other obligations the Bureau believes to be appropriate to carry out the consumer protection purposes of RESPA pursuant to section 6(k)(1)(E) of RESPA.

36(a) Information requests

Proposed § 1024.36(a) would require a servicer to comply with the requirements of proposed § 1024.36 for an information request from a borrower that includes the borrowers name, enables the servicer to identify the borrower’s mortgage loan account, and states the information the borrower is requesting for the borrower’s mortgage loan account.

The Bureau proposes to allow a borrower to make an information request either orally or in writing. Based on the Bureau’s discussions with consumers, consumer advocates, servicers, and industry trade associations, it appears that the vast majority of borrowers orally request information from servicers. As is the case for notices of error, a requirement that an information request must be in writing generally serves as a barrier that unduly restricts the ability of borrower to have errors resolved. Further, as with notices of error, servicers and servicer representatives stated that allowing an information request to be provided orally would create new burdens for servicers. The Bureau recognizes the burdens on servicers to ensure compliance with this proposed rule and incorporates the discussion above with respect to oral notices of error. Responding to oral information requests will impose costs on servicers to ensure that such requests receive responses, but the Bureau believes it is important for consumers to receive the benefit of a requirement that servicers provide information requested by the borrowers.

The Bureau further believes that elements of the proposed rule would assist in mitigating servicer burden. These elements include, for example, a proposal to allow servicers to designate a specific telephone number for receiving oral information requests and an alternative compliance provision that allows a servicer to provide information orally if the information is provided within five days of the borrower’s request. The Bureau has learned from discussions with servicers, including the SERs in the Small Business Review Panel outreach, that most information requests are responded to by servicers either on the same telephone call with the borrower or within an hour of a borrower’s communication.[84] The Bureau believes that allowing servicers to respond to information requests orally significantly reduces burden associated with the proposed information request requirements on servicers. Further, the Bureau believes that this requirement provides flexibility for small servicers consistent with the recommendations of the Small Business Review Panel and mitigates concerns by the SERs regarding compliance costs.[85]

The Bureau requests comment regarding whether servicers should be required to apply the information request requirements to requests received orally from borrowers. The Bureau further requests comment regarding whether small servicers (as that term is defined in the 2012 TILA Servicing Proposal) should be exempt from the information request requirements for information requests received orally.

Qualified written requests. Similar to the proposed requirements for notices of error, proposed § 1024.36(a) would require a servicer to treat information requests, whether oral or written, the same way it treats a qualified written request that requests information. The Bureau’s intention is to propose servicer obligations applicable to an information request that are exactly the same as obligations applicable to a qualified written request. Thus, under proposed § 1024.36(a), there is no reason for a borrower to send a qualified written request nor is there a reason for a servicer to reject a qualified written request because it does not meet the requirements for a qualified written request in section 6(e) of RESPA when the request would otherwise constitute an information request pursuant to proposed § 1024.36.

Borrower’s representative. Proposed comment 36(a)-1 would clarify that an information request submitted by a person acting as an agent of the borrower is treated the same as a request by the borrower. This requirement is substantially similar as the current requirement existing under section 6(e)(1)(A) of RESPA for a qualified written request. Specifically, section 6(e)(1)(A) of RESPA states that a qualified written request may be provided by a “borrower (or an agent of the borrower).” See RESPA section 6(e)(1)(A).

Information subject to information request procedures. In general, any information requested by a borrower is subject to the information request requirements in proposed § 1024.36 unless such information is subject to proposed § 1024.36(f). Proposed comment 36(a)-2 would clarify that if a borrower requests information regarding the owner or assignee of a mortgage loan, a servicer identifies the owner or assignee of the mortgage loan by identifying the entity that holds the legal right to receive payments from a mortgage loan. Proposed comments 36(a)-2.i and 36(a)-2.ii provide examples of which party is the owner or assignee of a mortgage loan for different forms of mortgage loan ownership. These include situations when a mortgage loan is held in portfolio by an affiliate of a servicer, when a mortgage loan is owned by a trust in connection with a private label securitization transaction, and when a mortgage loan is held in connection with a GSE or Ginnie Mae guaranteed securitization transaction. The Bureau believes that it would not provide additional consumer protection to impose an obligation on a servicer to identify entities that may have an interest in a borrower’s mortgage loan other than the owner or assignee of the mortgage loan.

Servicers generally have not expressed concerns to the Bureau regarding the obligation to provide borrowers with the type of information subject to the information request requirements. Specifically, in the Small Business Review Panel outreach, SERs indicated that they felt fairly comfortable with the types of information that would be subject to the requirements, indicating that this information was generally in the borrower’s mortgage loan file.[86]

The SERs did express concern regarding the obligation to provide information regarding the owner or assignee of a mortgage loan. The SERs stated that servicers may not have contact information for owners or assignees of mortgage loans, that such owners or assignees are not prepared to handle calls from borrowers, and that a typical servicer duty is to handle customer complaints so that owners or assignees of mortgage loans do not have to handle that responsibility.[87] Certain owners, assignees, and guarantors of mortgage loans, including other federal agencies, have expressed similar concerns to the Bureau.

The Bureau understands the concerns asserted by servicers, owners, assignees, guarantors, and other federal agencies that requiring servicers to provide this information to borrowers may confuse borrowers and lead to attempts to communicate with owners or assignees that are unprepared or unwilling to engage in such communications. The requirement that servicers identify to the borrower the owner or assignee of a mortgage loan was added as section 6(k)(1)(D) of RESPA by the Dodd-Frank Act and is not a discretionary exercise of the Bureau’s authority. The Dodd-Frank Act clearly requires that information regarding the owner or assignee of a mortgage loan must be provided to borrowers. The Bureau proposes comment 36(a)-2 to implement this requirement.

Legal authority. The Bureau relies on its authority in sections 6(k)(1)(E) of RESPA to implement the information request requirements. To the extent the information request requirements relate to qualified written requests, the Bureau also relies on its authority in sections 6(e) and 6(k)(1)(B) of RESPA. The Bureau further has authority pursuant to section 6(k)(1)(D) of RESPA to implement information request requirements for requests for the identity of the owner or assignee of a mortgage loan. The Bureau further relies on section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA and has authority under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations, and to grant such reasonable exemptions for classes of transactions as may be necessary to achieve the consumer protection purposes of RESPA.

36(b) Contact information for borrowers to request information

Proposed § 1024.36(b) permits a servicer to establish a telephone number and address that a borrower must use to request information. If a servicer chooses to establish a separate telephone number and address for receiving information requests, a servicer must provide the borrower a written notice that states that the borrower should only assert an error at the telephone number and address established by the servicer for that purpose. Proposed comment 36(b)-2 would clarify that the written notice to the borrower may be set forth in another written notice provided to the borrower, such as a notice of transfer, periodic statement, or coupon book.

As discussed above for proposed § 1024.35(c), the purpose of establishing a telephone number and address that a borrower must use to request information is to allow servicers to direct oral and written errors to appropriate personnel that have been trained to ensure that the servicer responds appropriately. Proposed comment 36(b)-1 clarifies that if a servicer has not designated a telephone number and address that a borrower must use to request information then a servicer will be required to comply with the information request requirements for any information request received by any office of the servicer.

The Bureau believes it is reasonable, especially in light of the expanded burden of requiring compliance with error resolution and information requests, to allow servicers to manage the intake of information requests to designated telephone numbers and addresses. Further, allowing a servicer to designate a specific telephone number and address is consistent with current requirements of Regulation X with respect to qualified written requests. Current § 1024.21(e)(1) permits a servicer to designate a “separate and exclusive office and address for the receipt and handling of qualified written requests.” Moreover, the Bureau believes that identifying a specific telephone number and address for receiving errors and information requests will benefit consumers as well. By providing a specific telephone number and address, servicers will identify to consumers the office capable of responding to information requests. The Bureau is proposing in the concurrent 2012 TILA Servicing Proposal to require that any telephone number or address identified by a servicer must appear on the periodic statement or other payment form supplied by the servicer. See 2012 TILA Servicing Proposal at proposed § 1026.41(d)(6).

Internet intake of information requests. Proposed comment 36(b)-4 would clarify that a servicer is not required to establish a process for receiving information requests through email, website, or other online methods. In the event a servicer establishes a process for receiving information requests through online methods, comment 36(b)-4 is intended to clarify that the process established is the only online intake process that a borrower can use to make an information request. Thus, a servicer would not be required to provide a written notice to a borrower in order to gain the benefit of the online process being considered the exclusive online process for receiving information requests.

Multiple offices. Proposed § 1024.36(b), similar to proposed § 1024.35(c) for notices of error, would require a servicer to use the same telephone number and address it designates for receiving notices of error for receiving information requests pursuant to proposed § 1024.36(b), and vice versa. Further, proposed comment 36(b)-3 clarifies that any telephone numbers or address designated by a servicer for any borrower may be used by any other borrower to submit an information request. This clarifies that a servicer may not determine that an information request is invalid if it was received at any telephone number or address designated by the servicer for receipt of information requests just because it was not received by the specific phone number or address identified to a specific borrower. Proposed comment 36(b)-5 clarifies that a servicer may use automated systems, such as an interactive voice response system, to manage the intake of borrower calls. Prompts for requesting information must be clear and provide the borrower the option to connect to a live representative.

Legal authority. The Bureau relies on its authority in section 6(k)(1)(E) of RESPA to implement the proposed information request requirements. To the extent the information request requirements relate to qualified written requests, the Bureau also relies on its authority in section 6(e) and 6(k)(1)(B) of RESPA. The Bureau further has authority pursuant to section 6(k)(1)(D) of RESPA to implement information request requirements for requests for the identity of the owner or assignee of a mortgage loan. The Bureau further relies on section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA and has authority under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations, and to grant such reasonable exemptions for classes of transactions as may be necessary to achieve the consumer protection purposes of RESPA.

36(c) Acknowledgment of receipt

Proposed § 1024.36(c) would require a servicer to provide a borrower a written acknowledgement of an information request within five days (excluding legal public holidays, Saturdays, and Sundays) of receiving an information request. Proposed § 1024.36(c) would implement section 1463(c) of the Dodd-Frank Act which amended the current acknowledgement deadline of 20 days for qualified written requests to five days. Proposed § 1024.36(c) would further apply the same timeline applicable to a qualified written request to any information request.

The Bureau relies on its authority in section 6(k)(1)(E) of RESPA to implement the information request requirements. Further, to the extent the requirements are also applicable to qualified written requests, the Bureau relies on its authority in section 6(e), including the amendment to section 6(e) of RESPA set forth in section 1463(c) of the Dodd-Frank Act, as well as section 6(k)(1)(B) of RESPA. The Bureau further has authority pursuant to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA and has authority under section 19(a) of RESPA to prescribe such rules and regulations and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

36(d) Response to information request

Proposed § 1024.36(d) would set forth requirements on servicers for responding to information requests.

36(d)(1) Investigation and response requirements

Proposed paragraph 36(d)(1) would require a servicer to respond to an information request within 30 days by either (i) providing the borrower with the requested information and contact information for further assistance, or (ii) conducting a reasonable search for the requested information and providing the borrower with a written notification that states that the servicer has determined that the requested information is not available or cannot reasonably be obtained by the servicer, as appropriate, the basis for the servicer’s determination, and contact information for further assistance. A servicer would only be required to provide a written notice to the borrower in response to the information request if the information requested by the borrower is not available or cannot reasonably be obtained by the servicer. A servicer would be able to respond either orally or in writing to the borrower (or electronically with the borrower’s consent) if the servicer is providing the information requested by the borrower. The Bureau believes that the goal of providing information to borrowers is furthered by allowing servicers to respond orally. Additionally, allowing oral communication reduces burden on servicers.

A servicer could demonstrate its compliance with this requirement by, for example, retaining a copy of any written correspondence to the borrower that includes the information, retaining tapes of telephone conversations during which the borrower is provided the requested information, or by making a notation in a collector’s notes that the information requested was provided to the borrower. The Bureau believes that the flexibility for a servicer to develop systems that are appropriate for that servicer addresses the Small Business Review Panel recommendation that the Bureau consider adopting a more flexible process for small servicers to demonstrate compliance with the information request requirements.[88]

Information not available. Proposed comment 36(d)(1)(ii)-1 clarifies that information should not be considered as available to a servicer if the information is not in the servicer’s possession or control and the servicer cannot retrieve the information in the ordinary course of business through reasonable efforts.

The purpose of the information request requirements is to provide an efficient means for borrowers to obtain information regarding their mortgage loan accounts and the Bureau believes that imposing obligations on servicers to provide information in response to an information request is an efficient means of achieving the goal of providing a borrower with access to requested information. The Bureau believes that burden for information requests will greatly increase, however, if a servicer is required to undertake an investigation for documents that are not in a servicer’s possession or control. The same inefficiency exists even if information is in a servicer’s possession or control but, for appropriate business reasons, is stored in a medium that is not accessible by a servicer in the ordinary course of business. The Bureau believes that the marginal benefit of additional information available to borrowers is outweighed by the significant burdens that such investigations may incur.

Accordingly, the Bureau believes that servicers should not be required to provide documents in response to an information request that are not in the possession or control of the servicer and cannot be retrieved through reasonable efforts in the ordinary course of business. Proposed comment 36(d)(1)(ii)-1 provides examples of when documents should and should not be considered to be available to a servicer in response to an information request.

The Bureau has authority pursuant to section 6(k)(1)(E) of RESPA to set forth servicer obligations to provide information in response to information requests. The Bureau further has authority pursuant to section 6(j)(3) of RESPA to set forth requirements necessary to carry out section 6 of RESPA. The Bureau further relies on its authority in section 19(a) of RESPA to make such rules and regulations necessary to achieve the consumer protection purposes of RESPA.

36(d)(2) Time limits

Paragraph 36(d)(2)(i)

Proposed paragraph 36(d)(2)(i) would require a servicer to respond to an information request not later than 30 days (excluding legal public holidays, Saturdays, and Sundays) after the servicer receives the information request, with one exception discussed below.

Legal authority. Section 1463(b) of the Dodd-Frank Act amended section 6(e)(2) of RESPA to require a servicer to investigate and respond to a qualified written request within 30 days. Proposed paragraph 36(e)(e)(i) would implement this provision of RESPA with respect to qualified written requests.

Shortened time limit to provide information regarding the identity of the owner or assignee. Under proposed paragraph 36(d)(2)(i)(A), if a borrower submits a request for information regarding the identity of, and address or relevant contact information for, the owner or assignee of a mortgage loan, a servicer shall respond to the information request with ten days (excluding legal public holidays, Saturdays, and Sundays).

Section 1463(a) of the Dodd-Frank Act added section 6(k)(1)(D) to RESPA, which sets forth a ten business day limitation on a servicer to respond to an information request with respect to the owner or assignee of a mortgage loan. Proposed paragraph 36(d)(2)(i)(A) implements this provision of RESPA. Proposed § 1024.36(d)(2)(i)(A) would require a servicer to provide the requested information within ten days (excluding legal public holidays, Saturdays, and Sundays) instead of “10 business days.” The Bureau interprets the “10 business day” requirement in section 6(k)(1)(D) of RESPA to mean ten calendar days with an exclusion for intervening legal public holidays, Saturdays, and Sundays, and proposes to implement that interpretation in proposed § 1024.36(d)(2)(i)(A). Section 19(a) of RESPA provides the Bureau with authority to make interpretations that are necessary to achieve the consumer protection purposes of RESPA.

Extensions of time limits. Proposed § 1024.36(d)(2)(ii) permits a servicer to extend the time period for responding to an information request by 15 days (excluding legal public holidays, Saturdays, and Sundays) if, before the end of the 30-day period set forth in proposed § 1024.36(d)(2)(i)(B), the servicer notifies the borrower of the extension and the reasons for the delay in responding. Section 1463(c)(3) of the Dodd-Frank Act amended section 6(e) of RESPA to provide a 15-day extension of time and proposed § 1024.36(d)(2)(ii) would implement this provision with respect to qualified written requests. The Bureau has authority pursuant to section 6(k)(1)(E) and 6(j)(3) of RESPA to apply the extension of time provision to information requests as well. The Bureau further has authority under section 19(a) of RESPA to make such rules and regulations, and to make such interpretations necessary to achieve the consumer protection purposes of RESPA.

The Bureau proposes not to apply the extension allowance of proposed § 1024.36(d)(2)(ii) to information requests with respect to the owner or assignee of a mortgage loan. The Bureau does not believe that the burden of obtaining this information for any borrower will be significant enough to justify an extension beyond the ten days (excluding legal public holidays, Saturdays, and Sundays) established by Congress. Servicers generally have access to identification of investors as that information is necessary to determine where to direct mortgage loan payments and reports with respect to the performance of serviced assets. The benefit to the borrower of obtaining the information, which Congress has required, outweighs the costs to servicers of complying within ten days (excluding legal public holidays, Saturdays, and Sundays).

36(e) Alternative compliance

Proposed § 1024.36(e) would provide that a servicer is not required to comply with the requirements of paragraphs (c) and (d) of proposed § 1024.36 if the information requested by a borrower is provided to the borrower within five days along with contact information the borrower can use for further assistance. A servicer may provide the information requested either orally or in writing (including electronically, with the borrower’s consent). A servicer’s records should indicate that a servicer has provided the information requested to the borrower. A servicer may demonstrate its compliance with this requirement by, for example, retaining a copy of any written correspondence to the borrower that includes the information, retaining tapes of telephone conversations during which the borrower is provided the requested information, or by making a notation in a collector’s notes that the information requested was provided to the borrower. As discussed above, the Bureau believes that the flexibility for a servicer to develop systems that are appropriate for that servicer addresses the Small Business Review Panel recommendation that the Bureau consider adopting a more flexible process for small servicers to demonstrate compliance with the information request requirements.[89]

36(f) Requirements not applicable

Proposed § 1024.36(f) would state that the information request requirements of proposed § 1024.36 would not apply to certain types of information requests if the servicer complies with proposed § 1024.36(f)(2). The types of information requests to which the requirements would not apply would be set forth in § 1024.36(f)(1). The Bureau solicits comments regarding whether any forms of information requests should be removed from proposed § 1024.36(f)(1) or whether additional potential forms of information requests should be identified in proposed § 1024.36(f)(1).

36(f)(1) In general

Paragraph 36(f)(1)

Proposed paragraph 36(f)(1) would state that a servicer is not required to comply with the information request requirements in proposed § 1024.36(c) and (d) if the servicer reasonably makes certain determinations specified in paragraphs (f)(1)(i), (ii), (iii), (iv), or (v). A servicer may be liable to the borrower for its unreasonable determination and resulting failure to comply with proposed § 1024.36(c) and (d).

Paragraph 36(f)(1)(i)

Proposed paragraph 36(f)(1)(i) would state that a servicer is not required to comply with the information request requirements in proposed § 1024.36(c) and (d) with respect to an information request that requests information that is substantially the same as information previously requested by or on behalf of the borrower, and for which the servicer has previously complied with its obligation to respond to the information request. The purpose of this proposed paragraph is to ensure that a servicer is not required to expend resources conducting duplicative searches for documents.

Paragraph 36(f)(1)(ii)

Proposed paragraph 36(f)(1)(ii) provides that a servicer is not required to comply with the information request requirements in proposed § 1024.36(c) and (d) with respect to an information request that requests confidential, proprietary, or general corporate information of a servicer.

The Bureau believes that the purposes of the provision, which is to provide borrowers with a means to request information regarding a borrower’s mortgage loan account, are not furthered by permitting borrowers to request confidential, proprietary, or general corporation information of a servicer. Proposed comment 36(f)(1)(ii)-1 provides examples of confidential, proprietary, or general corporate information. These include information requests regarding: management and profitability of a servicer; other mortgage loans than the borrower’s; investor reports; compensation, bonuses, and personnel actions for servicer personnel; the servicer’s training programs; investor agreements; the evaluation or exercise of any owner or assignee remedy; the servicer’s servicing program guide; investor instructions or requirements regarding loss mitigation options, examination reports, compliance audits or other investigative materials.

The Bureau believes the protection in proposed paragraph 36(f)(1)(ii) is appropriate to fulfill the purpose of the proposed rule, which is to provide a means for borrowers to obtain information from servicers regarding their own mortgage loan accounts. Permitting information requests for confidential, proprietary, or general corporate information does not further the purposes of the proposed rule.

Paragraph 36(f)(1)(iii)

Proposed paragraph 36(f)(1)(iii) would provide that a servicer is not required to comply with the information request requirements in proposed § 1024.36(c) and (d) with respect to a request for information that is not directly related to the borrower’s mortgage loan account. The Bureau believes the protection in proposed paragraph 36(f)(1)(iii) is appropriate to fulfill the purpose of the proposed rule, which is to provide a means for borrowers to obtain information from servicers regarding their own mortgage loan accounts.

Paragraph 36(f)(1)(iv)

Proposed paragraph 36(f)(1)(iv) provides that a servicer is not required to comply with the request for information requirements in proposed § 1024.36(c) and (d) with respect to a request for information that is overbroad or unduly burdensome. The rule defines “overbroad” and “unduly burdensome” for this purpose. An information request is overbroad if a borrower requests a servicer provide an unreasonable volume of documents or information to a borrower. A notice of error is unduly burdensome if a diligent servicer could not respond to the information request without either exceeding the maximum timeframe permitted by paragraph (e)(3)(ii) or incurring costs (or dedicating resources) that would be unreasonably in light of the circumstances.

As discussed above for proposed paragraph 35(g)(1)(ii), consumers, consumer advocates, servicers, and servicing industry representatives have indicated to the Bureau that the current qualified written request process is not typically utilized by consumers to request information. During the Small Business Review Panel outreach, SERs expressed that typically qualified written requests received from borrowers were vague forms found online or forms used by advocates as a form of pre-litigation discovery.[90] Servicers and servicing industry representatives indicated that these types of qualified written requests are unreasonable and unduly burdensome. SERs in the Small Business Review Panel outreach requested that the Bureau consider an exemption for abusive requests, or requests made with the intent to harass the servicer.[91]

The Bureau is concerned that, in light of the expanded requirements for servicers to respond to information requests, a requirement for servicers to respond to information requests that are overbroad or unduly burdensome may harm consumers and frustrate servicers’ ability to comply with the new information request requirements. The effect of the proposed rule is to expand a servicer’s obligation to undertake the obligations similar to those currently applicable to qualified written requests to a broader universe of information requests, including requests made orally to a servicer and requests for information that do not specifically relate to “servicing” as defined in RESPA. Requiring servicers to respond to overbroad or unduly burdensome information requests from some borrowers may impose unjustified and unmanageable burdens on servicers. Further, the Bureau does not believe that the request for information requirements should replace or supplant civil litigation document requests and should not be used as a forum for pre-litigation discovery.

Proposed paragraph 36(f)(1)(iv) provides that if a servicer determines that an information request is overbroad or unduly burdensome, the servicer is required to notify the borrower, pursuant to proposed § 1024.36(f)(2), that the servicer is not required to comply with the requirements of proposed § 1024.36(c) and (d). Further, the servicer must identify the specific basis for the servicer’s determination so that the borrower is informed that the basis of the servicer’s determination was that the information request was overbroad or unduly burdensome. Proposed comment 36(f)(1)(iv)-1 sets forth characteristics that may indicate if an information request is overbroad or unduly burdensome. A servicer bears the risk that its determination that an information request is overbroad or unduly burdensome is found to be unjustified. If a servicer can identify a proper information request from an information request that is otherwise overbroad or unduly burdensome, a servicer would be required to respond to those information requests it could identify.

The Bureau requests comment regarding whether a servicer should not be required to undertake the information request requirements in proposed § 1024.36(c) and (d) for information requests that are overbroad or unduly burdensome.

Paragraph 36(f)(1)(v)

Proposed paragraph 36(f)(1)(v) would provide that a servicer is not required to comply with the information request requirements in proposed § 1024.36(c) and (d) with respect to an information request that is delivered to a servicer more than one year after either servicing for the mortgage loan that is the subject of the information request was transferred from the servicer to a transferee servicer or the mortgage loan amount was paid in full, whichever date is applicable.

The purpose of this proposed paragraph is to set a bound on the time that a servicer may be responsible for responding to information requests with respect to a mortgage loan. The effect of the proposed paragraph is to achieve the same limitation that currently exists in Regulation X with respect to qualified written requests. Specifically, current § 1024.21(e)(2)(ii) states that “a written request does not constitute a qualified written request if it is delivered to a servicer more than one year after either the date of transfer of servicing or the date that the mortgage servicing loan amount was paid in full, whichever date is applicable.” The Bureau requests comment regarding the requirement that servicers provide a notice to the borrower and the appropriate content for the notice.

36(f)(2) Notice to borrower

Proposed § 1024.36(f)(2) provides that if a servicer determines it is not required to comply with the information request requirements in proposed § 1024.36(c) and (d) with respect to an information request because the information requests meets one of the categories in proposed § 1024.36(f)(1), the servicer must provide a notice to the borrower informing the borrower of the servicer’s determination. The notice must be sent not later than five days (excluding legal public holidays, Saturdays, and Sundays) after the servicer’s determination and must set forth the basis upon which the servicer has made the determination, with a reference to the applicable provision of proposed § 1024.36(f)(1).

The Bureau’s intention for proposing this requirement is to ensure that borrowers are notified that a servicer does not intend to otherwise respond to the information requests and that borrowers are informed of the basis for the servicer’s determination that it is not required to comply with the information request requirements in proposed § 1024.36(c) and (d).

By receiving a notice that sets forth for the servicer’s determination, a borrower will have the opportunity to assert any claims the borrower may have with respect to the reasonableness of the servicer’s determination that the servicer is not required to comply with the information request requirements in proposed § 1024.36(c) and (d).

Legal authority. The Bureau relies on its authority pursuant to section 6(k)(1)(E) of RESPA to set forth information requests requirements. Further, to the extent the information request requirements apply to qualified written requests, the Bureau further relies on its authority in section 6(e) and 6(k)(1)(B) of RESPA with respect to qualified written requests. The Bureau has authority pursuant to section 6(j)(3) of RESPA to set forth requirements necessary to carry out section 6 of RESPA. The Bureau further relies on its authority in section 19(a) of RESPA to make such rules and regulations necessary to achieve the consumer protection purposes of RESPA.

36(g) Payment Requirement Limitations

Proposed § 1024.36(g) would prohibit a servicer from charging a fee, or requiring a borrower to make any payment that may be owed on a borrower’s account, as a condition of responding to an information request. The Bureau is implementing this provision for three reasons. First, section 1463(a) of the Dodd-Frank Act added section 6(k)(1)(B) to RESPA, which prohibits a servicer from charging fees for responding to valid qualified written requests. Proposed § 1024.36(g) would implement that provision with respect to qualified written requests that for information relating to the servicing of a mortgage loan. Second, the Bureau does not believe that a servicer practice of charging for responding to an information request facilitates the purpose of the information request requirements, which is to provide a tool for borrowers to obtain information regarding their mortgage loan accounts. Rather, such a practice would improperly impede borrowers from pursuing valid information requests. Third, the Bureau has learned from outreach with consumer advocates that, in some instances, servicers have demanded that borrowers make payments before the servicer will provide a borrower with information requested by the borrower or will correct errors identified by a borrower. The Bureau believes that a servicer is required to provide a borrower with information about the borrower’s mortgage loan account notwithstanding the payment status of a borrower’s account.

Legal authority. The Bureau relies on its authority in section 6(k)(1)(B) and 6(k)(1)(E) of RESPA. The Bureau believes the limitations of fees are appropriate to carry out the consumer protection purposes of RESPA, pursuant to section 6(k)(1)(E) of RESPA.

In addition to the authority, the Bureau also has authority pursuant to section 6(j)(3) and 19(a) of RESPA to establish requirements to carry out section 6 of RESPA or to make such rules and regulations as appropriate to achieve the consumer protection purposes of RESPA.

The Bureau requests comment regarding whether the Bureau should carve out from the prohibition on charging fees for responding to an information request any fees charged in connection with providing payoff statements or State law beneficiary notices. The Bureau further requests comment regarding whether other types of information requests should be excluded from a proposed prohibition on charging fees for responding to an information request.

36(h) Servicer remedies

Proposed § 1024.36(h) states that the existence of an outstanding information request does not prohibit a servicer from furnishing adverse information to any consumer reporting agency or from pursuing any remedies, including proceeding with a foreclosure sale, permitted by the applicable mortgage loan instrument. This proposed requirement is consistent with section 6(e)(3) of RESPA and clarifies that prohibitions on furnishing adverse information only apply to qualified written requests that assert an error with respect to a mortgage loan, not to a qualified written request that requests information. The Bureau relies on its authority in section 6(k)(1)(E) to apply this provision to information request requirements. The Bureau further relies on its authority in section 6(j)(3) to establish any requirement to carry out section 6 of RESPA and its authority in section 19(a) to make such interpretations as may be necessary to carry out the consumer protection purposes of RESPA.

Section 1024.37 Force-Placed Insurance

37(a) Definitions

37(a)(1) Force-placed Insurance

Section 1463 of the Dodd-Frank Act amended RESPA section 6 by adding a new section 6(k)(2), which sets forth that for purposes of RESPA section 6(k)-(m), “force-placed insurance” means “hazard insurance coverage obtained by a servicer of a federally related mortgage when the borrower has failed to maintain or renew hazard insurance on such property as required of the borrower under the terms of the mortgage.” The Bureau proposes to implement RESPA section 6(k)(2) by adding new § 1024.37(a)(1) to Regulation X to define “force-placed insurance” to mean hazard insurance obtained by a servicer on behalf of the owner or assignee of a mortgage loan on a property securing such loan.

The Bureau’s definition of force-placed insurance is broader than the statutory definition of force-placed insurance. Virtually all mortgage loan contracts require borrowers to maintain hazard insurance during the term of the loan, and permit lenders to charge borrowers for any hazard insurance lenders obtain if borrowers fail to maintain hazard insurance coverage.[92] The Bureau recognizes that force-placed insurance is hazard insurance that servicers are contractually required to obtain on behalf of the owner or assignee of a mortgage loan when the servicer is unable to obtain evidence that the borrower has complied with the borrower’s obligation to maintain hazard insurance.[93] But in its review of issues related to force-placed insurance, the Bureau has learned that in recent years, some servicers might have improperly obtained force-placed insurance when they arguably knew or should have known that the borrower already had hazard insurance.[94] The Bureau has met with servicers and insurance companies that write force-placed insurance. They have told the Bureau that when they detect a gap in borrower-obtained hazard insurance coverage, they typically communicate with the borrower to confirm the absence of borrower-obtained hazard insurance before obtaining force-placed insurance. According to industry, force-placed insurance is an uncommon occurrence.[95] It appears that the new Dodd-Frank requirements on force-placed insurance, such as, for example, requiring servicers to provide advance notice over a 45-day notice period before charging borrowers for force-placed insurance, discussed further below, reflect common practice for the majority of the mortgage servicing market.[96] But the Bureau has learned that there does not appear to be an industry standard for providing advance notice before a servicer renews or replaces existing force-placed insurance. As discussed further below, the Bureau proposes to exercise its authority under RESPA sections 6(j)(3), 6(k)(1)(E) and 19(a) to add new § 1024.37(e), which would require servicers to follow an advance notice process before they renew or replace existing force-placed insurance.

The Bureau also believes that obtaining force-placed insurance when servicers arguably knew or should have known that the borrower already had insurance is problematic for individual borrowers, particularly borrowers experiencing financial hardship. Force-placed insurance is generally substantially more expensive than hazard insurance a borrower could purchase.[97] It also generally provides less protection against loss than insurance that a borrower could purchase.[98] Consumer advocates have asserted that the higher cost of force-placed insurance could drive borrowers into default.[99] According to Fannie Mae, “[force-placed insurance] should only be issued after the servicer has exhausted all means to keep the borrower’s insurance policy in force.”[100] The Bureau also notes that it finds problematic the incentives that have reportedly influenced some servicers’ decision to obtain force-placed insurance, such as the receipt of commissions or reinsurance fees by servicers and their insurance affiliates on the force-placed insurance policies they obtain,[101] or that a servicer or an affiliate of the servicer may have an ownership interest in an insurance company that writes force-placed insurance.[102] For similar reasons, the Bureau is proposing to require that servicers continue paying for a borrower’s hazard insurance when practicable if the borrower has escrowed for hazard insurance, as discussed previously in the Bureau’s discussion of proposed § 1024.17(k)(5).

The statutory definition in RESPA section 6(k)(2), discussed previously, may convey that “force-placed insurance” used in RESPA section 6(k)-(m) is limited to hazard insurance obtained when the borrower has in fact failed to maintain or renew hazard insurance. Based on its review of issues concerning force-placed insurance discussed above, the Bureau has concluded that defining force-placed insurance broadly is appropriate to carry out the consumer protection purposes of the new Dodd-Frank requirements on force-placed insurance.

As discussed previously in the Bureau’s discussion of proposed § 1024.30, the Bureau’s proposed subpart C would maintain Regulation X’s current exclusion for all open-end lines of credit (home-equity plans) from the servicer requirements of Regulation X. Although virtually all mortgage loan contracts require borrowers to maintain hazard insurance during the term of the loan, the majority of open-end home-equity plans are subordinate liens.[103] The Bureau has learned that servicers generally obtain force-placed insurance on behalf of first-lien holders, not subordinate-lien holders. Accordingly, the Bureau believes it is appropriate to maintain the exemption in current Regulation X for open-end lines of credit (home-equity plans) from the Bureau’s proposed force-placed insurance regulations. The Bureau understands that the one exception to servicers obtaining force-placed insurance for open-end lines of credit (home-equity plans) is when flood insurance is required by the FDPA. As discussed below, however, the Bureau is proposing to exempt hazard insurance to protect against flood loss obtained by a servicer as required by the FDPA from the Bureau’s proposed definition of force-placed insurance. The Bureau, however, invites comment on whether the Bureau’s proposed force-placed insurance regulations should be extended cover open-end lines of credit (home-equity plans).

Legal authority. As discussed previously, section 1463 of the Dodd-Frank Act amended RESPA section 6 by adding a new section 6(k)(2), which sets forth the definition of “force-placed insurance” for purposes of RESPA section 6(k)-(m). The Bureau is proposing to implement section 6(k)(2) of RESPA, pursuant to its authority under section 6(j)(3) of RESPA by adding new § 1024.37(a)(1) to Regulation X to define “force-placed insurance” to mean hazard insurance obtained by a servicer on behalf of the owner or assignee of a mortgage loan on a property securing such loan. Section 6(j)(3) of RESPA authorizes the Bureau to set forth any requirements necessary to carry out section 6 of RESPA. Section 10247.37(a)(1) is additionally proposed pursuant to the Bureau’s authority under section 6(k)(1)(E) of RESPA to prescribe regulations that are appropriate to carry out the consumer protection purposes of RESPA, and under section 19(a) of RESPA to make such rules and regulations, and to make such interpretations, as may be necessary to achieve the consumer protection purpose of RESPA.

37(a)(2) Types of insurance not considered force-placed insurance

37(a)(2)(i)

Proposed § 1024.37(a)(2)(i) would exempt hazard insurance to protect against flood loss obtained by a servicer as required by the FDPA from the definition of force-placed insurance for the purposes of § 1024.37. The Bureau understands that pursuant to section 102(e) of the FDPA, lenders or the servicers acting on the lenders’ behalf must obtain force-placed flood insurance under certain circumstances. The Bureau understands that the circumstances are as follows: (1) the lender determines at any time during the life of the loan that the property securing the loan is located in a Special Flood Hazard Area (SFHA); (2) flood insurance under the “Act” (referring to both the National Flood Insurance Act of 1968 and the FDPA, as revised by the National Flood Insurance Reform Act of 1994) is available; (3) the lender determines that flood insurance coverage is inadequate or does not exist; and (4) after required notice, the borrower fails to buy the appropriate amount of coverage within 45 days.[104]

Since servicers are already subject to regulations when obtaining force-placed flood insurance as required by the FDPA,[105] the Bureau proposes to exempt hazard insurance to protect against flood loss obtained by a servicer as required by the FDPA from the definition of force-placed insurance for purposes of proposed § 1024.37.

As discussed previously, to implement Dodd-Frank Act section 1463, the Bureau’s proposed definition of “hazard insurance” would include hazard insurance to protect against flood loss. Additionally, the Bureau has proposed to define “force-placed insurance” as a type of “hazard insurance” to implement RESPA section 6(k)(2). If the Bureau does not propose an exemption for hazard insurance to protect against flood loss obtained by a servicer as required by the FPDA, such insurance would be considered “force-placed insurance” under the definition of “force-placed insurance” set forth in proposed § 1024.37(a)(1). In turn, servicers who obtain force-placed flood insurance as required by the FDPA would be subject to the Bureau’s proposed § 1024.37 as well if the Bureau does not propose the exemption. Without the Bureau’s proposed exemption, the Bureau believes the result would be the creation of overlapping servicer obligations. For example, section 6(l) of RESPA, discussed in greater detail below, requires a servicer to provide a borrower with two written notices over a 45-day notice period before charging the borrower for force-placed insurance. The FDPA also provides a 45-day notice period, but only one notice is required. Additionally, the FPDA was recently amended to require the lender or servicer to terminate force-placed flood insurance and refund to the borrower all force-placed flood insurance premiums and related fees paid by the borrower during any period when the borrower had insurance coverage in force within 30 days of receiving confirmation of a borrower’s existing flood insurance coverage.[106] In contrast, section 6 of RESPA, as amended by Dodd-Frank Act section 1463, requires a servicer to cancel force-placed insurance and refund any premium and fees paid during the period of overlapping coverage within 15 days of receiving confirmation of a borrower’s existing hazard insurance coverage.

The requirements set forth in Dodd-Frank Act section 1463 with respect to servicers’ purchase of force-placed insurance represent the establishment of new consumer protections where protection did not exist before. The FDPA, however, has established a separate consumer protection paradigm to protect consumers when servicers are required by the FDPA to obtain force-placed flood insurance. As discussed above, the FDPA requires advance notice to consumers, and provides consumers with 45 days to provide evidence of flood insurance. Also as discussed above, the FDPA now contains termination and refund provisions with respect to force-placed flood insurance obtained by servicers as required by the FDPA. Accordingly, the Bureau believes it is consistent with the consumer protection purposes of RESPA to exempt hazard insurance to protect against flood loss obtained by a servicer as required by the FPDA from the Bureau’s proposed definition of “force-placed insurance.” For similar reasons, the Bureau proposes to exempt charges authorized by the FDPA from the proposed requirement that charges related to force-placed insurance (other than charges subject to State regulation as the business of insurance) must be bona fide and reasonable for purposes of proposed § 1024.37(h), discussed below.

The Bureau notes that the proposed exemption would only apply to servicers that obtain hazard insurance to protect against flood loss as required by the FDPA. The Bureau understands that the FDPA does not currently apply to a mortgaged property that is not located in a SFHA.[107] The Bureau further understands that the FDPA does not currently apply to mortgage loans made by and kept in the portfolio of a private mortgage lender.[108] The Bureau’s proposed § 1024.37 would apply in situations where the FDPA does not apply. The Bureau, however, recognizes that operational complexity may be introduced if a servicer had to continuously monitor its servicing portfolio to identify when it is required to comply with the FDPA and when it is required to comply with proposed § 1024.37. As discussed above, the Bureau invites comment on whether the Bureau’s definition of “hazard insurance” should exclude hazard insurance to protect against flood loss. An alternative to excluding hazard insurance to protect against flood loss from the definition of “hazard insurance” is to exclude hazard insurance to protect against flood loss obtained by a servicer from the definition of “force-placed insurance.” The Bureau also seeks comment on this alternative. The Bureau recognizes that another possible alternative exists, and it is to harmonize the force-placed insurance requirements set forth in Dodd-Frank Act section 1463 with the FDPA. Accordingly, the Bureau invites comments on how the force-placed insurance requirements set forth in Dodd-Frank Act section 1463 could be harmonized with the FDPA.

Legal authority. The Bureau proposes to exempt hazard insurance to protect against flood loss obtained by a servicer as required by the FDPA from the definition of force-placed insurance for purposes of proposed § 1024.37 by adding new § 1024.37(a)(2)(i), pursuant to its authority under section 19(a) of RESPA. Section 19(a) of RESPA provides the Bureau with authority to prescribe such rules and regulations, to make such interpretations, and to grant such reasonable exemptions for classes of transactions as may be necessary to achieve the purposes of RESPA. As previously discussed, the FDPA has established a separate consumer protection paradigm to protect consumers when servicers are required by the FDPA to obtain force-placed flood insurance. Furthermore, for reasons discussed above, the exemption will reduce regulatory burden.

Pargraph 37(a)(2)(ii)

Proposed § 1024.37(a)(2)(ii) provides that hazard insurance obtained by a borrower but renewed by the borrower’s servicer as required by § 1024.17(k)(1), (k)(2), or (k)(5) is not force-placed insurance for purposes of § 1024.37. A servicer that complies with § 1024.17(k)(1), (k)(2) or proposed § 1024.17(k)(5) would be continuing the borrower’s hazard insurance. Paragraph 37(a)(2)(iii)

Proposed § 1024.37(a)(2)(iii) provides that hazard insurance renewed by the servicer at its discretion if the servicer is not required to renew the borrower’s hazard insurance as required by § 1024.17(k)(1), (k)(2), or (k)(5) is not force-placed insurance for purposes of § 1024.37. The Bureau believes that proposed § 1024.37(a)(2)(iii) would provide an incentive for servicers to work with non-escrowed borrowers to renew hazard insurance obtained by these borrowers.

Legal authority. The Bureau proposes to add new § 1024.37(a)(2)(ii)-(iii) pursuant to its authority under section 6(j)(3) of RESPA, which authorizes the Bureau to establish any requirements necessary to carry out the purposes of section 6 of RESPA. As discussed previously, the Bureau is proposing to define “force-placed insurance” as hazard insurance obtained by a servicer on behalf of the owner or assignee of a mortgage loan on a property securing such loan in proposed § 1024.37(a)(1). The Bureau believes it is necessary and appropriate to clarify that the term does not apply to hazard insurance obtained by a borrower and renewed by a borrower’s servicer. It will reduce regulatory burden and may, as discussed above, incentivize servicers to work with non-escrowed borrowers to renew the hazard insurance obtained by such borrowers. Section 1024.37(a)(2)(ii)-(iii) is additionally proposed pursuant to the Bureau’s authority under section 6(k)(1)(E) of RESPA to prescribe regulations that are appropriate to carry out the consumer protection purposes of RESPA, and under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations as may be necessary to achieve the purposes of RESPA.

37(b) Basis for Obtaining Force-Placed Insurance

The Bureau is proposing a new § 1024.37(b) to implement new section 6(k)(1)(A) of RESPA, added by section 1463 of the Dodd-Frank Act, which requires a servicer to have a reasonable basis to believe that the borrower has failed to comply with the loan contract’s requirement to maintain property insurance before obtaining force-placed insurance. Proposed § 1024.37(b) sets forth that a servicer may not obtain force-placed insurance unless the servicer has a reasonable basis to believe that the borrower has failed to comply with the mortgage loan contract’s requirement to maintain hazard insurance.

Proposed comment 37(b)-1 provides examples of “reasonable basis” for borrowers with escrow. The comment clarifies that a servicer has a reasonable basis to believe that a borrower with an escrow account established for hazard insurance has failed to maintain hazard insurance if, for example, by a reasonable time leading up to the expiration date of the borrower’s hazard insurance (e.g., 30 days before the expiration date), the servicer has not received a renewal bill. It also sets forth that the receipt by a servicer of a notice of cancellation or non-renewal from the borrower’s insurance company before payment is due for the borrower’s hazard insurance provides a servicer with a reasonable basis to believe that the borrower has failed to maintain hazard insurance.

Proposed comment 37(b)-2 provides an example of “reasonable basis” for borrowers without escrow. The comment provides that a servicer has a reasonable basis to believe a borrower without an escrow account established for hazard insurance has failed to maintain hazard insurance if, for example, a servicer receives a notice of cancellation or non-renewal from the borrower’s insurance company.

The Bureau believes it is appropriate to distinguish situations where the borrower has escrowed for hazard insurance from situations where the borrower has not done so. For a borrower who has escrowed for hazard insurance, a servicer receives a request to pay a borrower’s existing hazard insurance before the insurance lapses. When a borrower has not escrowed for hazard insurance, the Bureau understands that a servicer does receive a payment request and thus may not learn of the lapse in insurance until the borrower’s coverage has expired.

Legal authority. As discussed above, the Bureau is proposing a new § 1024.37(b) to implement new section 6(k)(1)(A) of RESPA. The Bureau proposes to implement section 6(k)(1)(A) pursuant to its authority under RESPA section 6(j)(3) to establish any requirements necessary to carry out the purposes of section 6 of RESPA. The Bureau has additional authority under section 6(k)(1)(E) of RESPA to prescribe regulations that are appropriate to carry out the consumer protection purposes of RESPA, and under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations as may be necessary to achieve the purposes of RESPA.

37(c) Requirements for Charging Borrower Force-Placed Insurance

37(c)(1) In general

Section 1463 of the Dodd-Frank Act amended section 6 of RESPA by setting forth certain requirements a servicer must follow before imposing any charge on a borrower for force-placed insurance with respect to any property securing a mortgage by adding new section 6(l)(1)(A)-(C) to RESPA. RESPA section 6(l)(1)(A) requires servicers to use first-class mail to send a written notice to the borrower 45 days before charging a borrower for force-placed insurance. RESPA section 6(l)(1)(B) requires servicers to use first-class mail to send a second written notice to the borrower at least 30 days after mailing the notice required by RESPA section 6(l)(1)(A). RESPA section 6(l)(1)(C) permits a servicer to charge a borrower for force-placed insurance at the end of the 45-day notice period only if the servicer has not received any demonstration of hazard insurance coverage during the 45-day notice period.

Legal authority. The Bureau proposes to implement RESPA section 6(l)(1)(A)-(C), pursuant to its authority under RESPA section 6(j)(3) to establish any requirements necessary to carry out section 6 of RESPA by adding new § 1024.37(c)(1) to Regulation X. The Bureau has additional authority under section 6(k)(1)(E) of RESPA to prescribe regulations that are appropriate to carry out the consumer protection purposes of RESPA, and under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations as may be necessary to achieve the purposes of RESPA.

Proposed § 1024.37(c)(1), in implementing RESPA section 6(l)(1)(A)-(C), states that a servicer may not charge a borrower for force-placed insurance unless: (1) The servicer delivers to the borrower or places in the mail a written notice with the disclosures set forth in proposed § 1024.37(c)(2) at least 45 days before the premium charge or any fee is assessed; (2) the servicer delivers to the borrower or places in the mail a written notice in accordance with § 1024.37(d)(1); and (3) during the 45-day notice period, the servicer has not received verification that the borrower has hazard insurance in place continuously. Determining whether the borrower has hazard insurance in place continuously shall take account of any grace period provided under State or other applicable law.

Proposed 1024.37(c)(1) permits a servicer to choose between delivering the written notice to the borrower or mailing the written notice required by RESPA section 6(l)(1)(A) and 6(l)(1)(B). In some situations, a borrower who receives the written notice via courier may get it faster than a borrower who gets the notice in the mail. The Bureau believes allowing servicers to deliver the notice is appropriate to carry out the consumer protection purposes of RESPA.

Proposed comment 37(c)(1)-1 clarifies that the 45-day notice period set forth in § 1024.37(c)(1) begins on the day that the servicer delivers or mails the notice to the borrower and expires 45 days later. The servicer may assess the premium charge and any fees for force-placed insurance beginning on the 46th day if the servicer has fulfilled the requirements of § 1024.37(c) and (d). As discussed previously, virtually all mortgage loan contracts provide that lenders may charge borrowers for hazard insurance lenders obtain if borrowers fail to maintain hazard insurance coverage, and that the obligation to obtain the coverage typically falls on servicers. Accordingly, proposed comment 37(c)(1)-1 clarifies that if not prohibited by State or other applicable law, the servicer may retroactively charge a borrower for force-placed insurance obtained during the 45-day notice period.

The Bureau notes, however, pursuant to proposed § 1024.37(g) discussed below, if a servicer receives verification that the borrower had hazard insurance in place during some or all of the 45-day notice period, then, if the servicer retroactively charged the borrower for force-placed insurance during the notice period, the servicer would have to refund the force-placed insurance premium charges and related fees paid by the borrower for the period of time during the notice period during which the borrower’s hazard insurance was in place. The servicer would also have to remove all force-placed insurance premium charges and related fees from the borrower’s account for that period of time.

Proposed comment 37(c)(1)(iii)-1 provides examples of borrowers having hazard insurance in place continuously. A borrower’s prior hazard insurance might have expired on January 2. But so long as a borrower’s current hazard insurance takes effect January 3, then the borrower has hazard insurance in place continuously. When there is a grace period, the servicer must take the grace period into account when determining whether the borrower has hazard insurance in place continuously. For example, a borrower’s prior hazard insurance might have an expiration date of June 1, but a grace period extends the effectiveness of the borrower’s prior hazard insurance to June 10. Accordingly, so long as the borrower obtains hazard insurance, effective June 11, then the borrower has hazard insurance in place continuously.

37(c)(2) Content of notice

RESPA section 6(l)(1)(A)(i)-(iv) requires the following disclosures in the notice required pursuant to RESPA section 6(l)(1)(A) and (1)(B): (1) A reminder of the borrower’s obligation to maintain hazard insurance on the property securing the federally related mortgage; (2) a statement that the servicer does not have evidence of insurance coverage of such property; (3) a clear and conspicuous statement of the procedures by which the borrower may demonstrate that the borrower already has insurance coverage; and (4) a statement that the servicer may obtain such coverage at the borrower’s expense if the borrower does not provide such demonstration of the borrower’s existing coverage in a timely manner.

Additionally, RESPA section 6(l)(2) requires a servicer to accept any reasonable form of written confirmation from a borrower of existing force-placed coverage, which “shall include the existing insurance policy number along with the identity of, and contact information for the insurance company or agent, or as otherwise required by the Bureau of Consumer Financial Protection.” The Bureau believes that it is the servicer’s obligation to verify a borrower’s hazard insurance status, and that RESPA section 6(l)(2) means that for purposes of verification, the servicer must accept from the borrower information that contains the borrower’s existing insurance policy number, and the name, mailing address, and phone number of the borrower’s insurance company or the borrower’s insurance agent if the borrower provides the information to the servicer in writing. To implement RESPA section 6(l)(2), the Bureau is requiring a servicer to provide, in the notice required by proposed § 1024.37(c)(1)(i), a statement requesting the borrower to promptly provide the servicer with the insurance policy number and the name, mailing address and phone number of the borrower’s insurance company or the borrower’s insurance agent.

Proposed § 1027.37(c)(2) would require servicers to provide, in the notice required by proposed § 1024.37(c)(1)(i), the following disclosures: (1) The date of the notice; (2) the servicer’s name and mailing address; (3) the borrower’s name and mailing address; (4) a statement that requests the borrower to provide hazard insurance information for the borrower’s property and identifies the property by its address; (5) a statement that the borrower’s hazard insurance is expiring or expired, as applicable, and that the servicer does not have evidence that the borrower has hazard insurance coverage past the expiration date. For a borrower that has more than one type of hazard insurance on the property, the servicer must identify the type of hazard insurance for which for which the servicer lacks evidence of coverage; (6) a statement that hazard insurance is required on the borrower’s property and that the servicer has obtained or will obtain, as applicable, insurance at the borrower’s expense; (7) a statement requesting the borrower to promptly provide the servicer with the insurance policy number and the name, mailing address and phone number of the borrower’s insurance company or the borrower’s insurance agent; (8) a description of how the borrower may provide the information requested pursuant to § 1024.37(c)(2)(vii). A servicer that will only accept the requested information in writing must disclose that fact in the notice; (9) the cost of the force-placed insurance, stated as an annual premium. If the cost of the force-placed insurance is not known as of the date of the disclosure, a good faith estimate shall be disclosed and be identified as such; (10) a statement that insurance the servicer obtains may cost significantly more than hazard insurance obtained by the borrower and may not provide as much coverage as hazard insurance obtained by the borrower; and (11) the servicer’s telephone number for borrower questions. Proposed § 1024.37(c)(2) is subject to the general disclosure requirements proposed § 1024.32, including, for example, proposed § 1024.32’s clear and conspicuous requirement. As discussed previously, proposed § 1024.32 also permits servicers to combine disclosures required pursuant to subpart C of Regulation X with disclosures required by applicable law, including state law.

Proposed comment 37(c)(2)(v)-1 explains that if a borrower has purchased a homeowner’s insurance policy and a separate hazard insurance policy to insure loss against hazards not covered under his or her homeowner’s insurance policy, the servicer must disclose whether it is the borrower’s homeowner’s insurance policy or the separate hazard insurance policy for which it lacks evidence of coverage to comply with § 1024.37(c)(2)(v). As discussed previously, certain hazards are covered by policies separate from a homeowner’s insurance policy. The Bureau believes that it is important to specify the type of hazard insurance that the borrower is required to maintain if the borrower has a hazard insurance policy the borrower uses to protect against loss by hazards excluded from his or her homeowner’s insurance policy.

As discussed in part III.B, above, the Bureau tested the force-placed insurance disclosures required by the Dodd-Frank Act in three rounds of consumer testing. Participant response in consumer testing suggests that knowing about higher cost of force-placed insurance could motivate borrowers to act promptly and thus avoid being charged with force-placed insurance. All participants said that they would immediately contact their insurance provider to find out whether or not their hazard insurance has expired or purchase new hazard insurance because they would not want to pay for the higher cost of force-placed insurance. Accordingly, in proposed § 1024.37(c)(2)(ix) discussed above, the Bureau is proposing to supplement the disclosure requirements of the Dodd-Frank Act by requiring servicers to disclose the cost of the force-placed insurance, stated as an annual premium. If the cost of the force-placed insurance is not known as of the date of the disclosure, a good faith estimate shall be disclosed and be identified as such.

Proposed comment 37(c)(2)(ix)-1 explains that the good faith estimate of the cost of the force-placed insurance the servicer may obtain should be consistent with the best information reasonably available to the servicer at the time the disclosure is provided. Differences between the amount of the estimated cost disclosed under § 1024.37(c)(2)(ix) and the actual cost do not necessarily constitute a lack of good faith, so long as the estimated cost was based on the best information reasonably available to the servicer at the time the disclosure was provided. For example, a mortgage investor’s requirements may provide that the amount of coverage for force-placed insurance depends on the borrower’s delinquency status (the number of days the borrower’s mortgage payment is past due). The amount of coverage affects the cost of force-placed insurance. A servicer that provides an estimate of the cost of force-placed insurance based on the borrower’s delinquency status at the time the disclosure is made complies with § 1024.37(c)(2)(ix). The Bureau believes its proposed good faith standard balances the concern that some servicers may underestimate the cost of force-placed insurance and mislead borrowers into believing the cost of the force-placed insurance to be less than it actually is and the fact that the cost may change due to legitimate reasons between the time the disclosure is made and the time the borrower is charged.

The Bureau is also proposing to supplement the disclosure requirements of the Dodd-Frank Act with the requirement, discussed above, that servicers disclose to borrowers that insurance obtained by the servicer may cost significantly more than hazard insurance obtained by the borrower and that such insurance may not provide as much coverage as hazard insurance obtained by the borrower. As discussed previously, the consequences of servicers obtaining force-placed insurance may be significant and negative for borrowers. Accordingly, the Bureau believes it is appropriate to inform borrowers about the fact that force-placed insurance may not provide as much coverage as insurance borrowers could purchase for themselves, even though force-placed insurance may be significantly more expensive.

Legal authority. The Bureau is proposing a new § 1024.37(c)(2) to Regulation X pursuant to its authority under section 6(j)(3) of RESPA to implement new section 6(l)(1)(A)(i)-(iv) and 6(l)(2) of RESPA, added by section 1463 of the Dodd-Frank Act. Section 6(j)(3) of RESPA authorizes the Bureau to establish any requirements necessary to carry out the purposes of section 6 of RESPA. The Bureau has additional authority under section 6(k)(1)(E) of RESPA to prescribe regulations that are appropriate to carry out the consumer protection purposes of RESPA, and under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations as may be necessary to achieve the purposes of RESPA. The disclosures in proposed § 1024.37(c)(2) are additionally proposed pursuant to Dodd Frank Act section 1032. Consistent with this provision, the Bureau believes that proposed disclosures will ensure that the costs, benefits, and risks associated with the service that servicers provide in servicing the loan by obtaining force-placed insurance are fully, accurately, and effectively disclosed to borrowers, in light of the facts and circumstances.

37(c)(3) Format

Proposed 1024.37(c)(3) provides the disclosures set forth in § 1024.37(c)(2) must be in a format substantially similar to form MS-3(A), set forth in appendix MS-3. Disclosures made pursuant to § 1024.37(c)(2)(vi) and (c)(2)(ix) must be in bold text. Disclosure made pursuant to § 1024.37(c)(2)(iv) must be in bold text, except that the physical address of the borrower’s property may be in regular text. The Bureau believes the use of highlighting (bold text) to bring attention to important information allows borrowers to find the information quickly and efficiently. The Bureau believes it is important that borrowers can promptly identify the purpose of the notice. Additionally, the Bureau believes it is important to bring attention to the cost of force-placed insurance so borrowers have a clear understanding of the cost to them of the service that servicers provide in obtaining force-placed insurance. The Bureau further believes it is important for borrowers to understand that the servicer’s purchase of force-placed insurance arises from the borrower’s obligation to maintain hazard insurance. Although the notice contains additional information that are important, the Bureau believes the usefulness of highlighting in focusing a borrower’s attention on important information decreases if highlighting is used unsparingly.

Legal authority. As previously discussed, section 6(l)(1) of RESPA requires a servicer to provide a borrower with two notices before charging a borrower for force-placed insurance. The Bureau believes that model forms facilitate compliance with the new Dodd-Frank Act requirements concerning force-placed insurance disclosures and the Bureau’s proposed supplemental disclosures. To implement section 6(l)(1) of RESPA, the Bureau is proposing a new § 1024.37(c)(3) to Regulation X pursuant to its authority under section 6(j)(3) of RESPA. Section 6(j)(3) of RESPA authorizes the Bureau to establish any requirements necessary to carry out the purposes of section 6 of RESPA. The Bureau has additional authority under section 6(k)(1)(E) of RESPA to prescribe regulations that are appropriate to carry out the consumer protection purposes of RESPA, and under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations as may be necessary to achieve the purposes of RESPA. The model form MS-3(A) in appendix MS-3 is additionally proposed pursuant to Dodd-Frank Act section 1032(b).

37(d) Reminder notice

37(d)(1) In general

As discussed above, section 6(l) of RESPA, as added by section 1463 of the Dodd-Frank Act, requires that servicers send two written notices to the borrower prior to charging the borrower for force-placed insurance. Specifically, RESPA section 6(l)(1)(B) requires servicers to use first-class mail to send a second written notice to the borrower at least 30 days after mailing initial the notice required by RESPA section 6(l)(1)(A).

Proposed §1024.37(d)(1) implements section 6(l)(B) of RESPA by providing that one written notice in addition to the written notice required pursuant to § 1024.37(c)(1)(i) must be delivered to the borrower or placed in the mail prior to a servicer charging a borrower for force-placed insurance. The servicer may not deliver or place the written notice required pursuant to § 1024.37(d)(1) in the mail until 30 days after delivering to the borrower or placing in the mail the written notice set forth in § 1024.37(c)(1)(i). A servicer that receives no insurance information after delivering or placing in the mail the written notice set forth in § 1024.37(c)(1)(i) must provide the disclosures set forth in § 1024.37 (d)(2)(i). A servicer that receives insurance information after delivering or placing in the mail the written notice set forth in § 1024.37(c)(1)(i) but does not receive verification that the borrower has hazard insurance coverage continuously must provide the disclosures set forth in § 1024.37(c)(1)(ii).

Proposed comment 37(d)(1)-1 explains when a servicer is required to deliver or place in the mail the written notice pursuant to § 1024.37(d)(1), the content of the reminder notice will be different depending on the insurance information the servicer has received from the borrower. For example, on June 1, the servicer places in the mail the written notice required pursuant to § 1024.37(c)(1)(i) to Borrower A. The servicer does not receive any insurance information from Borrower A. The servicer must deliver to Borrower A or place in the mail one written notice, with the content set forth in § 1024.37(d)(2)(i), 15 days before the servicer charges Borrower A for force-placed insurance. Take the example above, except that Borrower A provides the servicer with insurance information on June 18. But the servicer cannot verify that Borrower A has had continuous insurance coverage based on the information Borrower A provided (e.g., the servicer cannot verify that Borrower A had coverage between June 10 and June 15. The servicer must either deliver to Borrower A or place in the mail one reminder notice, with the content set forth in § 1024.37(d)(2)(ii), 15 days before charging Borrower A for force-placed insurance it obtains for the period between June 10 and June 15.

Legal authority. The Bureau proposes to implement RESPA section 6(l)(1)(B) pursuant to its authority under RESPA section 6(j)(3) by adding new § 1024.37(d)(1) to Regulation X. Section 6(j)(3) of RESPA authorizes the Bureau to establish any requirements necessary to carry out the purposes of section 6 of RESPA. The Bureau has additional authority under section 6(k)(1)(E) of RESPA to prescribe regulations that are appropriate to carry out the consumer protection purposes of RESPA, and under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations as may be necessary to achieve the purposes of RESPA.

37(d)(2) Content of reminder notice

37(d)(2)(i) Servicer Receiving No insurance Information

Proposed § 1024.37(d)(2)(i) implements RESPA section 6(l)(1)(B). It provides that a servicer that has not received any insurance information from the borrower within 30 days after delivering or placing in the mail the notice required pursuant to § 1024.37(c)(1)(i) must provide a reminder notice that contains the disclosures forth in § 1024.37(c)(2)(ii) to (c)(2)(xi), the date of the notice, and a statement that the notice is the second and final notice. The Bureau believes that the date of the notice and a statement that the notice is the second and final notice helps to distinguish the notice from the notice required pursuant to § 1024.37(c)(1)(i). Because the servicer has not received any insurance information, the Bureau believes it is appropriate to require the servicer to provide the disclosures set forth in § 1024.37(c)(2)(ii) to (c)(2)(xi).

Legal authority. The Bureau proposes to implement section 6(l)(1)(B) of RESPA by adding new § 1024.37(d)(2)(i) pursuant to its authority under section 6(j)(3) of RESPA. Section 6(j)(3) of RESPA authorizes the Bureau to establish any requirements necessary to carry out the purposes of section 6 of RESPA. The Bureau has additional authority under section 6(k)(1)(E) of RESPA to prescribe regulations that are appropriate to carry out the consumer protection purposes of RESPA, and under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations as may be necessary to achieve the purposes of RESPA. The disclosures in proposed § 1024.37(d)(2)(i) are additionally proposed pursuant to Dodd-Frank Act section 1032. Consistent with this provision, the Bureau believes that proposed disclosures will ensure that the costs, benefits, and risks associated with the service that servicers provide in servicing the loan by obtaining force-placed insurance are fully, accurately, and effectively disclosed to borrowers, in light of the facts and circumstances.

The Bureau notes that proposed § 1024.37(d)(2)(i) is subject to the general disclosure requirements proposed § 1024.32, including, for example, proposed § 1024.32’s clear and conspicuous requirement. As discussed previously, proposed § 1024.32 also permits servicers to combine disclosures required pursuant to subpart C of Regulation X with disclosures required by applicable law, including state law.

37(d)(2)(ii) Servicer not Receiving Verification of Continuous Coverage

Proposed § 1024.37(d)(2)(ii) provides that a servicer that has received insurance information from the borrower within 30 days after delivering to the borrower or placing in the mail the written notice set forth § 1024.37(c)(1)(i), but not verification that the borrower has hazard insurance in place continuously, must deliver or place in the mail a written notice that contains the following: (1) The date of the notice; (2) a statement that the notice is the second and final notice; (3) the disclosures set forth in § 1024.37(c)(2)(ii), (c)(2)(iii), (c)(2)(iv), and (c)(2)(xi); (4) a statement that the servicer has received the hazard insurance information that the borrower provided; and (5) a statement that indicates to the borrower that the servicer is unable to verify that the borrower has hazard insurance in place continuously; and (6) a statement that the borrower will be charged for insurance the servicer obtains for the period of time where the servicer is unable to verify hazard insurance coverage unless the borrower provides the servicer with hazard insurance information for such period.

As discussed previously, new RESPA section 6(l)(1) requirements added by section 1463 of the Dodd-Frank Act require servicers to provide advance written notice to borrowers 45 days before charging a borrower for force-placed insurance. RESPA section 6(l)(1)(B) provides that the notice required pursuant to RESPA section 6(l)(1)(B) must contain all of the information set forth in the first written notice. The Bureau believes that a borrower that provides his or her servicer with the information requested after receiving the initial written notice might become angry and confused if he or she receives a second notice containing information they previously received. However, if a borrower’s servicer cannot verify that the borrower has hazard insurance in place continuously based on the information the borrower provided, the Bureau believes it benefits the borrower to receive the reminder notice required pursuant to proposed § 1024.37(d)(1) because it would be useful in helping borrowers avoid force-placed insurance charges. Accordingly, the Bureau is proposing to require servicers to disclose different information in the notice required pursuant to proposed § 1024.37(d)(1), as set forth in proposed § 1024.37(d)(2)(i) and (d)(2)(ii).

Legal authority. The Bureau proposes to implement section 6(l)(1)(B) of RESPA by adding new § 1024.37(d)(2)(ii) pursuant to its authority under section 6(j)(3) of RESPA. Section 6(j)(3) of RESPA authorizes the Bureau to establish any requirements necessary to carry out the purposes of section 6 of RESPA. The Bureau has additional authority under section 6(k)(1)(E) of RESPA to prescribe regulations that are appropriate to carry out the consumer protection purposes of RESPA, and under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations as may be necessary to achieve the purposes of RESPA. The disclosures in proposed § 1024.37(d)(2)(ii) are additionally proposed pursuant to Dodd-Frank Act section 1032. Consistent with this provision, the Bureau believes that proposed disclosures will ensure that the costs, benefits, and risks associated with the service that servicers provide in servicing the mortgage loan by obtaining force-placed insurance are fully, accurately, and effectively disclosed to borrowers, in light of the facts and circumstances.

The Bureau notes that proposed § 1024.37(d)(2)(ii) is subject to the general disclosure requirements proposed § 1024.32, including, for example, proposed § 1024.32’s clear and conspicuous requirement. As discussed previously, proposed § 1024.32 also permits servicers to combine disclosures required pursuant to subpart C of Regulation X with disclosures required by applicable law, including state law.

37(d)(3) Format

Proposed § 1024.37(d)(3) provides that the disclosures set forth in paragraph (d)(2)(i) of this section must be in a format substantially similar to form MS-3(B), and the disclosures set forth in paragraph (d)(2)(ii) of this section must be in a format be substantially similar to form MS-3(C). The model forms are set forth in appendix MS-3. Disclosures required by § 1024.37(d)(2)(i)(B), (d)(2)(ii)(B), and (d)(2)(ii)(F) of this section must be in bold text. The Bureau discussed the use of highlight (bold text) previously. It is proposing that disclosures required by § 1024.37(d)(2)(i)(B), (d)(2)(ii)(B), and (d)(2)(ii)(F) of this section must be in bold text for reasons previously discussed.

Legal authority. As previously discussed, section 6(l)(1) of RESPA requires a servicer to provide a borrower with two notices before charging a borrower for force-placed insurance, and that the Bureau believes that model forms facilitate compliance with the new Dodd-Frank Act requirements concerning force-placed insurance disclosures and the Bureau’s proposed supplemental disclosures. To implement section 6(l)(1) of RESPA, the Bureau is proposing a new § 1024.37(d)(3) to Regulation X pursuant to its authority under section 6(j)(3) of RESPA. Section 6(j)(3) of RESPA authorizes the Bureau to establish any requirements necessary to carry out the purposes of section 6 of RESPA. The Bureau has additional authority under section 6(k)(1)(E) of RESPA to prescribe regulations that are appropriate to carry out the consumer protection purposes of RESPA, and under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations as may be necessary to achieve the purposes of RESPA. The forms MS-3(B) and MS-3(C) are additionally proposed under Dodd-Frank Act section 1032(b).

37(d)(4) Updating notice with borrower information

Proposed § 1024.37(d)(4) provides that if a servicer receives hazard insurance information from a borrower after a written notice required pursuant to § 1024.37(d)(1) has been put into production, the servicer is not required to update the notice so long as the notice was put into production within a reasonable time prior to the servicer delivering the notice to the borrower or placing the notice in the mail. Proposed comment 37(d)(4)-1 provides that a servicer may have to prepare the written notice required pursuant to § 1024.37(d)(1) in advance of delivering or placing the notice in the mail. If the notice has already been put into production, the servicer is not required to update the notice with insurance information received from the borrower after production has started so long the notice was put into production within a reasonable time prior to the servicer delivering or placing the notice in the mail. The Bureau proposes to provide guidance that 5 days prior is a reasonable time. The Bureau invites comment on whether, in certain circumstances, a longer time frame is reasonable.

Legal authority. The Bureau recognizes that servicers may receive borrower’s hazard insurance information after they have put the notices required pursuant to § 1024.37(d)(1) into production, and that it may be impracticable for them to stop production to update the notices. Accordingly, the Bureau is using its authority under RESPA sections 6(k)(1)(E) to provide a safe harbor in proposed § 1024.37(d)(4). Section 6(k)(1)(E) of RESPA authorizes the Bureau to prescribe regulations that are appropriate to carry out the consumer protection purposes of RESPA. The Bureau has additional authority under section 6(j)(3) of RESPA to establish any requirements necessary to carry out the purposes of section 6 of RESPA, and under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations as may be necessary to achieve the purposes of RESPA.

37(e) Renewal or Replacement of Force-Placed Insurance

(37)(e)(1) In general

Proposed § 1024.37(e)(1) provides that a servicer may not charge a borrower for renewing or replacing existing force-placed insurance unless: (1) The servicer delivers or places in the mail a written notice to the borrower with the disclosures set forth in § 1024.37(e)(2) at least 45 days before the premium charge or any fee is assessed; and (2) during the 45-day notice period, the servicer has not received evidence that the borrower has obtained hazard insurance. Proposed § 1024.37(e)(1) further provides that notwithstanding § 1024.37(e)(1)(i) and (e)(ii), a servicer that has renewed or replaced the existing force-placed insurance during the 45-day notice period may charge the borrower for the renewal or replacement promptly after the servicer receives verification that hazard insurance obtained by the borrower did not provide the borrower with insurance coverage for any period of time following the expiration of the existing force-placed insurance.

Proposed comment 37(e)(1)(iii)-1 illustrates when a servicer may charge a borrower for the renewal or replacement of the borrower’s existing force-placed insurance before the end of the 45-day notice period. In the example, on January 2, the servicer sends the notice required by § 1024.37(e)(1). On January 12, the existing force-placed insurance the servicer had obtained on the borrower’s property expires and the servicer replaces the expired force-placed insurance policy with a new force-placed insurance policy effective January 13. On February 5, the servicer receives verification that the borrower obtained hazard insurance effective January 31. The servicer may charge the borrower for force-placed insurance from January 13 to January 30, as early as February 5.

Legal authority. As discussed previously, there does not appear to be an industry standard that applies to renewal procedures for force-placed insurance. Moreover, incentives like commissions paid to servicers or their insurance affiliates may cause servicers to prefer renewing or replacing existing force-placed insurance coverage over providing borrowers with an opportunity to obtain hazard insurance. The Bureau’s proposal could help a borrower avoid incurring the cost to the borrower associated his or her servicer renewing or replacing existing force-placed insurance because the proposal provides for advance notice that allows a borrower the time the borrower may need to buy hazard insurance before being charged for the cost of force-placed insurance. The Bureau proposes to add new § 1024.37(e)(1) pursuant to its authority under RESPA section 6(k)(1)(E), which authorizes the Bureau to prescribe regulations that are appropriate to carry out the consumer protection purposes of RESPA. The Bureau has additional authority under section 6(j)(3) of RESPA to establish any requirements necessary to carry out the purposes of section 6 of RESPA, and under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations as may be necessary to achieve the purposes of RESPA.

37(e)(2) Content of Renewal Notice

Except as set forth below, proposed § 1024.37(e)(2) would require servicers to provide the disclosures set forth in proposed § 1024.37(c)(2) in the notice required by proposed § 1024.37(e)(1). The main differences between the disclosures set forth in proposed § 1024.37(c)(2) and proposed § 1024.37(e)(2) is that in proposed § 1024.37(e)(2), servicers must provide a statement that: (1) The servicer previously obtained insurance on the borrower’s property and assessed the cost of the insurance to the borrower because the servicer did not have evidence that the borrower had hazard insurance coverage for the property; and (2) the servicer has the right to maintain insurance by renewing or replacing the insurance it previously obtained because insurance is required. The Bureau believes the differences are necessary to distinguish the notice required pursuant to § 1024.37(e)(1) from the notice required pursuant to proposed § 1024.37(c)(1).

Paragraph 37(e)(2)(vii)

Proposed § 1024.37(e)(2)(vii) would require a servicer to set forth the cost of the force-placed insurance, stated as an annual premium. If the cost of the force-placed insurance is not known as of the date of the disclosure, a good faith estimate shall be disclosed and be identified as such. Proposed comment 37(e)(2)(vii)-1 provides that the good faith requirement set forth in § 1024.37(e)(2)(vii) is the same good faith requirement set forth in § 1024.37(c)(2)(ix).

Legal authority. The Bureau proposes to add new § 1024.37(e)(2) to Regulation X pursuant to its authority under section 6(k)(1)(E) of RESPA. Section 6(k)(1)(E) of RESPA authorizes the Bureau to prescribe regulations that are appropriate to carry out the consumer protection purposes of RESPA. As discussed above, the Bureau’s proposal to require servicers to provide a written notice before charging a borrower for the renewal or replacement of existing hazard insurance could help a borrower avoid incurring the cost to the borrower associated his or her servicer renewing or replacing existing force-placed insurance. The Bureau has additional authority under section 6(j)(3) of RESPA to establish any requirements necessary to carry out the purposes of section 6 of RESPA, and under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations as may be necessary to achieve the purposes of RESPA. The disclosures in proposed § 1024.37(e)(2) are additionally proposed pursuant to Dodd-Frank Act section 1032. Consistent with this provision, the Bureau believes that proposed disclosures will ensure that the costs, benefits, and risks associated with the service that servicers provide in the loan by obtaining force-placed insurance to renew or replace existing force-placed insurance are fully, accurately, and effectively disclosed to borrowers, in light of the facts and circumstances.

The Bureau notes that proposed § 1024.37(e)(2) is subject to the general disclosure requirements proposed § 1024.32, including, for example, proposed § 1024.32’s clear and conspicuous requirement. As discussed previously, proposed § 1024.32 also permits servicers to combine disclosures required pursuant to subpart C of Regulation X with disclosures required by applicable law, including state law.

37(e)(3) Format

Proposed § 1024.37(e)(3) provides that the disclosures set forth in § 1024.37(e)(2) must be in a format substantially similar to form MS-3(D), set forth in appendix MS-3. Disclosures made pursuant to § 1024.37(e)(2)(vi)(B) and 37(e)(2)(vii) must be in bold text. Disclosures made pursuant to § 1024.37(e)(2)(iv) must be in bold text, except that the physical address of the property may be in regular text. The Bureau discussed the usefulness of highlighting (bold text) important information to borrowers previously, and is proposing that disclosures discussed above be in bold text for similar reasons.

Legal authority. The Bureau proposes to exercise its authority under RESPA sections 6(k)(1)(E) add § 1024.37(e)(3) to Regulation X. As discussed above, the Bureau believes model forms facilitate compliance. Section 6(k)(1)(E) of RESPA authorizes the Bureau to prescribe regulations that are appropriate to carry out the consumer protection purposes of RESPA. The Bureau has additional authority under section 6(j)(3) of RESPA to establish any requirements necessary to carry out the purposes of section 6 of RESPA, and under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations as may be necessary to achieve the purposes of RESPA. The model form MS-3(D) is additionally proposed under Dodd-Frank Act section 1032(b).

37(e)(4) Compliance

Proposed § 1024.37(e)(4) provides that before the first anniversary of a servicer obtaining force-placed insurance on a borrower’s property, the servicer shall deliver to the borrower or place in the mail the notice required by § 1024.37(e)(1). Subsequently, a servicer is not required to comply with § 1024.37(e)(1) before charging a borrower for renewing or replacing existing force-placed insurance more than once every 12 months.

The Bureau expects borrowers should be able to retain the notice proposed in proposed § 1024.37(e)(1) over the course of a 12-months period. Additionally, the Bureau notes that because it is proposing to require a servicer to state the annual cost of force-placed insurance, the borrower would be informed of the annualized cost of the force-placed insurance. Accordingly, the Bureau does not believe that receiving more than one renewal or replacement notice every 12-month period would significantly benefit borrowers. The Bureau solicits comment on whether providing the renewal or replacement notice once during a 12-month period adequately informs borrowers about the costs, benefits, and risks associated with servicers’ renewal or replacement of existing force-placed insurance.

Legal authority. The Bureau proposes to exercise its authority under RESPA sections 6(k)(1)(E) add § 1024.37(e)(4) to Regulation X. Section 6(k)(1)(E) of RESPA authorizes the Bureau to prescribe regulations that are appropriate to carry out the consumer protection purposes of RESPA. For reasons discussed above, the Bureau does not believe that receiving more than one renewal or replacement notice every 12-month period would significantly benefit borrowers. Section 1024.37(e)(4) is additionally proposed under section 6(j)(3) of RESPA to establish any requirements necessary to carry out the purposes of section 6 of RESPA, and under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations as may be necessary to achieve the purposes of RESPA.

37(f) Mailing the Notices

RESPA section 6(l)(1), discussed previously, requires servicers to send the notices required under RESPA section 6(l)(1)(A) and (B) by first-class mail. The Bureau proposes to implement RESPA section 6(l)(1) by adding new § 1024.37(f) to Regulation X to provide that if a servicer mails a notice required pursuant to § 1024.37(c)(1)(i), (d)(1) and (e)(1) of this section, as applicable, the servicer must use a class of mail not less than first-class mail. Although the notice required proposed § 1024.37(e)(1) is not required by statute, the Bureau believes that proposing that the same mailing requirements to any notice required pursuant to § 1024.37 facilitates compliance by promoting consistency.

Legal authority. The Bureau proposes to implement RESPA section 6(l)(1), pursuant to its authority under RESPA section 6(j)(3) to establish any requirements necessary to carry out section 6 of RESPA by adding new § 1024.37(f) to Regulation X. Section 1024.37(f) is additionally proposed pursuant to the Bureau’s authority under section 6(k)(1)(E) of RESPA to prescribe regulations that are appropriate to carry out the consumer protection purposes of RESPA, and under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations as may be necessary to achieve the purposes of RESPA.

37(g) Cancellation of force-placed insurance

Section 1463 amended RESPA by adding new section 6(l)(3) to RESPA. RESPA section 6(l)(3) provides that within 15 days of receipt by a servicer of confirmation of a borrower’s existing coverage, the servicer must: (1) Terminate the force-placed insurance; and (2) refund to the borrower all force-placed insurance premium charges and related fees charged to the borrower during any period in which the borrower’s insurance and the force-placed insurance were each in effect.

Proposed § 1024.37(g) provides that within 15 days of receiving verification that the borrower has hazard insurance in place, a servicer must: (1) Cancel force-placed insurance obtained for a borrower’s property; and (2) for any period during which the borrower’s hazard insurance was in place, refund to the borrower all force-placed insurance premium charges and related fees paid by the borrower for such period and remove all force-placed insurance charges and related fees from the borrower’s account for such period that the servicer has assessed to the borrower. Proposed comment 37(g)-1 provides an example of how to comply with proposed § 1024.37(g). Assume that a servicer obtains force-placed insurance, effective January 1, and the premium and related charges are paid by the borrower in monthly installments, due on the first of each month. After the borrower paid the April installment, the servicer receives insurance information from the borrower, and verifies that the borrower had obtained hazard insurance and that the insurance had been in place since March 15. To comply with § 1024.37(g), within 15 days of receiving such verification, the servicer must: (1) Cancel the force-placed insurance; (2) provide a refund for force-placed insurance premium charges and related fees paid by the borrower for the period between March 15 and April 30; and (3) remove from the borrower’s account any force-placed insurance premium charges and related fees for the period after March 15 that the servicer has assessed to the borrower but the borrower has not yet paid.

Legal authority. The Bureau proposes to implement RESPA section 6(l)(3), pursuant to its authority under RESPA section 6(j)(3) to establish any requirements necessary to carry out section 6 of RESPA by adding new § 1024.37(g) to Regulation X. Section 1024.37(g) is additionally proposed pursuant to the Bureau’s authority under section 6(k)(1)(E) of RESPA to prescribe regulations that are appropriate to carry out the consumer protection purposes of RESPA, and under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations as may be necessary to achieve the purposes of RESPA.

37(h) Limitation on Force-Placed Insurance Charges

Section 1463 of the Dodd-Frank Act amended RESPA section 6 by adding new section 6(m) to RESPA to require that all charges, apart from charges subject to State regulation as the business of insurance, related to force-placed insurance imposed on the borrower by or through the servicer must be bona fide and reasonable.

Proposed § 1024.37(h)(1) provides that except for charges subject to State regulation as the business of insurance and charges authorized by the FDPA, all charges related to force-placed insurance assessed to a borrower by or through the servicer must be bona fide and reasonable. Proposed § 1024.37(h)(2) provides that that a bona fide and reasonable charge is a charge for a service actually performed that bears a reasonable relationship to the servicer’s cost of providing the service, and is not otherwise prohibited by applicable law.

As previously discussed, RESPA section 6(m) provides that charges subject to State regulation as the business of insurance are not subject to RESPA 6(m)’s “bona fide and reasonable” requirement. Furthermore, the Bureau believes it is important to clarify that proposed § 1024.37(h) does not regulate charges authorized by the FDPA. As discussed previously in the discussion of proposed § 1024.37(a)(2)(i), certain servicers are required by the FDPA to obtain force-placed flood insurance. The FDPA provides that notwithstanding any Federal or State law, any servicer for a loan “secured by improved real estate or a mobile home” may charge a reasonable fee for determining whether the building or mobile home securing the loan is located or will be located in a SFHA. See 42 U.S.C. 4012a(h). As discussed previously, the Bureau is concerned about issuing regulations that would overlap with regulations issued pursuant to the FDPA. Accordingly, the Bureau proposes to use its exemption authority pursuant to RESPA section 19(a) to exempt charges authorized by the FDPA from proposed § 1024.37(h).

Also as previously discussed, force-placed insurance is substantially more expensive than hazard insurance a borrower could obtain for himself and some servicers may be incentivized to obtain force-placed insurance even though helping a borrower to renew hazard insurance obtained by the borrower when practicable is better for the borrower and the owners and assignees of mortgage loans. The Bureau believes it is important to ensure that these servicers do not try to inflate the already-high cost of force-placed insurance by assessing charges to borrowers that are not for services actually performed, do not bear a reasonable relationship to the servicer’s cost of providing the service, and is prohibited by applicable law. Accordingly, the Bureau believes its proposed definition of bona fide and reasonable charge, discussed above, is appropriate.

Legal authority. The Bureau proposes to implement RESPA section 6(m), pursuant to its authority under RESPA section 6(j)(3), to establish any requirements necessary to carry out section 6 of RESPA by adding § 1024.37(h) to Regulation X. Section 1024.37(h) is additionally proposed pursuant to the Bureau’s authority under section 6(k)(1)(E) of RESPA to prescribe regulations that are appropriate to carry out the consumer protection purposes of RESPA, and under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations, and to grant such reasonable exemptions, as may be necessary to achieve the purposes of RESPA.

37(i) Relationship to Flood Disaster Protection Act of 1973

Section 1463 of the Dodd-Frank Act amended RESPA section 6 to add new section 6(l)(4) to provide that the new Dodd-Frank Act requirements concerning force-placed insurance do not prohibit servicers from sending a simultaneous or concurrent notice of a lack of flood insurance pursuant to section 102(e) of the FDPA. Proposed § 1024.37(i) provides that if permitted by regulation under section 102(e) of the Flood Disaster Protection Act of 1973, a servicer subject to the requirements of § 1024.37 may deliver to the borrower or place in the mail any notice required by § 1024.37 together with the notice required by section 102(e) of the Flood Disaster Protection Act of 1973.

Legal authority. The Bureau proposes to implement RESPA section 6(l)(4), pursuant to its authority under RESPA section 6(j)(3) to establish any requirements necessary to carry out section 6 of RESPA by adding § 1024.37(i) to Regulation X. Section 1024.37(i) is additionally proposed pursuant to the Bureau’s authority under section 6(k)(1)(E) of RESPA to prescribe regulations that are appropriate to carry out the consumer protection purposes of RESPA, and under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations, and to grant such reasonable exemptions, as may be necessary to achieve the purposes of RESPA.

Section 1024.38 Reasonable Information Management Policies and Procedures.

Background. A servicer’s obligation to maintain accurate and timely information regarding a mortgage loan account is one of the most basic servicer duties. A servicer cannot comply with its myriad obligations to investors and under applicable law, unless it maintains accurate information regarding a mortgage loan account, including accurate and timely information with respect to borrower payments. Notwithstanding these obligations, recent evaluations of mortgage servicer practices have indicated that borrowers have been harmed as a result of servicer’s lacking adequate practices to provide servicer personnel with appropriate borrower information. Federal regulatory agencies reviewing mortgage servicing practices have found that certain servicers demonstrated “significant weaknesses in risk-management, quality control, audit, and compliance practices.”[109]

Further, and as discussed in detail above, major servicers demonstrated failures to document and verify, in accordance with applicable law, information relating to borrower mortgage loan accounts in connection with foreclosure proceedings.[110] Examinations by prudential regulators found “critical deficiencies in foreclosure governance processes, document preparation processes, and oversight and monitoring of third parties . . . [a]ll servicers [examined] exhibited similar deficiencies, although the number, nature, and severity of deficiencies varied by servicer.”[111]

38(a) In General

Proposed § 1024.38(a) would require a servicer to establish reasonable policies and procedures for maintaining and managing information and documents relating to borrower mortgage loan accounts. The proposed rule would provide that a servicer meets this requirement if the servicer’s policies and procedures are reasonably designed to achieve the objectives set forth in proposed § 1024.38(b) and are reasonably designed to ensure compliance with the standard requirements in proposed § 1024.38(c).

Proposed comment 38(a)-1 clarifies that a servicer may determine the specific methods by which it will implement reasonable information management policies and procedures to achieve the required objectives. Servicers have flexibility to design the operations that are reasonable in in light of the size, nature, and scope of the servicer’s operations, including, for example, the volume and aggregate unpaid principal balance of mortgage loans serviced, the credit quality, including the default risk, of the mortgage loans serviced, and the servicer’s history of consumer complaints. This clarification is intended to provide servicers, including small servicers, flexibility to design policies and procedures that are appropriate for their servicing businesses. When this proposal was discussed with SERs during the Small Business Review Panel outreach, the SERs were supportive of a definition that provides inherent flexibility for small servicers to design policies and procedures that reflect the needs of their servicing operations.[112] Consistent with the Small Business Review Panel recommendations[113] the Bureau requests comment on further guidance that should be included to clarify the types of policies and procedures that would be reasonable for small servicers.

Proposed § 1024.38(a)(2) provides a safe harbor, which states that a servicer satisfies the requirement in proposed § 1024.38(a)(1) if the servicer does not engage in a pattern or practice of failing to achieve any of the objectives set forth in proposed § 1024.38(b) and does not engage in a pattern or practice of failing to comply with any of the standard requirements in proposed § 1024.38(c). The purpose of this provision is to establish an objectives-based test for determining if a servicer’s policies and procedures are reasonable. Thus, servicers have flexibility to develop policies and procedures that a servicer determines are appropriate so long as those policies and procedures do not result in a pattern or practice of failing to achieve an enumerated objective or comply with a standard requirement. If a servicer demonstrates a pattern or practice of failing to achieve an objective or comply with a standard requirement, a servicer may violate this provision if the policies and procedures are not reasonable. Proposed comment 38(a)(1)-1 provides examples of potential pattern and practice failures by servicers. Proposed comment 38(a)(2)-1 clarifies that in the event a servicer fails to comply with the safe harbor in proposed § 1024.38(a)(2) because the servicer has a pattern or practice of failing to achieve the objectives set forth in proposed § 1024.38(b) or failing to ensure compliance with the standard requirements in proposed § 1024.38(c), a servicer may still comply with the requirements of proposed § 1024.38 if the servicer’s policies and procedures were reasonably designed to achieve the objectives set forth in proposed § 1024.38(b) and to ensure compliance with the standard requirements in proposed § 1024.38(c).

A servicer’s failure to achieve each of the objectives harms borrowers because such failures create the potential for adverse consequences. These may include, without limitation, imposing improper fees on borrowers, inability to reasonably evaluate loss mitigation applications for loss mitigation options that may benefit borrowers and owners or assignees of mortgage loans, unwarranted costs to borrowers, and the potential for fraud upon courts through inaccurate or unverifiable legal pleadings.

The Bureau relies on its authority in section 6(k)(1)(E) of RESPA to establish obligations appropriate to carry out the consumer protection purposes of RESPA to propose § 1024.38(a). The Bureau further has authority pursuant to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA and has authority under section 19(a) of RESPA to prescribe such rules and regulations and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

38(b) Objectives

38(b)(1) Accessing and Providing Accurate Information

Proposed § 1024.38(b)(1) would mandate that a servicer’s policies and procedures for maintaining and managing information and documents must be designed to enable the servicer to (1) provide accurate and timely disclosures to borrowers, (2) investigate, respond to, and, as appropriate, correct errors, (3) provide borrowers with requested information, (4) provide owners or assignees of mortgage loans with accurate and current information about any mortgage loans they own, and (5) submit documents or filings required for a foreclosure process that reflect accurate and current information and comply with applicable law.For the reasons stated above in the background to proposed § 1024.38, the Bureau believes it is necessary to achieve the consumer protection purposes of RESPA that servicers implement policies and procedures to achieve the objectives set forth in proposed § 1024.38(b)(1). These objectives provide reasonable and appropriate protections for borrowers against harms resulting from actions based on improper or inaccurate servicer documentation or information. Further, the requirement in proposed § 1024.38(b)(4) ensures that owners and assignees of mortgage loans get better information reporting about the mortgage loans they own. Owners and assignees can play an important role in ensuring that servicers comply with requirements of the owner or assignee, which may inure to the benefit of consumers. For example, when a servicer improperly obtains force-placed insurance for a delinquent borrower, the costs of that insurance may push a borrower further into delinquency and ultimately foreclosure, where the costs of the more expensive policy will reduce the ultimate recovery to the owner or assignee.

The Bureau requests comment regarding whether the Bureau had identified the appropriate objectives and whether objectives should be removed, or other objectives included, in the requirements.

Legal authority. The Bureau relies on its authority pursuant to section 6(k)(1)(E) of RESPA to require servicers to comply with any obligation found by the Bureau to be appropriate to carry out the consumer protection purposes of RESPA. The Bureau further has authority pursuant to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA and has authority under section 19(a) of RESPA to prescribe such rules and regulations and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

38(b)(2) Evaluating Loss Mitigation Options

Proposed § 1024.38(b)(2) would mandate that a servicer’s policies and procedures for maintaining and managing information and documents must be designed to enable the servicer to (1) provide accurate information to borrowers regarding loss mitigation options, (2) identify all loss mitigation options for which a borrower may be eligible, (3) provide prompt access to all documents and information submitted by a borrower in connection with a loss mitigation option, (4) identify documents and information that a borrower is required to submit to make a loss mitigation application complete, and (5) evaluate borrower applications, and any appeals, as appropriate.

The Bureau believes that requiring servicers to have reasonable policies and procedures to maintain and manage information and documents that are designed to enable the servicer to evaluate borrower’s for loss mitigation options facilitates compliance with proposed § 1024.41. Further, such policies and procedures will lead to processes that are more protective of consumers by requiring servicers to consider, in advance of the potential delinquency of a particular mortgage loan, the loss mitigation options that are generally available to borrowers.

Loss mitigation options for which borrowers may be eligible. In order to meet the objectives, a servicer will have to determine, on a loan by loan basis, which loss mitigation options offered by the servicer are available to borrowers. The Bureau anticipates that for servicers that service mortgage loans held by the servicer or an affiliate in portfolio, this determination will not present significant burdens with respect to such mortgage loans as any such policies likely will be uniformly set forth by the servicer or affiliate. Similarly, the Bureau anticipates that servicers that service mortgage loans that are included in securitizations guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae, or insured by FHA or other government sponsored insurance programs, will be familiar with policies that will be set forth by those entities regarding the requirements for loss mitigation options.

Servicers that service mortgage loans that are securitized through private label securities will be required to undertake more burdensome efforts to identify which, if any, loss mitigation programs offered by the servicer are available to mortgage loan borrowers whose mortgage loans are owned by the securitization trust pursuant to the terms of any servicing agreement.

Servicer failures to achieve optimal loss mitigation efforts. The Bureau believes that regulations relating to the evaluation of borrowers for loss mitigation options, including the requirements of proposed § 1024.38(b)(2) and proposed § 1024.41 are necessary in light of the current servicing industry structure.

Servicing industry compensation is not structured to incentivize servicers to engage in loss mitigation efforts. In that regard, “the servicing industry‘s combination of two distinct business lines— transaction processing and default management—encourage servicers to underinvest in default management capabilities, leaving them with limited ability to mitigate losses.”[114] Direct servicing compensation is generally fixed per loan. A servicer of a prime mortgage loan may earn 25 basis points for servicing that loan, whereas a servicer of a subprime mortgage loan may earn 50 basis points for servicing that loan.[115] The increased fee for servicing a loan with a lower credit quality should reflect the increased cost a servicer may incur to service the loans because of the higher default or cash flow advance assumptions related to those loans. However, the Bureau’s outreach with consumers, servicers, GSEs, investors, and other federal regulators indicates that servicers have failed to invest in systems and processes necessary to undertake the work necessary to service mortgage loans that are not performing.

Further, mortgage servicing cash flows, including servicer expenses like advances to investors, incentivize servicers to pursue foreclosure. Servicers are required to advance payments to investors so long as a mortgage loan has not been “charged off.” When a servicer modifies a mortgage loan on behalf of an investor, it is sometimes unclear how the modified payment amounts should be treated and whether a servicer must continue to advance funds to the investor to make up for any deficiency between a borrower’s modified payment and the scheduled payment owed to an investor.

The Bureau observes that servicers have begun to alter the manner in which they invest in infrastructure and are changing their approach to default management. Notwithstanding these developments, reasonable policies and procedures to maintain and manage information and documents that are designed to enable a servicer to evaluate loss mitigation options impose a reasonable burden on servicers that will benefit borrowers in future years as servicers transition from reacting to the current crisis to a more steady market punctuated by regional spikes in delinquencies and foreclosures. Servicers that have not invested in improving loss mitigation functions may find less incentivize to do so as housing markets recover, leading to continued inadequate infrastructure during future regional or national housing downturns, which may lead to future borrower harm.

The Bureau requests comment regarding whether the Bureau had identified the appropriate objectives and whether objectives should be removed, or other objectives included, in the requirements.

Legal authority. The Bureau relies on its authority pursuant to section 6(k)(1)(E) of RESPA to require servicers to comply with any obligation found by the Bureau to be appropriate to carry out the consumer protection purposes of RESPA. The Bureau further has authority pursuant to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA and has authority under section 19(a) of RESPA to prescribe such rules and regulations and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

38(b)(3) Facilitating Oversight of, and Compliance by, Service Providers

Proposed § 1024.38(b)(3) would mandate that a servicer’s policies and procedures for maintaining and managing information and documents must be designed to enable the servicer to provide appropriate servicer personnel with accurate and current information reflecting actions performed by service providers, facilitate periodic reviews of service providers, and facilitate the sharing of accurate and current information among servicer personnel and service providers.

Recent evaluations of mortgage servicer practices have found that some major servicers “did not properly structure, carefully conduct, or prudently manage their third-party vendor relationships[.]”[116] For example, certain servicers supervised by the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency did not monitor third-party vendor foreclosure law firms compliance with the servicer’s standards, did not retain copies of documents maintained by third-party law firms, and did not provide formal guidance, policies, or procedures governing the selection, ongoing management, and termination of law firms used to manage foreclosures.[117] Similar failures were present in connection with servicer relationships with default management service providers and Mortgage Electronic Registration Systems, Inc. (MERS).[118] The Federal Reserve Board stated to Congress that federal regulatory agencies identified significant “shortcomings in staff training, coordination among loan modification and foreclosure staff, and management and oversight of service providers, including legal services.”[119] These failures have manifested in significant harms for borrowers, including imposing unwarranted fees on borrowers and harms relating to so-called “dual tracking” from miscommunications between service providers and servicer loss mitigation personnel.

The Bureau requests comment regarding whether the Bureau had identified the appropriate objectives and whether objectives should be removed, or other objectives included, in the requirements.

Legal authority. The Bureau relies on its authority pursuant to section 6(k)(1)(E) of RESPA to require servicers to comply with any obligation found by the Bureau to be appropriate to carry out the consumer protection purposes of RESPA. The Bureau further has authority pursuant to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA and has authority under section 19(a) of RESPA to prescribe such rules and regulations and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

38(b)(4) Facilitating Servicing Transfers

Proposed § 1024.38(b)(4) would mandate that a servicer’s policies and procedures for maintaining and managing information and documents must be designed to ensure the timely transfer of all information and documents relating to a transferred mortgage loan to a transferee servicer in a form and manner that enables the transferee servicer to comply with the requirements of subpart C and the terms of the transferee servicer’s contractual obligations to owners or assignees of the mortgage loans. Further, proposed § 1024.38(b)(4) provides that a transferee servicer shall have documents and information regarding the status of discussions with a borrower regarding loss mitigation options, any agreements with a borrower for a loss mitigation option, and any analysis be a servicer with respect to potential recovery from a non-performing mortgage loan, as appropriate (typically called a final recovery determination).

Servicing transfers give rise to potential harms to consumers. Servicers may experience problems relating to inaccurate transfer of past payment information, failures to transfer documents provided to a transferor servicer, and inaccurate transfer of information relating to loss mitigation discussions with borrowers. Borrowers engaged in loss mitigation efforts may be transferred to transferee servicers who had no knowledge of the existence or status of the loss mitigation efforts.

The Bureau believes it is a typical servicer duty for servicers to be able to effectuate sales, assignments, and transfers of mortgage servicing in a manner that does not adversely impact mortgage loan borrowers. Servicers generally should expect that servicing may be sold, assigned, or transferred for certain loans they service. Servicers owe a duty to investors to ensure that mortgage servicing can be transferred without adversely impacting the value of the investor’s asset.

The Bureau believes it is appropriate for servicers to implement reasonable information management policies and procedures to ensure that in the event of any such transfer, documents and information regarding mortgage loan accounts are identified and transferred to a transferee servicer in a manner that permits the transferee servicer to continue providing appropriate service to the borrower.

The Bureau requests comment regarding whether the Bureau had identified the appropriate objectives and whether objectives should be removed, or other objectives included, in the requirements.

Legal authority. The Bureau relies on its authority pursuant to section 6(k)(1)(E) of RESPA to require servicers to comply with any obligation found by the Bureau to be appropriate to carry out the consumer protection purposes of RESPA. The Bureau further has authority pursuant to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA and has authority under section 19(a) of RESPA to prescribe such rules and regulations and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

38(c) Standard Requirements

In addition to the objectives set forth in proposed § 1024.38(b), proposed § 1024.38(c) sets forth two standard requirements that servicers must include in the required policies and procedures. These include provisions for record retention and identification of a servicing file. With respect to record retention, proposed § 1024.38(c)(1) would require a servicer to retain documents and information relating to a mortgage file until one year after a mortgage loan is paid in full or servicing of a mortgage loan was transferred to a successor servicer. The Bureau observes that proposed §§ 1024.35 and 1024.36 require servicers to respond to notices of error and information requests provided up to one year after a mortgage loan is paid in full or servicing of a mortgage loan was transferred to a successor servicer and the Bureau believes the record retention requirement is necessary for servicer compliance with obligations set forth in §§ 1024.35 and 1024.36. Further, the Bureau observes that servicers will require accurate information for the life of the mortgage loan in order to provide accurate payoff balances to borrowers or to exercise a right to foreclose for a mortgage loan account.

The Bureau requests comment regarding whether servicers should be required to retain documents and information relating to a mortgage file until one year after a mortgage loan is paid in full or servicing of a mortgage loan was transferred to a successor servicer and the potential burden of this requirement.

Proposed § 1024.38(c)(2) would require a servicer to provide a borrower upon request a servicing file, which shall contain a schedule of all payments credited or debited to the mortgage loan account, including any escrow account as defined in § 1024.17(b) and any suspense account; a copy of the borrower’s mortgage note; a copy of the borrower’s deed of trust; any collection notes created by servicer personnel reflecting communications with borrowers about the mortgage loan account; a report of any data fields relating to a borrower’s mortgage loan account created by a servicer’s electronic systems in connection with collection practices, including records of automatically or manually dialed telephonic communications; and copies of any information or documents provided by a borrower to a servicer in accordance with the procedures set forth in §§ 1024.35 or 1024.41.

While document and information management practices vary among servicers, many large servicers maintain documents and information relating to a borrower’s mortgage loan account in many different places and forms, including on separate electronic systems. The Bureau understands that in the absence of a required convention for storage of servicing related documents and information, servicers have difficulty identifying a central file containing all necessary information regarding a borrower’s mortgage loan account, including collector’s notes, payment histories, note and deed of trust documents, and account debit and credit information, including escrow account information. Proposed § 1024.38(c)(2) would require servicers, as part of the reasonable information management policies and procedures to adopt practices to provide an accurate, complete, and defined “servicing file” to a borrower upon request and would create a commonly understood industry convention.

The Bureau requests comment regarding whether servicers should be required to adopt reasonable information management policies and procedures that facilitate providing a defined servicing file to a borrower upon request. The Bureau requests comment on the burden of adopting this requirement. Further, the Bureau requests comment regarding whether the Bureau has identified the appropriate components of a servicing file and whether certain categories of documents and information should be included or removed from the proposed requirement.

Legal authority. The Bureau relies on its authority pursuant to section 6(k)(1)(E) of RESPA to require servicers to comply with any obligation found by the Bureau to be appropriate to carry out the consumer protection purposes of RESPA. The Bureau further has authority pursuant to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA and has authority under section 19(a) of RESPA to prescribe such rules and regulations and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

Section 1024.39 Early Intervention Requirements for Certain Borrowers

Background. How a servicer manages a borrower’s delinquency plays a significant role in whether the borrower cures the delinquency or ends up in foreclosure.[120] However, for a variety of reasons, servicers have not been consistent in managing delinquent accounts to provide borrowers with an opportunity to avoid foreclosure. At the outset of the recent financial crisis, many servicers had not developed the institutional capacity to manage delinquent accounts.[121] While servicers have gained some experience managing loss mitigation programs, incentives remain that may discourage servicers from addressing a delinquency quickly, and in some cases may even cause them to favor foreclosure.[122]

For their part, delinquent borrowers may not make contact with servicers to discuss their options because they may be unaware that they have options[123] or that their servicer is able to assist them.[124] As a result of these impediments to borrower-servicer communication, many borrowers are not informed of their options to avoid foreclosure at the early stages of a delinquency, when it can be most critical for them to reach out. There is significant risk to consumers as a result of this delay because the longer a borrower remains delinquent, the more difficult it can be to avoid foreclosure.[125]

Private lenders and investors, Fannie Mae and Freddie Mac, and Federal agencies, such as FHA and VA, already have early intervention servicing standards in place for delinquent borrowers.[126] However, there are currently no uniform minimum national standards for all servicers of federally related mortgage loans. In order to ensure that servicers are providing delinquent borrowers with information about their options at the early stages of delinquency, the Bureau is proposing to establish minimum early intervention requirements under RESPA.

Proposed section 1024.39 would require servicers to provide delinquent borrowers with two notices. First, proposed § 1024.39(a), would require servicers to notify or make good faith efforts to notify a borrower orally that the borrower’s payment is late and that loss mitigation options may be available, if applicable. Servicers would be required to take this action 30 days after the payment due date, unless the borrower satisfies the payment during that period. Second, proposed § 1024.39(b) would require servicers to provide a written notice with information about the foreclosure process, housing counselors and the borrower’s State housing finance authority, and, if applicable, information about loss mitigation options that may be available to the borrower. The servicer would be required to provide the written notice not later than 40 days after the payment due date, unless the borrower satisfies the payment during that period. These two notices are designed primarily to encourage delinquent borrowers to work with their servicer to identify their options for avoiding foreclosure. The Bureau recognizes that not all delinquent borrowers who receive these notices may respond to the servicer and pursue available loss mitigation options. However, the Bureau believes that the notices will ensure, at a minimum, that all borrowers have an opportunity to do so at the early stages of a delinquency.

39(a) Oral notice

If a borrower is late in making a payment sufficient to cover principal, interest, and, if applicable, escrow, proposed § 1024.39(a) would require the servicer to notify or make good faith efforts to notify the borrower orally of that late payment and that loss mitigation options, if applicable, may be available. The term “loss mitigation options” is defined in proposed § 1024.31 and is discussed in more detail above. The Bureau is proposing this requirement because, as discussed above, evidence suggests that one of the barriers to communication between borrowers and servicers is that borrowers do not know that servicers may be helpful or that they have options to avoid foreclosure. By notifying borrowers through live contact that loss mitigation options may be available, servicers would be able to begin working with the borrower to develop appropriate relief.

Proposed § 1024.39(a) would require servicers to notify borrowers about loss mitigation options “if applicable.” Thus, servicers that do not make any loss mitigation options available to borrowers would not be required to notify borrowers that loss mitigation options may be available. In addition, proposed comment 39(a)-1.ii explains that the servicer would not be required to describe any particular option, but instead would need only inform the borrower that loss mitigation options may be available. The Bureau is not proposing that servicers provide borrowers detailed information because not all borrowers may benefit from such a conversation at the time of this contact. However, as explained in proposed comment 39(a)-1.ii, nothing would preclude the servicer from providing more detailed information that the servicer believes would assist the borrower.

During the Small Business Panel Review process, small servicer representatives explained that they are able to distinguish between borrowers who had simply forgotten to mail in a payment from borrowers who were actually having trouble making a payment.[127] The Bureau recognizes that not all borrowers may require information about loss mitigation options in order to become current on their payments, but the Bureau also understands that not all borrowers may be forthcoming regarding the reasons for a delinquency. The Bureau is concerned that these borrowers may not learn about loss mitigation options unless the servicer indicates that help may be available at the time of the proposed oral notice. The Bureau invites additional comment on how servicers typically determine whether and at what stage a borrower should be informed that loss mitigation options may be available.

Proposed comment 39(a)-1.i explains that the oral notice would have to be made through live contact with the borrower, such as by telephoning or meeting in-person with the borrower, and that oral contact does not include a recorded message delivered by phone. The Bureau has included this comment because the Bureau believes that servicers are likely to learn about the circumstances surrounding a borrower’s delinquency through an interactive conversation and thus, for example, would be better able to help the borrower identify an appropriate loss mitigation option.

Proposed § 1024.39(a) would also require the servicer to notify or make good faith efforts to provide the oral notice that the borrower is late in making a payment. This oral notice is intended to work in concert with the written periodic statement proposed in the Bureau’s 2012 TILA Mortgage Servicing Proposal, which would inform the borrower of any late fees that the borrower faces due to a delinquency. A servicer could, for example, use the oral notice to explain any late charge appearing on the periodic statement the borrower would receive. In addition, by providing this notice through live contact, a servicer could learn about the circumstances of the borrower’s delinquency and the borrower’s ability to self-cure without the assistance of a loss mitigation option.

Late payment. Proposed § 1024.39(a) would require the servicer to provide the oral notice, or make good faith efforts to do so, if the borrower is late in making “a payment sufficient to cover principal, interest, and, if applicable, escrow.” Thus, a servicer would not be required to provide the oral notice if a borrower is late only with respect to paying a late fee for a given billing cycle. The Bureau is proposing this trigger because the Bureau believes there is low risk that borrowers will default solely because of accumulated late charges if they are otherwise current with respect to principal, interest, and escrow payments.

Regulation Z § 1026.36(c)(1)(ii) generally prohibits servicers from “pyramiding” late fees—i.e., imposing a late fee or delinquency charge in connection with a payment, when the only delinquency is attributable to late fees or delinquency charges assessed on an earlier payment, and the payment is otherwise a full payment.[128] “Pyramiding” late fees can result in future payments being deemed late even if they are paid in full within the required time period, thus permitting the servicer to charge additional late fees. This practice can cause an account to appear to be in default, and thus can give rise to charging excessive or unwarranted fees to borrowers who may be unable to catch up on payments.[129] However, because this practice is prohibited under Regulation Z and other regulations, the Bureau does not expect that borrowers would be likely to be pushed into foreclosure solely because of accumulated late charges if they are otherwise current on their payment. The Bureau has taken the same approach with respect to the written notice that would be required by proposed § 1024.39(b)(1). See the section-by-section analysis below of proposed § 1024.39(b)(1).

Proposed comment 39(a)-3 explains that, for purposes of proposed § 1024.39(a), a payment would be considered late the day after a payment due date, even if the borrower is afforded a grace period before the servicer assesses a late fee. Thus, for example, if a payment due date is January 1, the servicer would be required to notify or make good faith efforts to notify the borrower not later than 30 days after January 1 (i.e., by January 31) if the borrower has not fully paid the amount owed as of January 1 and the full payment remains due during that period. Proposed comment 39(a)-3 contains a cross-reference to proposed comment 39(a)-4, which, as discussed in more detail below, addresses situations in which the borrower satisfies the payment during the 30-day period.

The Bureau recognizes that certain borrowers may be temporarily delinquent because of an accidental missed payment, a technical error in transferring funds, a short-term payment difficulty, or some other reason. These borrowers may be able to cure a delinquency without a servicer’s efforts to make live contact. Thus, proposed § 1024.39(a) provides that if the borrower fully satisfies the payment before the end of the 30-day period, the servicer would not be required to provide the notice under proposed § 1024.39(a). Proposed comment 39(a)-4 explains that a servicer would not be required to notify or make good faith efforts to notify a borrower unless the borrower remains late in making a payment during the 30-day period after the payment due date. To illustrate, proposed comment 39(a)-4 provides an example in which a borrower is initially overdue on a payment due January 1 but satisfies the payment on January 20. In this case, the servicer would not be required to notify or make good faith efforts to notify the borrower by January 31.

Proposed comment 39(a)-6 clarifies that a servicer would not be required under § 1024.39(a) to notify a borrower who is performing as agreed under a loss mitigation option designed to bring the borrower current on a previously missed payment. The Bureau is proposing this clarification because the Bureau believes it would be unnecessary for a servicer to notify a borrower of a previously missed payment if the borrower is performing under a loss mitigation option designed to cure that delinquency.

30-day period. Proposed § 1024.39(a) would require servicers to provide the oral notice not later than 30 days after a payment due date. In developing the proposed 30-day time period, the Bureau sought to harmonize the timing of the oral notice with the timing of the periodic statement under the Bureau’s 2012 TILA Mortgage Servicing Proposal, as noted above. During the Small Business Review Panel process, some small servicer representatives expressed concern that those servicing loans for agencies with more restrictive timeframes and collection requirements would incur costs if they had to meet duplicative requirements.[130] To address this concern, the Bureau is proposing an outer bound timeframe for servicers to comply with the proposed oral notice. In particular, the Bureau sought to harmonize the timing of the oral notice with existing early intervention standards established by the GSEs, FHA, and VA so that servicers already complying with those standards that meet the Bureau’s proposed requirements could comply with proposed § 1024.39.

Fannie Mae and Freddie Mac generally recommend that servicers initiate phone calls for borrowers who have missed a payment by the 16th day after a payment due date.[131] Similarly, HUD generally requires that servicers of FHA loans take “prompt action” to collect on delinquent loans.[132] Although servicers may satisfy the “prompt action” requirement through a variety of means, HUD recommends that servicers that choose to contact borrowers by telephone begin efforts by the 17th day of a borrower’s delinquency and complete them by the end of the month.[133] Servicers of VA loans are generally required to commence efforts to contact borrowers by phone concurrent with sending a written delinquency notice by the 20th day of a borrower’s delinquency.[134]

In order to provide servicers with flexibility in contacting borrowers who may have different default risk profiles, the Bureau’s proposal would provide servicers with discretion to make the contact at any time during the 30-day period. Thus, servicers who are already providing an oral notice with the information required in proposed § 1024.39(a) sooner than 30 days after a missed payment would be in compliance with the Bureau’s proposal. Although some servicers may choose to contact borrowers at a high risk of default within several days after a borrower misses a payment due date,[135] there are drawbacks to requiring servicers to contact all borrowers too soon. Borrowers may not think of themselves as being delinquent until after the expiration of a grace period, which may occur on the 10th or the 15th of the month, and they may consider contact by the servicer before the grace period unwarranted. As noted above, certain borrowers may be temporarily delinquent because of an accidental missed payment, a technical error in transferring funds, a short-term payment difficulty, or some other reason. The Bureau believes these borrowers frequently would be able to self-cure within 30 days of a missed payment.[136]

At the time the Bureau proposed its early intervention requirements for the Small Business Panel, the Bureau considered requiring servicers to contact a delinquent borrower 45 days after the borrower misses a payment.[137] The Bureau is not proposing a 45-day period as the deadline for the oral notice because the Bureau is concerned that allowing servicers to wait this long after a borrower misses a payment to provide initial notice of loss mitigation options may not afford the borrower sufficient time to consider and pursue loss mitigation options. In addition, by 45 days after a payment due date, a borrower may have become late on a second missed payment. The Bureau is concerned that delaying the time in which a servicer must make initial live contact with the borrower may make it more difficult for borrowers to cure their delinquency.

Moreover, based on feedback received from small servicer representatives during the Small Business Panel Review process, the Bureau does not believe a 30-day deadline for the proposed oral notice will present a significant burden. During the Small Business Panel Review process, small servicer representatives explained that they are often in touch with delinquent borrowers well before the 45-day period initially considered by the Bureau,[138] and often within the first ten days of a delinquency.[139] Based on this feedback, the Bureau believe that, with respect to the timeframe in which the Bureau is proposing for servicers to make initial contact,[140] a 30-day deadline for the oral notice would not require small servicers to change their early intervention practices.

The Bureau invites comment on whether the proposed 30-day time period provides borrowers with adequate notice of loss mitigation options while providing servicers sufficient flexibility in managing delinquent borrowers with different risk profiles. The Bureau also invites comment on whether the 30-day requirement would pose a substantial conflict with existing servicer practices. The Bureau invites comment on whether servicers should provide the oral notice by some deadline before or after the proposed 30-day period.

Borrower contacts the servicer about a late payment. To account for situations in which a borrower proactively contacts the servicer about a late payment, proposed comment 39(a)-5 explains that, if the borrower contacts the servicer at any time prior to the end of the 30-day period to explain that the borrower expects to be late in making a payment, the servicer could provide the oral notice under proposed § 1024.39(a) by informing the borrower at that time that loss mitigation options, if applicable, may be available. The Bureau recognizes that borrowers may contact the servicer proactively to explain that the borrower expects to become overdue on a payment or to acknowledge an ongoing delinquency. In such cases, it would not be necessary for the servicer to notify the borrower of the delinquency. However, the Bureau believes that borrowers who contact the servicer proactively would benefit from knowing about loss mitigation options for the reasons discussed above.

Proposed comment 39(a)-5.i provides two examples to clarify how servicers would comply with proposed § 1024.39(a) for borrowers who contact the servicer about a late payment. In the example in proposed comment 39(a)-5.i.A, a borrower contacts a servicer on January 25 to explain that he expects to miss a payment due February 1. The borrower satisfies the payment on February 8 and the servicer had not yet notified or made good faith efforts to notify the borrower that loss mitigation options may be available. In this case, the servicer would not be required to notify or make good faith efforts to notify the borrower that loss mitigation options may be available during the 30 days after February 1 because the borrower was able to satisfy the payment within the 30-day period after the payment due date. The proposed comment includes a cross-reference to proposed comment 39(a)-4, which addresses situations in which the borrower satisfies the payment within the 30-day period. The Bureau has included this example because many borrowers are only delinquent for short periods and may be able to self-cure within 30 days after a payment due date. In these cases, the Bureau does not believe it would be necessary to explain that loss mitigation options may be available.

In the example in proposed comment 39(a)-5.i.B, the borrower in the example at proposed comment 39(a)-5.i.A subsequently misses a payment due March 1. However, the borrower does not contact the servicer to explain the March 1 missed payment and the borrower remains late on that payment during the 30 days after March 1. In this case, not later than 30 days after March 1, the servicer would be required to notify or make good faith efforts to notify the borrower orally that he is overdue on the March 1 payment and that loss mitigation options, if applicable, may be available. This comment is intended to clarify that the servicer’s obligations to notify a borrower of a late payment is tied to the 30-day period commencing on the date of the late or missed payment. The servicer in the example in proposed comment 39(a)-5.i.B would be required to notify the borrower of the March 1 late payment because the borrower has not contacted the servicer about that payment.

Good faith efforts. The Bureau recognizes that servicers may not always be able to reach a borrower despite the servicer’s good faith efforts to make contact. Thus, under proposed § 1024.39(a), if a borrower is late in making a payment, not later than 30 days after the payment due date, the servicer would be required notify or “make good faith efforts to notify” the borrower. Proposed § 1024.39(a) also provides that if the servicer attempts to notify the borrower by telephone, good faith efforts would require calling the borrower on at least three separate days in order to reach the borrower. Proposed comment 39(a)-2 clarifies that, in order to make a good faith effort by telephone, the servicer must complete the three phone calls attempting to reach the borrower by the end of the 30-day period after the payment due date. The proposed comment also explains that a servicer attempting to reach the borrower by telephone should make the first call not later than the 28 days after the payment due date, in order to make three phone call attempts by the 30th day, because each phone call would be required to occur on a separate day, assuming the first two are unsuccessful. The Bureau believes servicers attempting to contact a borrower by phone should be required to make several attempts because of the importance of making contact. The Bureau is proposing to define good faith efforts as requiring that each attempt by phone occur on a different day because the Bureau does not believe that contacting an absent borrower in quick succession on the same day would constitute good faith efforts.

The Bureau is proposing requirements for good faith efforts by telephone because it understands this is a common method by which servicers attempt to reach delinquent borrowers. However, this is not the only way to notify the borrower under proposed § 1024.39(a). Servicers may also provide the oral notice through a live, in-person meeting. The Bureau is interested in whether there are forms of communication other than oral contact that would promote a dialogue between the borrower and the servicer regarding the borrower’s delinquency and any appropriate loss mitigation options. For example, the Bureau invites comment on whether text messages or email are as or more effective in communicating with a delinquent borrower and, if so, whether such communications should be required to meet any particular standards to satisfy a good faith effort.

Legal authority. As discussed above, the Bureau has authority to implement requirements for servicers to provide information about borrower options pursuant to section 6(k)(1)(E) of RESPA. As set forth above, the Bureau has determined that providing borrowers with timely information about loss mitigation options and encouraging servicers to work with borrowers to identify any appropriate loss mitigation options are necessary to provide borrowers a meaningful opportunity to avoid foreclosure. Proposed § 1024.39(a) would provide borrowers information about their options by requiring servicers to notify or make good faith efforts to notify borrowers that loss mitigation options, if applicable, may be available to assist them. Accordingly, the Bureau proposes to implement proposed § 1024.39(a) pursuant to its authority under section 6(k)(1)(E) of RESPA. The Bureau further has authority pursuant to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA and has authority under section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations, and to grant such reasonable exemptions for classes of transactions, as may be necessary to achieve the consumer protection purposes of RESPA.

39(b) Written Notice

39(b)(1) In General

Proposed § 1024.39(b)(1) would require the servicer to provide borrowers who are late in making a payment with a written notice containing information about the foreclosure process, contact information for housing counselors and the borrower’s State housing finance authority, and, if applicable, loss mitigation options. This notice would be required to be provided not later than 40 days after the payment due date. The proposed content requirements are discussed in more detail below in the discussion of proposed § 1024.39(b)(2).

Proposed comment 39(b)(1)-1 explains that the written notice would be required even if the servicer provided information about loss mitigation and the foreclosure process previously during the oral notice under proposed § 1024.39(a). The Bureau is proposing to require a written disclosure because borrowers may be unable to adequately assess and recall detailed information provided orally. In addition, a written disclosure would provide borrowers with the ability to review the information or discuss it with a housing counselor or other advisor.

Based on feedback received during the Small Business Review Panel process, the Bureau understands that some small servicers may not provide a written notice to delinquent borrowers.[141] The Bureau recognizes that not all servicers may provide written information to borrowers because each borrower may present unique situations. However, as discussed in more detail below, the Bureau believes borrowers would benefit from receiving written information about loss mitigation options, if applicable, and the foreclosure process. To address concerns about requiring an overly-prescriptive written notice that may not account for the variety of situations posed by delinquent borrowers, the Bureau has proposed generally applicable minimum content requirements that can be tailored to specific situations, as discussed in more detail in the section-by-section analysis of proposed § 1024.39(b)(2) below.

In addition, during the Small Business Review Panel process, some small servicers indicated they may face costs in developing and providing the written notice.[142] To assist servicers in complying with the written notice, the Bureau has developed proposed model clauses, referenced in proposed § 1024.39(b)(3). The model clauses are discussed in the section-by-section analysis of appendix MS-4. The Bureau also notes that under proposed § 1024.32, discussed above, servicers would be permitted to provide the written notice to borrowers in electronic form, subject to compliance with the consent and other provisions of the E-Sign Act. .

Late payment. Similar to the oral notice under proposed § 1024.39(a), proposed § 1024.39(b) would require the servicer to provide the written notice if a borrower is late in making a payment sufficient to cover principal, interest, and, if applicable, escrow. However, unlike the oral notice, the written notice would be required to be provided not later than 40 days after the payment due date. Proposed comment 39(b)(1)-2 includes a cross-reference to proposed comment 39(a)-3 to clarify that, for purposes of calculating when the written notice must be provided, servicers should consider a payment late in the same manner as would they would for purposes of calculating when the oral notice must be provided. Proposed comment 39(b)(1)-2 also provides an example in which a borrower misses a payment due date of January 1 and the payment remains due during the 40-day period after January 1. In this case, the servicer would be required to provide the written notice not later than 40 days after January 1—i.e., by February 10.

40-day time period. As with the oral notice, the Bureau is proposing to permit servicers to provide the written notice at any time during the 40-day period. Some servicers may choose to provide the written notice earlier for borrowers who pose a high risk of default. The Bureau is proposing a deadline that occurs after the 30-day deadline for the proposed oral notice under § 1024.39(a) to provide servicers an opportunity to tailor the written notice and other information to the borrower’s individual circumstances following the oral notice. Some servicers may choose to provide the written notice prior to the oral notice. The Bureau believes servicers should retain flexibility in determining when to provide the written notice.

In addition, the Bureau has selected a 40-day time period to provide borrowers with a reasonable opportunity to cure the delinquency within ten days after servicers would be required to provide the oral notice under proposed § 1024.39(a). Accordingly, proposed comment 39(b)(1)-3 explains that a service would not be required to provide the written notice unless the borrower is late in paying the amount owed in full during the 40 days after the payment due date. Proposed comment 39(b)(1)-3 provides an example in which a borrower who is contacted by a servicer on January 20 regarding a missed January 1 payment later satisfies the payment by January 30. In this case, the servicer would not be required to provide the written notice 40 days after January 1—i.e., by February 10. In addition, proposed comment 39(b)(1)-5 clarifies that a servicer would not be required under § 1024.39(b)(1) to notify a borrower who is performing as agreed under a loss mitigation option designed to bring the borrower current on a previously missed payment. See the section-by-section analysis of comment 39(a)-6 (borrower performing under a loss mitigation option) in the discussion of proposed § 1024.39(a) above.

In developing the proposed 40-day time period, the Bureau sought to harmonize the timing of the written notice with the recommended timing for the delivery of similar written notices under standards for servicers of FHA, VA, and GSE loans. HUD generally requires servicers of FHA-insured loans to provide each mortgagor in default HUD’s “Avoiding Foreclosure” pamphlet, or a form developed by the mortgagee and approved by HUD, not later than the 60th day of delinquency, although HUD recommends sending the form by the 32nd day of delinquency in order to prevent foreclosures from proceeding where avoidable.[143] Servicers of VA loans generally must provide borrowers with a letter if payment has not been received within 30 days after it is due and telephone contact could not be made.[144] Servicers of GSE loans are expected to send a written package soliciting delinquent borrowers to apply for loss mitigation options 31 to 35 days after a payment due date, unless the servicer has made contact with the borrower and received a promise to cure the delinquency within 30 days,[145] although GSE servicers have additional flexibility in providing the solicitation package to certain lower-risk borrowers as late as the 65th day of their delinquency.[146] The Bureau also understands that section 106(c)(5) of the Housing and Urban Development Act of 1968, as amended, generally requires creditors to provide notice of homeownership counseling to eligible delinquent borrowers not later than 45 days after a borrower misses a payment due date. 12 U.S.C. 1701x(c)(5)(B). Similar to the information required under section 106(c)(5) of the Housing and Urban Development Act, the written notice in proposed § 1024.39(b)(2)(vi) would include contact information for housing counselors and the borrower’s State housing finance authority, although servicers would be required to provide the written notice not later than 40 days after a borrower misses a payment due date.

At the time the Bureau proposed its early intervention requirements for the Small Business Panel, the Bureau considered requiring servicers to provide delinquent borrowers with written information not later than 45 days after the borrower misses a payment.[147] The Bureau is not proposing a 45-day period for the deadline for the written notice in proposed § 1024.39(a) because, as noted above, the Bureau intended to provide borrowers with a reasonable opportunity to cure a delinquency after receiving the oral notice (which, pursuant to proposed § 1024.39(a), would be required by the 30th day of the borrower’s delinquency). The Bureau is aware that some borrowers may be able to self-cure even after they become 30 days delinquent. In light of this, the Bureau invites comment on how far the deadline for the written notice could be extended to permit a borrower to self-cure, while still providing delinquent borrowers with adequate notice of loss mitigation options.

Based on feedback provided during the Small Business Review Panel process, the Bureau does not believe a 40-day timeframe for providing the written notice would impose a significant burden for small servicers; small servicer representatives explained that they are generally in touch with delinquent borrowers well ahead of the 45-day time period initially considered by the Bureau.[148]

During informal consultation, some commenters expressed concern that servicers may have difficulty complying with the Bureau’s proposed 40-day deadline in light of existing servicer requirements. The Bureau understands that a single deadline for sending the written notice may require some servicers to change their practices with respect to certain borrowers, such as GSE servicers servicing loans for borrowers determined to be at lower risk for foreclosure. To the extent requirements proposed by Bureau overlap with standards imposed by Federal agencies, the GSEs, or others parties, the Bureau expects servicers would abide by stricter standard in order to comply with all requirements. The Bureau, however, continues to consider how it may align its requirements with best practices that help borrowers avoid foreclosure.

Some commenters recommended that the Bureau could address a compliance conflict by extending the deadline for sending the notice. The Bureau is concerned that extending the deadline for the written notice too far into a borrower’s delinquency may not provide borrowers sufficient time to process loss mitigation applications before the foreclosure process begins. In addition, there is some risk that borrowers could fall further behind on their payments without knowing how to pursue loss mitigation options. The Bureau recognizes that providing the written notice to all delinquent borrowers within a 40-day period may be unnecessary for some borrowers, such as those who present a low risk of default. To mitigate this potential for unnecessary burden, the Bureau is proposing that the written notice be provided to delinquent borrowers only once every 180-day period, as discussed below in the paragraph heading, “Frequency of the notice.” The Bureau invites comment on whether extending the 40-day deadline for the written notice to 45 days, 65 days, or longer would provide borrowers with sufficient notice of loss mitigation options before a servicer begins the foreclosure process.

In developing the proposed 40-day deadline, the Bureau also considered whether to require servicers to provide the written notice not later than five days after a borrower contacts the servicer about the borrower’s anticipated difficulty with making a payment.[149] The Bureau has not proposed this requirement but instead is proposing a single 40-day deadline in order to balance the need to provide borrowers with assistance at the early stages of a delinquency with the need to provide clear and enforceable standards. The Bureau is concerned that it may be difficult to enforce a requirement to provide the written notice based on borrowers’ explaining that they may have difficulty making a payment, particularly because such a communication may be subject to interpretation. A single 40-day deadline would ensure servicers are accountable to a clear standard that avoids the question of whether borrowers had, in fact, communicated that they expect to have difficulty making payment. In addition, as previously noted, the single 40-day deadline is intended to provide servicers with flexibility to determine the most appropriate time to provide the written notice and to provide borrowers with the opportunity to self-cure. Finally, the Bureau believes that proposed § 1024.36, which would require servicers to respond to information requests, will address situations in which borrowers request information about loss mitigation and foreclosure.

Frequency of the notice. Proposed comment 39(b)(1)-4 explains that a servicer would not be required to provide the written notice under § 1024.39(b) more than once during any 180-day period beginning on the date on which the disclosure is provided. Proposed comment 39(b)(1)-4 further explains that, notwithstanding this limitation, a servicer would still be required to provide the oral notice required under § 1024.39(a) for each payment that is overdue. Proposed comment 39(b)(1)-4 provides an example in which a borrower misses a payment due March 1 and the borrower remains late on that payment during the 40 days after March 1. As would be required under § 1024.39(b)(1), the servicer provides the written disclosure 40 days after March 1—i.e., by April 10. If the borrower subsequently misses another payment due April 1 and remains late on that payment during the 40 days after April 1, the servicer would not be required to provide the written notice again for the 180-day period beginning on April 10, the date the servicer last provided the written notice. However, because the borrower missed payments due on March 1 and April 1, the servicer would be required to provide the oral notice under § 1024.39(a) within the 30-day periods beginning on March 1 and April 1.

During the Small Business Panel Review process, a small servicer representative expressed concern about sending a written notice each month for borrowers who are consistently behind on their payments.[150] The Bureau does not believe that borrowers who are consistently delinquent would benefit from receiving the same written notice every month. The Bureau expects borrowers would be able to retain the disclosure because, as discussed above, proposed § 1024.32 would require that the disclosure be provided in a form the borrower may keep. However, the Bureau does not believe servicers should only be permitted to provide the written notice once because the content in the written notice may be updated over time. The Bureau notes that providing the written disclosure once during any six-month period is generally consistent with HUD’s requirements for servicers of FHA-insured loans. HUD’s regulations provide that if an account is brought current and then again becomes delinquent, the “Avoiding Foreclosure” pamphlet must be sent again unless the beginning of the new delinquency occurs less than six months after the pamphlet was last mailed.[151] The Bureau solicits comment on whether providing the written disclosure once during any 180-day period is sufficient to provide borrowers with meaningful information.

Legal authority. As discussed above, the Bureau has authority to implement requirements for servicers to provide information about borrower options pursuant to section 6(k)(1)(E) of RESPA. As set forth above, the Bureau has determined that providing borrowers with timely information about loss mitigation options and the foreclosure process, and encouraging servicers to work with borrowers to identify any appropriate loss mitigation options, are necessary to provide borrowers a meaningful opportunity to avoid foreclosure. Proposed § 1024.39(b)(1) sets forth the general requirement that servicers provide borrowers with a written notice about their options by requiring servicers to provide them with a written notice about loss mitigation options and the foreclosure process. Proposed § 1024.39(b)(1) also sets forth timing requirements for the written notice. Accordingly, the Bureau proposes to implement proposed paragraph 39(b)(1) pursuant to its authority under section 6(k)(1)(E) of RESPA. The Bureau further has authority pursuant to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA and has authority pursuant to section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations, and to grant such reasonable exemptions for classes of transactions, as may be necessary to achieve the consumer protection purposes of RESPA.

39(b)(2) Content of the Written Notice

Proposed § 1024.39(b)(2) sets forth information that servicers would be required to include in the written notice. Under paragraphs (b)(2)(i) and (b)(2)(ii) of proposed § 1024.39, the servicer would be required to include a statement encouraging the borrower to contact the servicer, along with the servicer’s mailing address and telephone number. Under paragraphs (b)(2)(iii) and (b)(2)(iv) of proposed § 1024.39, the servicer would be required, if applicable, to include a statement providing a brief description of examples of loss mitigation options that may be available, as well as a statement explaining how the borrower can obtain additional information about those options. Proposed § 1024.39(b)(2)(v) would require the servicer to include a statement explaining that foreclosure is a process to end the borrower’s ownership of the property. Proposed § 1024.39(b)(2)(v) would also require servicers to provide an estimate for when the servicer may start the foreclosure process. This estimate would be required to be expressed in a number of days from the date of a missed payment. Finally, proposed § 1024.39(b)(iv) would require servicers to include contact information for any State housing finance authorities, as defined in FIRREA section 1301, for the State in which the property is located, and either the Bureau or HUD list of homeownership counselors or counseling organizations.

The Bureau recognizes that some of the proposed content may not appear on forms currently used by servicers. For example, the estimated foreclosure timeline in proposed § 1024.39(b)(3)(v), does not appear on the HUD “Avoiding Foreclosure” brochure that servicers of FHA loans are required to send by end of the second month of a borrower’s delinquency.[152] Additionally, during the Small Business Panel Review process, small servicer representatives expressed concern that the information contained in the written notice may differ from written information they currently provide to delinquent borrowers.[153] Small servicers representatives were generally concerned that overly-prescriptive early intervention requirements would interfere with “high-touch” engagement with delinquent borrowers, which they explained was frequently tailored to borrowers’ particular circumstances; thus, the Small Business Review Panel recommended that the Bureau consider flexible early intervention requirements for small servicers in light of their existing practices.[154]

To accommodate existing servicer requirements and practices, proposed comment 39(b)(2)-1 explains that a servicer may provide additional information beyond the proposed content requirements that the servicer determines would be beneficial to the borrower. In addition, proposed comment 39(b)(2)-2 explains that any color, number of pages, size and quality of paper, type of print, and method of reproduction may be used so long as the disclosure is clearly legible. The Bureau has attempted to propose a minimum amount of content in the proposed notice that will provide delinquent borrowers with helpful information. The Bureau solicits comments on whether the content requirements in proposed § 1024.39(b)(2) would pose a substantial conflict with existing disclosure standards established by Federal agencies, the GSEs, or other existing servicer practices. To the extent the proposed the written notice would provide information not currently being provided by the Federal agencies or the GSEs, the Bureau solicits comment on whether such information would be beneficial to delinquent borrowers. The Bureau solicits comment on the proposed content requirements, described below, and whether alternative or additional content would be beneficial to borrowers.

Content requirements. Proposed § 1024.39(b)(2)(i) would require the written notice to include a statement encouraging the borrower to contact the servicer. The Bureau believes that a statement informing borrowers that the servicer can provide assistance with respect to their delinquency is necessary in order to facilitate a discussion between the borrower and the servicer at the early stages of delinquency. As noted above, many borrowers do not know that their servicer can help them avoid foreclosure if they are having trouble make their monthly payments. The Bureau believes a statement encouraging the borrower to call would remove this barrier to borrower-servicer communication. The Bureau recognizes that not every loss mitigation option may be available or appropriate for every borrower. Therefore, the Bureau is not proposing to require servicers to emphasize any particular loss mitigation option over another. Accordingly, proposed comment 39(b)(2)(i)-1 explains that the servicer would not be required, for example, to specifically request the borrower to contact the servicer regarding any particular loss mitigation option.

Contact information for the servicer. To facilitate a dialogue between the servicer and the borrower, proposed § 1024.39(b)(2)(ii) would require the written notice to include the servicer’s mailing address and telephone number. Pursuant to proposed § 1024.40(a), a servicer would be required to make available direct access to servicer personnel for assistance with curing a delinquency or avoiding a delinquency, default, or foreclosure for any borrower whom a servicer is required to notify that loss mitigation options may be available under proposed § 1024.39(a). Thus, proposed comment 39(b)(2)(ii)-1 explains that, if applicable, a servicer should provide contact information that would put a borrower in touch with servicer personnel under proposed § 1024.40.

Brief description of loss mitigation options. Proposed § 1024.39(b)(2)(iii) would require that the written notice include a statement, if applicable, providing a brief description of examples of loss mitigation options that may be available from the servicer. Proposed comment 39(b)(2)(iii)-1 explains that proposed § 1024.39(b)(2)(iii) does not mandate that a specific number of examples be disclosed, but explains that borrowers are likely to benefit from examples that permit them to remain in their homes and examples of options that would require that borrowers end their ownership of the property in order to avoid foreclosure. The Bureau is not proposing a minimum number of examples because of the difficulty in identifying a minimum number given the variety of loss mitigation options offered by servicers.

At the time the Bureau proposed its early intervention requirements for the Small Business Panel, the Bureau considered requiring servicers to provide a brief description of any loss mitigation programs available to the borrower.[155] However, the Bureau is not proposing that servicers list all of the loss mitigation options they offer because the Bureau is concerned that servicers may have difficulty providing an accurate disclosure if the number of loss mitigation options they offer changes over time. In addition, the Bureau is concerned that a lengthy written notice would undermine the intended effect of encouraging borrowers to contact their servicer to discuss their options. To address the limitation of providing borrowers with information about every option, the Bureau is proposing that the written notice contain contact information for housing counselors and the borrower’s State housing finance authority. Housing counselors and State housing finance authorities may be able to provide the borrowers with information about other loss mitigation options that may not be listed on the written notice.

Proposed comment 39(b)(2)(iii)-1 explains that a servicer may include a generic list of loss mitigation options that it offers to borrowers, and that it may include a statement that not all borrowers will qualify for the listed options. Different loss mitigation options may be available to borrowers depending on the borrower’s qualifications or other factors. To avoid confusing borrowers, the Bureau believes servicers should be able to clarify that not all of the enumerated loss mitigation options will necessarily be available.

Proposed comment 39(b)(2)(iii)-2 explains that an example of loss mitigation option may be described in one or more sentences. Proposed comment 39(b)(2)(iii)-2 also explains that if a servicer offers several loss mitigation programs, the servicer may provide a generic description of each option instead of providing detailed descriptions of each program. For example, if a servicer provides several loan modification programs, it may simply provide a generic description of a loan modification. The Bureau recognizes that loss mitigation options are complex and providing comprehensive explanations to borrowers about each option may overwhelm a delinquent borrower with information. Thus, the Bureau does not believe that borrowers would benefit from a disclosure with voluminous detail at the early stage of exploring the options. Instead, the Bureau believes that servicers should provide borrowers with a brief explanation and encourage the borrower to contact the servicer to discuss whether any options may be appropriate. The Bureau solicits comment on whether the level of detail that would be required to describe loss mitigation options would be helpful to delinquent borrowers, and if more detail would be valuable, what specific information should be required.

Explanation of how the borrower may apply for loss mitigation options. Proposed § 1024.39(b)(2)(iv) would require the written notice to include an explanation of how the borrower may obtain more information about loss mitigation options, if applicable. Proposed comment 39(b)(2)(iv)-1 explains that, at a minimum, a servicer could comply with this requirement by directing the borrower to contact the servicer for more information, such as through a statement like, “contact us for instructions on how to apply.”

Proposed comment 39(b)(2)(iv)-1 explains that, to expedite the borrower’s timely application for any loss mitigation options, servicers may wish to provide more detailed instructions on how a borrower could apply, such as by listing representative documents the borrower should make available to the servicer, such as tax filings or income statements, and by providing estimates for when the servicer expects to make a decision on a loss mitigation option. Proposed comment 39(b)(2)(iv)-1 also provides that servicers may supplement the written notice with a loss mitigation application form. At the time the Bureau proposed its early intervention requirements for the Small Business Panel, the Bureau considered requiring servicers to provide a brief outline of the requirements for qualifying for any available loss mitigation programs, including documents and other information the borrower must provide, and any timelines that apply.[156] However, the Bureau is not proposing to require servicers to provide this level of detail in order to comply with proposed § 1024.39(b)(2)(iv). Each loss mitigation option may have its own specific documentation requirements and deadlines, and servicers may be unable to provide comprehensive application instructions generally applicable to all options. Additionally, because the Bureau is proposing that servicers only provide examples of loss mitigation options in the written notice, detailed instructions for only the listed options may not be useful for all borrowers.

Foreclosure statement. Proposed § 1024.39(b)(2)(v) would require that the written notice include a statement explaining that foreclosure is a legal process to end the borrower’s ownership of the property. Proposed § 1024.39(b)(2)(v) would also require that the notice include an estimate of how many days after a missed payment the servicer makes the referral to foreclosure. Proposed comment 39(b)(2)(v)-1 clarifies that the servicer may explain that the foreclosure process may vary depending on the circumstances, such as the location of the borrower’s property that secures the loan, whether the borrower is covered by the Servicemembers Civil Relief Act (50 U.S.C. App. 501 et seq.), and the requirements of the owner or assignee of the borrower’s loan. Proposed comment 39(b)(2)(v)-2 clarifies that the servicer may qualify its estimates with a statement that different timelines may vary depending on the circumstances, such as those listed in comment 39(b)(2)(v)-1. Proposed comment 39(b)(2)(v)-2 also explains that the servicer may provide its estimate as a range of days.

During the Small Business Review Panel process, some small servicer representatives explained that information about foreclosure is typically not provided until after loss mitigation options have been explored.[157] The Bureau believes borrowers would benefit from receiving information about the foreclosure process at the same time the borrower receives information about loss mitigation options. In order for borrowers to understand the choices they face at the early stages of delinquency, the Bureau believes they would benefit from understanding what foreclosure is and approximately when it may begin at the same time that they receive information about loss mitigation options. The Bureau invites comment on this expectation and whether borrowers would benefit from receiving information about foreclosure after servicers provide information about loss mitigation options.

In addition, the Bureau is not proposing that servicers provide detailed information about foreclosure because the Bureau recognizes that foreclosure processes are complex and vary by jurisdiction. The Bureau questions whether borrowers are likely to benefit from detailed information, particularly if they are experiencing financial distress. Nonetheless, the Bureau believes that borrowers should be informed about foreclosure to some degree. The Bureau invites comment on whether borrowers would benefit from knowing when the servicer may begin the foreclosure process and whether servicers anticipate difficulty complying with this requirement.

Contact information for housing counselors and State housing finance authorities. Proposed § 1024.39(b)(vi) would require the written notice to include contact information for any State housing finance authority for the State in which the borrower’s property is located, and contact information for either the Bureau list or the HUD list of homeownership counselors or counseling organizations.[158] The Bureau is proposing to include information about housing counselors to provide delinquent borrowers with additional resources to understand their loss mitigation options. The Bureau is proposing to require similar information pertaining to housing counseling resources that would be required on the ARM interest rate adjustment notice and the periodic statement, as provided in the Bureau’s 2012 TILA Mortgage Servicing Proposal.[159]

The Bureau is proposing to require that servicers include housing counselor contact information because borrowers may be more willing to contact a housing counselor than their servicer to discuss their options.[160] In addition, a housing counselor could also provide a borrower with additional information about loss mitigation options that a servicer may not have listed on the written notice. However, distressed borrowers may be unaware that they can talk to a housing counselor.[161] The Bureau believes that including housing counseling contact information on the written notice will assist borrowers in learning more about their options and, in turn, help them engage in a constructive dialogue with their servicer.

On July 9, 2012, the Bureau released proposed rules to implement Dodd-Frank Act requirements expanding protections for “high-cost” mortgage loans under HOEPA, including a requirement that borrowers receive housing counseling (2012 HOEPA Proposal).[162] The 2012 HOEPA Proposal also proposed to implement other homeownership-counseling-related requirements that are not amendments to HOEPA, including a proposed amendment to Regulation X that lenders provide a list of five homeownership counselors or counseling organizations to applicants for a federally related mortgage loan.[163]

In connection with the written notice for delinquent borrowers, however, the Bureau is not proposing to require that servicers include a list of specific housing counseling programs or agencies (other than the State housing finance authority, discussed below), but instead that servicers provide contact information for either the Bureau list or the HUD list of homeownership counselors or counseling organizations. During informal outreach, some commenters observed that delinquent borrowers may be confused by being directed to contact several different parties in the proposed § 1024.39(b) written notice—the servicer, housing counselors, and the State housing finance authority. As previously noted, the Bureau believes that delinquent borrowers would benefit from knowing how to access housing counselors because they may be more comfortable discussing their options with a third-party. However, the Bureau also understands that there is a benefit to providing distressed borrowers with a clear and concise notice. Providing contact information to access a list of counselors and counseling organizations would reduce the likelihood of information overload while still providing borrowers with access to assistance.

In addition to information about accessing housing counselors, the Bureau is proposing to require that the proposed § 1024.39(b) written notice include contact information for the State housing finance authority located in the State in which the property is located. The Bureau is proposing this because the Bureau believes borrowers are likely to benefit from knowing how to contact their State housing finance authority in the context of receiving information from their servicer about loss mitigation options. The Bureau is proposing that the § 1024.39(b) written notice include contact information for the State housing finance authority for the State in which the borrower’s property is located. The proposed § 1024.39(b) written notice would be required for delinquent borrowers of federally related mortgages, which are not limited to loans secured by the borrower’s principal dwelling. Thus, it is possible that the property securing the federally related mortgage may be located in a different State than the State in which the borrower resides. Accordingly, borrowers who are delinquent with respect to a federally related mortgage secured by a non-residential property may benefit from knowing how to access the State housing finance authority for the State in which the property is located, rather than the State in which the borrower resides.

The Bureau notes that the ARM initial interest rate adjustment notification in the 2012 TILA Mortgage Servicing Proposal would require the contact information for the State housing finance authority for the State in which the consumer resides (as opposed to the State in which the property is located).[164] While the Bureau expects the State in which the property is located will most often be the State where the consumer resides, there may be circumstances in which that is not the case. Additionally, the Bureau understands that a difference in requirements for different disclosures may increase compliance costs for servicers. The Bureau invites comment on how the Bureau can best mitigate any compliance difficulties.

More generally, the Bureau solicits comment on the costs and benefits of the provision of information about housing counselors and State housing finance authorities to delinquent borrowers in the proposed notice at § 1024.39(b). The Bureau also solicits comment on the potential effect of the Bureau’s proposal on access to homeownership counseling generally by borrowers, and the effect of increased borrower demand for counseling on existing counseling resources, including demand on State housing finance authorities. In particular, the Bureau solicits comment on whether the proposed notice at § 1024.39(b) should include a generic list to access counselors or counseling organizations, as proposed here, or a list of specific counselors or counseling organizations, as was proposed in the 2012 HOEPA Proposal. The Bureau also invites comment on whether including the State housing finance authority would be a helpful additional resource.

Legal authority. As discussed above, the Bureau has authority to implement requirements for servicers to provide information about borrower options pursuant to section 6(k)(1)(E) of RESPA. As set forth above, the Bureau has determined that providing borrowers with timely information about housing counselors and State housing finance authorities, information about loss mitigation options and the foreclosure process, and disclosures encouraging servicers to work with borrowers to identify any appropriate loss mitigation options, are necessary to provide borrowers a meaningful opportunity to avoid foreclosure. Proposed § 1024.39(b)(2) would provide borrowers with information about their options by setting forth the content requirements of the written notice about loss mitigation options and the foreclosure process that would be required under proposed § 1024.39(b)(1). Accordingly, the Bureau proposes to implement proposed paragraph 39(b)(2) pursuant to its authority under section 6(k)(1)(E) of RESPA. The Bureau further has authority pursuant to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA and has authority pursuant to section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations, and to grant such reasonable exemptions for classes of transactions, as may be necessary to achieve the consumer protection purposes of RESPA.

39(b)(3) Model Clauses

Proposed § 1024.39(b)(3) contains a reference to proposed model clauses that servicers may use to comply with the proposed written notice requirement. The proposed model clauses are contained in appendix MS-4. For more detailed discussion of the proposed model clauses, see the section-by-section analysis of appendix MS below.

Legal authority. As discussed above, the Bureau has authority to implement requirements for servicers to provide information about borrower options pursuant to section 6(k)(1)(E) of RESPA. As set forth above, the Bureau has determined that providing borrowers with timely information about housing counselors and State housing finance authorities, information about loss mitigation options and the foreclosure process, and disclosures encouraging servicers to work with borrowers to identify any appropriate loss mitigation options, are necessary to provide borrowers a meaningful opportunity to avoid foreclosure. . Proposed § 1024.39(b)(3) contains a reference to model clauses that provide borrowers with information about their options as required under paragraphs (b)(1) and (b)(2) of proposed § 1024.39. Accordingly, the Bureau proposes to implement proposed paragraph 39(b)(3) pursuant to its authority under section 6(k)(1)(E) of RESPA. The Bureau further has authority pursuant to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA and has authority pursuant to section 19(a) of RESPA to prescribe such rules and regulations, to make such interpretations, and to grant such reasonable exemptions for classes of transactions, as may be necessary to achieve the consumer protection purposes of RESPA.

Small Servicers

As discussed above, through outreach with servicers and servicing industry representatives, small servicers expressed concern that compliance with the information request provisions for oral information requests would require small servicers to invest in systems and processes at substantial costs. However, many small servicers generally explained that they did not expect the Bureau’s proposed early intervention requirements would impose significant burden because they were already providing early intervention for delinquent borrowers. Accordingly, the Bureau is not proposing to provide small servicers with an exemption from the proposed notice requirements under proposed § 1024.39. However, in light of the feedback provided by small entity representatives during the Small Business Panel Review process, as reflected in the Panel Report of the Small Business Panel, the Bureau solicits comment on whether the Bureau should consider alternative means of compliance with proposed § 1024.39 that would provide small servicers with additional flexibility, such as by permitting small servicers to develop a more streamlined written notice under proposed § 1024.39(b).[165]

Relationship with Other Applicable Laws

The Bureau understands that servicers may be subject to State and Federal laws related to debt collection practices, such as the Fair Debt Collection Practices Act, 15 U.S.C. 1692. In addition, the Bankruptcy Code’s automatic stay provisions generally prohibit, among other things, actions to collect, assess, or recover a claim against a debtor that arose before the debtor filed for bankruptcy. The Bureau invites comment on whether servicers may reasonably question how they could comply with Bureau’s proposal in light of these laws.

Section 1024.40 Continuity of Contact

Background. As discussed in part II above, the onset of the mortgage crisis revealed that many servicers did not have the infrastructure needed to handle the high volumes of delinquent mortgages, loan modification requests, and foreclosures they faced. Reports of servicers confusing delinquent borrowers with conflicting or misleading information, losing or mishandling borrower-provided documents supporting loan modifications requests, failing to respond to borrowers’ inquiries about loss mitigation in a timely manner, and transferring borrowers seeking assistance with loss mitigation from department to department made it apparent that many servicers did not provide appropriately-trained staff to assist delinquent borrowers.[166]

Regulators, both Federal and State, and the GSEs have responded by establishing staffing standards for servicers to meet when they assist delinquent borrowers. For example, in May of 2011, Treasury issued Supplemental Directive 11-04 to require qualifying servicers participating in the Making Home Affordable Program to assign potentially eligible borrowers with a member of the servicer’s staff to assist such borrowers throughout their delinquency once a servicer has made a successful effort to communicate with such borrowers about resolution of their delinquency. The staff member assigned to the borrower would have primary responsibility for coordinating the servicer’s actions to resolve the borrower’s delinquency or default and must perform certain functions with respect to the borrower, such as providing information to the borrower about loss mitigation programs available to the borrower, explaining the requirements of the various programs, notifying a borrower of the need for additional or missing information, being knowledgeable about the borrower’s mortgage loan account, and communicating the servicer’s decision regarding a borrower’s loan modification application.[167] The National Mortgage Settlement, discussed in part II.C, above, establishes similar staffing requirements for servicers to follow[168] As part of the GSE Servicing Alignment Initiative, Fannie Mae and Freddie Mac also established guidelines for servicer to follow when responding to delinquent borrowers to promote consistent borrower communications throughout delinquency.[169] In July 2012, the State of California amended its laws to require servicers to designate personnel on their staff to assist borrowers who are potentially eligible for a federal or proprietary loan modification application.[170]

Similar to the early intervention servicing standards discussed previously, however, there are currently no minimum uniform national standards that apply across the mortgage servicing industry. Proposed § 1024.40, discussed in detail below, would establish minimum staffing requirements that would apply to all mortgage servicers. The proposal is built around three obligations. First, servicers would be required to assign personnel to delinquent borrowers. Second, the servicers would be required to provide delinquent borrowers with live, telephonic responses to inquiries and, as applicable, assist the borrower with loss mitigation options. Third, servicers must establish policies and procedures reasonably designed to ensure that servicer personnel available to the borrower can perform an enumerated list of functions where applicable.

40(a)(1) In General

Proposed § 1024.40(a)(1) provides that no later than five days after a servicer has notified or made a good faith effort to notify a borrower to the extent required by § 1024.39(a), the servicer must assign personnel to respond to the borrower’s inquiries, and as applicable, assist the borrower with loss mitigation options. If a borrower has been assigned personnel as required by § 1024.40(a)(1) and the assignment has not ended when servicing for the borrower’s mortgage loan has transferred to a transferee servicer, subject to § 1024.40(c)(1)-(4), the transferee servicer must assign personnel to respond to the borrower’s inquiries, and as applicable, assist the borrower with loss mitigation options, within reasonable time of the transfer of servicing for the borrower’s mortgage loan.

Proposed comment 40(a)-1 explains that for purposes of responding to borrower inquiries and assisting the borrower with loss mitigation options as required pursuant to § 1024.40, the term “borrower” includes a person the borrower has authorized to act on behalf of the borrower (a borrower’s agent), which may include, for example, a housing counselor or attorney. Servicers may undertake reasonable procedures to determine if such person has authority from the borrower to act on the borrower’s behalf. Proposed comment 40(a)-2 clarifies that for purposes of § 1024.40(a)(1), a reasonable time for a transferee servicer to assign personnel to a borrower is by the end of the 30-day period of the transfer of servicing for the borrower’s mortgage loan.

Proposed comment 40(a)-3.i. explains that a servicer has discretion to determine the manner by which continuity of contact is implemented. For purposes of § 1024.40(a)(1), a servicer may assign a single person or a team of personnel to respond to a borrower. Proposed comment 40(a)-3.ii. explains that § 1024.40(a)(1) requires servicers to assign personnel to borrowers whom servicers are required to notify pursuant to § 1024.39(a). If a borrower whom a servicer is not required to notify pursuant to § 1024.39(a) contacts the servicer to explain that he or she expects to make be late in making a particular payment, the servicer, at its election, may assign personnel to the borrower. Proposed comment 40(a)-4 explains that § 1024.40(a)(1) does not permit or require a servicer to take any action inconsistent with applicable bankruptcy law or a court order in a bankruptcy case.

The Bureau intends § 1024.40 to work with proposed § 1024.39 (Early Intervention for Requirement for Certain Borrowers) and, as discussed below, with proposed § 1024.41 (Loss Mitigation Procedures). Proposed § 1024.40(a)(1) builds on proposed § 1024.39(a). As discussed previously, the Bureau believes that the borrowers that servicers are required to provide oral notice to pursuant to § 1024.39(a) are at high risk of becoming delinquent. As discussed above, common reported frustrations of delinquent borrowers include having to deal with servicers who would transfer them from department to department, getting confusing responses to loss mitigation requests from multiple representatives within a given servicer, and having to resubmit documents that they have previously submitted. By requiring servicers to assign the responsibility to assist delinquent borrowers to specific individuals, the Bureau believes that proposed § 1024.40(a)(1) would bring a more streamlined approach to how servicers communicate with delinquent borrowers. The streamlined approach would be responsive to the most common problems delinquent borrowers have reportedly faced in recent years.

Proposed § 1024.40(a)(1) allows for five days to pass before a servicer makes the assignment. A servicer may find itself faced with a high number of borrowers who are late with respect to making their mortgage payments. The Bureau believes it is appropriate to provide a servicer with some time to make the personnel assignment. Additionally, there could be situations where the servicer complies with the oral notification requirement with respect to a borrower, even though the servicer is not required to do so. For example, a borrower could miss his or her payment due on February 1. On February 29, the end of the month, payment has not been received. The servicer may choose to orally notify the borrower pursuant to proposed § 1024.39(a) on February 29. But so long as the borrower makes his payment by March 1, then pursuant to § 1024.39(a), the borrower would not be a borrower that the servicer is required to notify or make good faith efforts to notify pursuant to proposed § 1024.39(a). Hence the Bureau believes it is appropriate to provide servicers five days to make the personnel assignment. The Bureau invites comment on whether a longer time frame is appropriate.

Proposed comment 40(a)-1, discussed above, reflects that some delinquent borrowers may authorize third parties to assist them as they pursue alternatives to foreclosure. Accordingly, the Bureau seeks to clarify that a servicer’s obligation in proposed § 1024.40 extends to persons authorized to act on behalf of the borrower.

Proposed comment 40(a)-2, discussed above, reflects the Bureau’s belief that a transferee servicer may require some time after the transfer of servicing to identify delinquent borrowers who had personnel assigned to them by the transferor servicer. The Bureau believes that 30 days is a reasonable amount of time for a transferee servicer to assign personnel to a borrower whose mortgage loan has been transferred to the servicer through a servicing transfer. The Bureau invites comments on whether a longer time frame is appropriate.

Proposed comment 40(a)-3.i. discussed above, is consistent with the Bureau’s recognition that a one-size-fits-all approach to regulating the mortgage servicing industry may not be optimal,[171] and thus servicers should be given flexibility to implement proposed § 1024.40. It also reflects the recommendation of the Small Business Review Panel that the Bureau should provide sufficient discretion such that current, successful practices with respect to assisting delinquent borrowers could continue to exist.[172] Proposed comment 40(a)-3.ii explains that if a borrower whom a servicer is not required to notify pursuant to § 1024.39(a) contacts the servicer to explain that he or she expects to be late in making a particular payment, the servicer, at its election, may assign personnel to the borrower. As discussed above in the Bureau’s discussion of proposed comment 39(a)-5, many borrowers are delinquent for short periods of time and may be able to self-cure. The Bureau believes that servicers would incur significant cost if they were required to assign personnel to every borrower who contacts the servicer about a possible late payment. The Bureau further believes that the cost of assigning personnel to all such borrowers would be unduly burdensome to the servicer, while yielding little benefit to some of these borrowers. If the borrower who contacts the servicer about a possible late payment still has not made the payment within 30 days of the payment due date, then § 1024.39(a) would require the servicer to make oral contact with the borrower. As discussed previously, no later than five days after a servicer has notified or made a good faith effort to notify a borrower to the extent required by § 1024.39(a), the servicer must assign personnel to respond to the borrower. For these reasons, the Bureau believes it is appropriate to give servicers discretion when deciding whether or not to assign personnel to a borrower whom a servicer is not required to notify pursuant to § 1024.39(a).

Proposed comment 40(a)(1)-4 explains that § 1024.40(a) does not permit or require a servicer to take any action inconsistent with applicable bankruptcy law or a court order in a bankruptcy case. During outreach, the Bureau learned that once a borrower files for bankruptcy, servicers typically transfer the borrower’s file to a separate unit of personnel (i.e., personnel who are not part of the servicer’s loss mitigation unit), or to outside bankruptcy counsel to comply with bankruptcy law. The Bureau believes a clarification should be provided with respect to the relationship between proposed § 1024.40 and bankruptcy law. The Bureau, however, invites comment on whether servicers should be required to continue providing borrowers with access to personnel assigned to the borrowers to address borrower inquiries and loss mitigation options after borrowers have filed for bankruptcy.

Legal authority. The Bureau proposes to exercise its authority under section 6 (k)(1)(E) of RESPA to add new § 1024.40(a)(1) to Regulation X. For reasons previously discussed, the Bureau believes that proposed § 1024.40(a)(1) would bring a more streamlined approach to how servicers communicate with delinquent borrowers. The streamlined approach would be responsive to the most common problems delinquent borrowers have reportedly faced in recent years. Section 6(k)(1)(E) of RESPA authorizes the Bureau to prescribe regulations that are appropriate to carry out the consumer protection purpose of RESPA. Accordingly, the Bureau proposes to exercise its authority under section 6(k)(1)(E) of RESPA to add new § 1024.40(a)(1) to Regulation X. The Bureau further has authority under to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA, and under section 19(a) of RESPA to prescribe such rules and regulations, and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

40(a)(2) Access to Assigned Personnel

Proposed § 1024.40(a)(2) would require a servicer to make access to the assigned personnel available via telephone. If a borrower contacts the servicer and does not receive a live response from the assigned personnel, the borrower must be able to record his or her contact information. The servicer must respond to the borrower within a reasonable time. Proposed comment 40(a)(2)-1 provides that for purposes of § 1024.40(a)(2), three days (excluding legal public holidays, Saturdays, and Sundays) is a reasonable time to respond.

The Bureau previously discussed the importance of interactive conversations with delinquent borrowers in the discussion of proposed § 1024.39(a). For similar reasons, the Bureau is requiring servicers to provide telephone access where the borrower can receive live responses. The Bureau understands that some servicers may have the capacity to engage with borrowers in person. But the Bureau believes that in-person interactions are not practicable for the majority of mortgage servicers. Accordingly, the Bureau is proposing to require live, telephonic access instead. The Bureau, however, recognizes that it is possible that when a borrower calls the servicer, the borrower may not always reach a live person. Additionally, the Bureau does not believe it is necessary to require servicers to make access to a live person available 24 hours a day, seven days a week. Accordingly, the Bureau is proposing to provide servicers with a reasonable time to respond to a borrower if the borrower does not receive a live response. As discussed above, proposed comment 40(a)(2)-1 provides that for purposes of § 1024.40(a)(2), three days (excluding legal public holidays, Saturdays, and Sundays) is a reasonable time to respond. The Bureau invites comments on whether the Bureau should provide for a longer response time.

Legal authority. The Bureau proposes to exercise its authority under section 6(k)(1)(E) of RESPA to add new § 1024.40(a)(2) to Regulation X. The Bureau has previously discussed its belief in the importance of interactive conversations with delinquent borrowers. At the same time, the Bureau recognizes that it is not always possible that when a borrower calls the servicer, the borrower reaches a live person. Section 6(k)(1)(E) of RESPA authorizes the Bureau to prescribe regulations that are appropriate to carry out the consumer protection purpose of RESPA. Accordingly, the Bureau proposes to exercise its authority under section 6(k)(1)(E) of RESPA to add new § 1024.40(a)(2) to Regulation X. The Bureau further has authority under section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA, and under section 19(a) of RESPA to prescribe such rules and regulations, and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

40(b) Functions of Servicer Personnel

40(b)(1) In General

Proposed § 1024.40(b)(1) would require servicers to establish policies and procedures reasonably designed to ensure that the servicer personnel it makes available to the borrower pursuant to § 1024.40(a) perform an enumerated list of functions where applicable:(i) Provide the borrower with accurate information about:

(A) Loss mitigation options offered by the servicer and available to the borrower, based on information in the servicer’s possession;

(B) Actions the borrower must take to be evaluated for such options, including actions the borrower must take to submit a complete loss mitigation application, as defined in § 1024.41, and if applicable, actions the borrower must take to appeal the servicer’s denial of a borrower’s loss mitigation application;

(C) The status of any loss mitigation application that the borrower has submitted to the servicer;

(D) The circumstances under which the servicer may make a referral to foreclosure; and

(E) Any loss mitigation deadlines established by the servicer that the borrower must meet.

(ii) Access:

(A) A complete record of the borrower’s payment history in the servicer’s possession;

(B) All documents the borrower has submitted to the servicer in connection with the borrower’s application for a loss mitigation option offered by the servicer; and

(C) If applicable, documents the borrower has submitted to prior servicers in connection with the borrower’s application for loss mitigation options offered by those servicers, to the extent that those documents are in the servicer’s possession;

(iii) Provide the documents in § 1024.40(b)(2)(ii)(B)-(C) to persons authorized to evaluate a borrower for loss mitigation options offered by the servicer if the servicer personnel assigned to the borrower is not authorized to evaluate a borrower for loss mitigation options; and

(iv) Within a reasonable time after a borrower request, as applicable, provide the information to the borrower or inform the borrower of the telephone number and address the servicer has established for borrowers to assert an error pursuant to § 1024.35 or make an information request pursuant to § 1024.36. Proposed comment 40(b)(1)(iv) clarifies that for purposes of § 1024.40(b)(1)(iv), three days (excluding legal public holidays, Saturdays, and Sundays) is a reasonable time to provide the information the borrower has requested or inform the borrower of the telephone number and address the servicer has established for borrowers to assert an error pursuant to § 1024.35 or make an information request pursuant to § 1024.36. The Bureau invites comment on whether the Bureau should permit servicer a longer time frame to respond.

Proposed § 1024.40(b)(1) reflects the Bureau’s belief that having staff available to help delinquent borrowers is necessary, but not sufficient, to ensure that when a borrower at a high risk of default reaches out to a servicer for assistance, the borrower is connected to personnel who can address the borrower’s inquiries or loss mitigation requests adequately. The Bureau believes proposed § 1024.40(b)(1) would require servicers to provide appropriately-trained staff to assist delinquent borrowers. Further, as discussed previously, § 1024.40 is intended to work together with proposed § 1024.41 as well as proposed § 1024.39. For example, under proposed § 1024.41, a servicer is required to notify a borrower if the borrower has submitted an incomplete loss mitigation application. Section § 1024.40(b)(1) addresses this duty by requiring the personnel assigned to the borrower to inform a borrower about the steps the borrower must take to complete his or her loss mitigation application.

Another example of how proposed § 1024.40(b)(1) would work with proposed § 1024.41 is that the assigned personnel must provide a borrower with accurate information about any loss mitigation deadlines established by the servicer in accordance with § 1024.41. Proposed § 1024.41 also requires servicers to evaluate borrowers for loss mitigation options if loss mitigation options is offered in the ordinary course of a servicer’s business. Section 1024.40(b)(1)(iii), discussed above, would require assigned personnel to provide borrower-submitted documents in support of loss mitigation to other persons authorized to make loss mitigation evaluations. As discussed above, the Bureau believes it is appropriate to provide servicers with discretion on how they assist delinquent borrowers. The Bureau understands that for some servicers, especially servicers that have a small mortgage servicing portfolio of mortgage loans they originated, the personnel such servicers assign to work with delinquent borrowers typically have authority to evaluate borrowers’ loss mitigation applications. But other servicers, especially large servicers or those whose servicing portfolios are made of loans owed by mortgage investors, the process of evaluating borrowers for loss mitigation involves multiple parties. For these servicers, the personnel they assign to a delinquent borrower to provide live, telephonic responses to the borrower’s inquiries may not have the authority to evaluate the borrower’s loss mitigation application. Pursuant to proposed § 1024.40(b)(1)(iii), the servicer would nonetheless have to ensure that the assigned personnel can provide borrower-submitted documentation to other persons with such authority.

As previously discussed, the Bureau recognizes that mortgage investors and other regulators have responded with requiring servicers to adopt staffing standards. The Bureau proposes the list of functions with an eye to harmonize the various staffing standards that exist. The Bureau believes proposed § 1024.40(b)(1) would complement existing standards. The Bureau also invites comments on whether the Bureau should add additional functions to its proposed list of functions.

Proposed § 1024.40(b)(1)(iv) reflects the Bureau’s belief that even if servicers implement policies and procedures that would address staffing failures in mortgage servicing practices, borrowers may seek information that is temporarily unavailable to the servicer. For example, a borrower’s most current payment information may not be immediately available because it takes time for the payment to post to the borrower’s account. Another example is that documents a borrower has submitted to the servicer in connection with the borrower’s loss mitigation application may not be immediately available because it takes the servicer time to process them. Additionally, proposed § 1024.40(b)(1)(iv) indicates the Bureau’s belief that the assigned personnel may receive borrower requests that are more appropriately addressed through proposed §§ 1024.35 (Error Resolution Procedures) or 1024.36 (Requests for Information). The Bureau proposes to provide servicers with the discretion to make that determination. But the Bureau notes that even when a borrower request is addressed through proposed §§ 1024.35 or 1024.36, the personnel the servicer assigned to the borrower pursuant to proposed § 1024.40(a) would remain available to the borrower until an event described in § 1024.40(c), discussed below, occurs.

Legal authority. The Bureau proposes to exercise its authority under section (k)(1)(E) of RESPA to add new § 1024.40(b)(1) to Regulation X. As discussed above, proposed § 1024.40(b)(1) reflects the Bureau’s belief that having staff available to help delinquent borrowers is necessary, but not sufficient, to ensure that when a borrower at a high risk of default reaches out to a servicer for assistance, the borrower is connected to personnel who can address the borrower’s inquiries or loss mitigation requests adequately. The Bureau believes proposed § 1024.40(b)(1) would require servicers to provide appropriately-trained staff to assist delinquent borrowers. The Bureau further has authority under section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA, and under section 19(a) of RESPA to prescribe such rules and regulations, and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

40(b)(2) Safe Harbor

Proposed § 1024.40(b)(2) provides that a servicer’s policies and procedures satisfy the requirements in §1024.40(b)(1) if servicer personnel do not engage in a pattern or practice of failing to perform the functions set forth in § 1024.40(b)(1) where applicable. Proposed comment 40(b)(2)-1.i. provides that for purposes of § 1024.40(b)(2), a servicer exhibits a pattern or practice of failing to perform such functions, with respect to a single borrower, if

servicer personnel assigned to the borrower fail to perform any of the functions listed in § 1024.40(b)(1) where applicable on multiple occasions, such as, for example, repeatedly providing the borrower with inaccurate information about the status of the loss mitigation application the borrower has submitted. Proposed comment 40(b)(2)-1.ii. explains that a servicer exhibits a pattern or practice of failing to perform such functions, with respect to a large number of borrowers, if servicer personnel assigned to the borrowers fail to perform any of the functions listed in § 1024.40(b)(1) where applicable in similar ways, such as, for example, providing a large number of borrowers with inaccurate information about the status of the loss mitigation applications the borrowers have submitted.

As discussed above, proposed § 1024.40(b)(1) would establish a new servicer obligation that requires servicers to establish policies and procedures reasonably designed to ensure that the servicer personnel it makes available to a borrower pursuant to § 1024.40(a) perform an enumerated list of functions where applicable. The Bureau recognizes that servicers, after complying with the servicer obligation (i.e., established policies and procedures that are reasonably designed to ensure the personnel they make available borrowers perform the functions listed under proposed § 1024.40(b)(1)) , the personnel may occasionally make a mistake and fail to perform an enumerated function. Proposed § 1024.40(b)(2) reflects the Bureau’s belief that the occasional mistake is not necessarily indicative of servicers not complying with the servicing obligation in proposed § 1024.40(b)(1).

Legal authority. The Bureau relies on its authority under section 6(k)(1)(E) of RESPA to add new § 1024.40(b)(2) to Regulation X. Section 6(k)(1)(E) of RESPA authorizes the Bureau to prescribe regulations that are appropriate to carry out the consumer protection purposes of RESPA. As discussed above, the Bureau recognizes that even if a servicer has established policies and procedures that are reasonably designed to ensure that the servicer personnel it makes available to borrowers perform the functions listed under proposed § 1024.40(b)(1), such personnel may occasionally make a mistake. The Bureau believes that an occasional mistake is not necessarily indicative of a servicer’s failure to comply with proposed § 1024.40(b)(1). The Bureau further has authority pursuant to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA, and under section 19(a) of RESPA to prescribe such rules and regulations, and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

40(c) Duration of Continuity of Contact

Proposed § 1024.40(c) provides that a servicer shall ensure that the personnel it assigns and makes available to a borrower pursuant to § 1024.40(a) remains assigned and available to the borrower until any of the following occurs: (1) The borrower refinances the mortgage loan; (2) the borrower pays off the mortgage loan; (3) a reasonable time has passed since (i) the borrower has brought the mortgage loan current by paying all amounts owed in arrears; or (ii) the borrower and the servicer have entered into a permanent loss mitigation agreement in which the borrower keeps the property securing the mortgage loan; (4) title to the borrower’s property has been transferred to a new owner through, for example, a deed-in-lieu of foreclosure, a sale of the borrower’s property, including, as applicable, a short sale, or a foreclosure sale; or (5) if applicable, a reasonable time has passed since servicing for the borrower’s mortgage loan was transferred to a transferee servicer.

Proposed comment 40(c)(3)-1 provides that for purposes of § 1024.40(c)(3), a reasonable time has passed when the borrower has made on-time mortgage payments for three consecutive months. The Bureau notes the ability of a borrower to make on-time mortgage payments for three consecutive months has gained wide acceptance as an appropriate indicator of whether a previously-delinquent borrower could succeed in keeping his or her mortgage loan current. For example, under Treasury’s HAMP program, a borrower is put in a trial modification period lasting three months. The borrower must have made all trial period payments to qualify for a permanent loan modification.[173] The Bureau seeks comment on whether criteria other than a borrower making on-time mortgage payments for three consecutive months should be used to determine what is a “reasonable time” for purposes of § 1024.40(c)(3). Proposed comment 40(c)(5)-1 provides that for purposes of § 1024.40(c)(5), a reasonable time has passed when servicing for the borrower’s mortgage loan was transferred to a transferee servicer 30 days ago. As discussed above in the discussion of proposed comment 40(a)-2, the Bureau believes that the transferee servicer may require up to 30 days from the date of transfer of servicing to identify borrowers who had personnel assigned to them by the transferor servicer. Accordingly, the Bureau believes that it is appropriate to require the transferor servicer to continue providing such borrower with continuity of contact for 30 days following the transfer of servicing. The Bureau, however, seeks comment on whether a longer time period is reasonable.

Legal authority. As discussed above, the Bureau is proposing to establish minimum staffing requirements with respect to how servicers assist delinquent borrowers. The Bureau believes that servicers should be required to provide delinquent borrowers with access to assigned personnel until events occur that indicate assistance is no longer needed or practicable. The events listed in proposed § 1024.40(c)(1)-(4) reflects the Bureau’s belief of when assistance is no longer needed. The events listed in proposed § 1024.40(c)(5) indicates when assistance is no longer practicable. As discussed above, section 6(k)(1)(E) of RESPA authorizes the Bureau to prescribe regulations that are appropriate to carry out the consumer protection purposes of RESPA. The Bureau proposes to add new § 1024.40(c) to Regulation X pursuant to its authority under section 6(k)(1)(E) of RESPA. The Bureau further has authority under to section 6(j)(3) of RESPA to establish any requirements necessary to carry out section 6 of RESPA. The Bureau has additional authority under section 19(a) of RESPA to prescribe such rules and regulations, and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

40(d) Conditions Beyond a Servicer’s Control

Proposed § 1024.40(d) provides that a servicer has not violated § 1024.40 if the servicer’s failure to comply with this section is caused by conditions beyond a servicer’s control.

Proposed comment 40(d)-1 explains that “conditions beyond a servicer’s control” include natural disasters, wars, riots or other major upheaval, delays or failures caused by third parties, such as a borrower’s delay or failure to submit any requested information, disruptions in telephone service, computer system malfunctions, and labor disputes, such as strikes. Proposed § 1024.40(d) reflects the Bureau’s belief that even if servicers implement processes that would address staffing failures that had a significant adverse impact on borrowers seeking alternatives to foreclosure, circumstances beyond a servicer’s control may occasionally occur that could adversely affect a servicer’s ability to provide adequate and appropriate staff to assist delinquent borrowers.

Legal authority. The Bureau proposes to use its authority under RESPA section 6(k)(1)(E) to add new § 1024.40(d) to Regulation X. Section 6(k)(1)(E) of RESPA authorizes the Bureau to prescribe regulations that are appropriate to carry out the consumer protection purposes of RESPA. As discussed above, proposed § 1024.40(d) reflects the Bureau’s belief that even if servicers implement processes that would address staffing failures that had a significant adverse impact on borrowers seeking alternatives to foreclosure, circumstances beyond a servicer’s control may occasionally occur that could adversely affect a servicer’s ability to provide adequate and appropriate staff to assist delinquent borrowers. The Bureau additionally relies on its authority under section 6(j)(3) of RESPA to establish any requirements necessary to carry out the purposes of REPSA, and under section 19(a) of RESPA to make such rules and regulations and to make such interpretations as may be necessary to achieve the purposes of RESPA.

Section 1024.41 Loss Mitigation

Background. As discussed above, there has been widespread concern among mortgage market participants, consumer advocates, and policymakers regarding servicers’ performance of loss mitigation activity in connection with the mortgage market crisis. In response, servicers, investors, guarantors, and State and Federal regulators have undertaken efforts to adjust servicer loss mitigation and foreclosure practices to address problems relating to evaluation of loss mitigation options. For example:

  • Treasury and HUD sponsored the Making Home Affordable program, which established guidelines for Federal government sponsored loss mitigation programs such as HAMP;[174]
  • The Federal Housing Finance Agency (FHFA) directed Fannie Mae and Freddie Mac to align their guidelines for servicing delinquent mortgages they own or guarantee to improve servicing practices;[175]
  • Prudential regulators, including the Board and the OCC undertook enforcement actions against major servicers, resulting in consent orders imposing requirements on servicing practices;[176]
  • The recent national mortgage settlement agreement imposes obligations on servicers, including on the conduct of loss mitigation evaluations;[177]
  • States have begun to adopt regulations relating to mortgage servicing and foreclosure processing, including requiring evaluation of loss mitigation options.[178]

Many of these requirements have coalesced around a common set of best practices for servicing. For example, the FHFA servicing alignment initiative, the National Mortgage Settlement, and HAMP all require servicers to review loss mitigation applications within 30 days.[179] While these various initiatives are starting to bring standardization to significant portions of the market, none of them to date have set a consistent national set of procedures and expectations regarding loss mitigation procedures. The Bureau believes that because so much loss mitigation activity is ongoing, and because that activity has such potentially significant impacts on both individual consumers and the health of the larger housing market and economy, consistent uniform minimum regulations would be appropriate and useful to set borrower and servicer expectations and provide necessary consumer protections.

The Bureau has considered a number of different options for addressing consumer harms relating to loss mitigation. In general, the Federal government has at least three approaches to addressing loss mitigation: (1) establishing processes to facilitate compliance by market participants; (2) mandating outcomes of loss mitigation process (implicitly raising costs to market participants of pursuing actions in violation of the mandated outcomes); or (3) providing subsidies to incentivize the desired outcomes.[180] Only options (1) and (2) were considered by the Bureau in light of the authorities available to the Bureau. Options (1) and (2) present a stark choice: whether to mandate processes that provide consumer protections without mandating specific outcomes or whether to mandate specific outcomes by establishing criteria. For example, a requirement that a servicer review a completed loss mitigation application establishes process requirements but does not impose requirements on the substance of the servicers review. In contrast, a requirement that a servicer provide a loan modification when an evaluation of a loss mitigation application indicates that a loan modification may be net present value positive would impose an outcome on the process.

At the outset, it is worth noting that the Bureau’s goal is not to achieve any particular target with respect to the number or speed of foreclosures. The Bureau’s goal rather is to ensure that borrowers are protected from harm in connection with the process of evaluating a borrower for a loss mitigation option and proceeding to foreclosure. For instance, a borrower should not be misled about the options available to the borrower or the steps necessary to seek evaluation for those options. Further, servicers should review complete loss mitigation applications and make appropriate decisions with respect to those submissions.

Evaluating the options available to the Bureau requires comparison across multiple dynamics, including, among others, whether the Bureau has properly identified consumer harm, whether the proposed solutions will effectively address the identified consumer harm, the risk of unintended market consequences and costs, and the appropriate scope of authorities available to the Bureau. By establishing appropriate loss mitigation procedures, the Bureau can ensure that borrowers receive information about loss mitigation options available to them and the process for applying for those options. Further, borrowers should be protected by ensuring that borrowers receive an evaluation for all options for which they may be eligible, have an opportunity to appeal decisions by the servicer regarding loan modification options, and are protected from foreclosure until the process of evaluating the borrower’s complete loss mitigation application has ended.

At the same time, the Bureau is concerned that going beyond process rights to give borrowers the ability to file suit over the merits of individual loss mitigation options could have negative effects on the availability and structure of loss mitigation programs and, indeed, of mortgage credit generally. The Bureau is concerned that investors and guarantors could either eliminate loss mitigation efforts altogether or structure them as vague, formless discretionary activities rather than risk significant delays in foreclosure or incur potential liability over the structure and administration of the programs.[181] Alternatively, the prospect of delays and litigation risk might causing certain investors and guarantors to significantly reduce mortgage market activity, thus potentially curtailing general access to credit. The Bureau acknowledges the deep frustration and desperate circumstances that record numbers of borrowers face as they struggle to keep their loans current in this difficult economy, and believes that a solution that eliminates or severely restricts the recent increase in loss mitigation initiatives and current access to credit may not be in consumers’ best interest or the best interest of the broader market and economy.

Accordingly, proposed § 1024.41 requires servicers that make loss mitigation options available to borrowers in the ordinary course of business to undertake certain duties in connection with the evaluation of borrower applications for loss mitigation options. Proposed § 1024.41 is designed to achieve three main goals: First, proposed § 1024.41 provides protections to borrowers to ensure that, to the extent a servicer offers loss mitigation options, borrowers will receive timely information about how to apply and that a complete application will be evaluated in a timely manner. Second, proposed § 1024.41 prohibits a servicer from proceeding with the end of the foreclosure process – that is, the scheduled foreclosure sale – until a borrower and a servicer have terminated discussions regarding loss mitigation options.[182] Third, proposed § 1024.41 sets timelines that are designed to be completed without requiring a suspension of the foreclosure sale date to avoid strategic use of these procedures to extend foreclosure timelines and delay investor recover through foreclosure.

Although the proposed rule would prohibit a servicer from proceeding with a foreclosure sale while a complete and timely application for loss mitigation is pending, the proposal would not prohibit a servicer from taking other steps in the foreclosure process. The Bureau believes that addressing the problems associated with concurrent loss mitigation application and evaluation and foreclosure proceedings requires a balanced approach that considers the needs of consumers, servicers, and mortgage loan investors. This balance considers the interest of consumers in having servicers provide good faith evaluations and implementation of loss mitigation options as well as the interests of investors in obtaining timely recovery on assets for which losses cannot be mitigated consistent with investor requirements.

The Bureau believes that the proposed rule will require servicers to invest in processes to accomplish the regulatory requirements.

The Bureau notes that the steps prior to the scheduled foreclosure sale can vary by servicer, by jurisdiction, by type of proceeding, including judicial and non-judicial foreclosure. Some steps may be internal to an individual servicer, such as referring a case to a foreclosure department. The timing for other steps may be controlled by State law or court rules, which vary among jurisdictions. In some instances, there may be filing deadlines established for a particular matter. The Bureau recognizes that concerns can arise when a servicer proceeds on loss mitigation and foreclosure proceeding tracks simultaneously. At the same time, the Bureau believes that by creating obligations on servicers to provide prompt notice of what is needed to complete a loss mitigation application and prompt decisions on completed applications – and by prohibiting servicers from proceeding to a foreclosure sale while a complete and timely loss mitigation application is pending – the proposed rule will address the most problematic issues posed by concurrent evaluation of loss mitigation options and foreclosure proceedings.

The Bureau notes that the protection s provided in proposed § 1024.41 will be further augmented by protections in other parts of the servicing proposals that address loss mitigation issues. In proposed § 1024.39, for instance, the Bureau proposes to implement obligations on servicers to contact borrowers early in the delinquency process and to provide information to borrowers regarding loss mitigation options. In proposed § 1024.40, the Bureau proposes to require servicers to provide borrowers with contact personnel to assist the borrower with the process of applying for a loss mitigation option. Such personnel must have access to, among other things, information regarding loss mitigation options available to the borrower, actions the borrower must take to be evaluated for such loss mitigation options, and the status of any loss mitigation application submitted by the borrower. Further, in proposed § 1024.38, the Bureau proposes to require that servicers implement policies and procedures that achieve the objective of reviewing borrowers for loss mitigation options. Finally, in proposed § 1024.35, the Bureau proposes to permit a borrower to assert an error as a result of a servicer’s failure to postpone a scheduled foreclosure sale when a servicer has failed to comply with the requirements for proceeding with a foreclosure sale pursuant to proposed § 1024.41(g). All of these protections should be considered together and these protections, when implemented together, will have a substantial impact on reducing consumer harm.

In order to reduce burden to servicers and costs to borrowers, the Bureau has sought to maintain consistency among proposed § 1024.41, the national mortgage settlement, FHFA’s servicing alignment initiative, federal regulatory agency consent orders, and State law mortgage servicing statutory requirements. In certain instances, each of these other sources of servicing requirements may be more restrictive or prescriptive than proposed § 1024.41. That is intentional. Proposed § 1024.41 establishes a floor of minimum consumer protections and provides flexibility for Federal regulatory agency requirements, State law, or investor and guarantor requirements to impose obligations that may be more restrictive on servicers.

The Bureau requests comment on all aspects of the proposal, and, in particular, whether focusing on the provision of procedural rights would be sufficient to significantly improve the efficiency and fairness of loss mitigation processing. The Bureau seeks comment on whether there are additional appropriate measures within the authority of the Bureau, or the federal agencies collectively, that could be taken to improve loss mitigation outcomes for all parties. The Bureau seeks comment on whether the proposed requirements strike the appropriate balance between ensuring that consumers’ timely and complete applications receive fair and full consideration and ensuring predictability of outcomes for investors and guarantors. Finally, and as discussed further below, the Bureau seeks comment on whether the requirements of proposed § 1024.41 would require servicers to undertake practices that conflict with other federal regulatory agency requirements or State law or may cause servicers to undertake practices that may reduce the value to investors or guarantors of offering loss mitigation options.[183]

41(a) Scope

Proposed § 1024.41(a) provides that the requirements in proposed § 1024.41 apply to any servicer that offers loss mitigation options in the ordinary course of business. The purpose of this provision is to clarify that the requirements in proposed § 1024.41 are applicable only to those servicers that are engaged in a practice in the ordinary course of business of evaluating loss mitigation options for their own portfolios or pursuant to duties owed to investors or guarantors of mortgage loans. These include servicers that participate in the HAMP program sponsored by HUD and Treasury, as well as servicers subject to investor or guarantor requirements, including requirements imposed by Fannie Mae, Freddie Mac, Ginnie Mae, private investors, or government or private guarantors of mortgage loans to evaluate loss mitigation options for non-performing mortgage loans.

Proposed comment 41(a)-1 clarifies that nothing in proposed § 1024.41 is intended to impose a duty on a servicer to offer loss mitigation options to borrowers generally or to offer or approve any particular borrower for a loss mitigation option. As set forth above, the Bureau does not intend to create a right for borrowers to enforce in private litigation requirements that are imposed by investors or guarantors on servicers to take steps to protect the investors or guarantors from losses that can be avoided. The Bureau believes it is appropriate to clarify in proposed comment 41(a)-1 that the rules do not impose a duty on a servicer to offer loss mitigation or to approve any particular borrower for a loss mitigation option and that the rules should not be construed to impose liability on a servicer, or any other party, for any failure to offer a loss mitigation option, so long as the servicer complies with the procedural requirements of proposed § 1024.41.

Certain servicers that do not evaluate borrowers for loss mitigation options in the ordinary course of business would not be subject to proposed § 1024.41. In proposed comment 41(a)-2, the Bureau sets forth examples of practices that should not be considered, by themselves, considered indicia that a servicer had opted to offer loss mitigation options in the ordinary course of business. For example, it is not the Bureau’s intention to impose the requirements in proposed § 1024.41 on servicers that agree to limit adverse consequences to borrowers for making late payments, including by waiving late fees or declining to furnish negative information to a consumer reporting agency or on servicers that have decided to engage in a temporary or pilot program to explore the feasibility of offering certain loss mitigation options. Proposed comment 41(a)-2 clarifies that such practices, which may be the economic equivalent of a loss mitigation option, such as a forbearance plan, should not indicate by themselves that a servicer offers loss mitigation options to borrowers in the ordinary course of business.

41(b) Loss Mitigation Application

Proposed § 1024.41(b)(1) provides that a complete loss mitigation application includes all the information the servicer regularly obtains and considers in evaluating loss mitigation applications. This provision provides each servicer with flexibility to establish requirements regarding the type of information that the servicer deems necessary to determine whether a borrower is eligible for a loss mitigation option based on differing investor or guarantor guidelines.

Upon receipt of an incomplete loss mitigation application, proposed § 1024.41(b)(2) requires servicers to exercise reasonable diligence to obtain the additional information required to make a loss mitigation application complete. To that end, a servicer that receives an incomplete loss mitigation application earlier than 5 days before the timeline established for proposed § 1024.41(f) shall within a reasonable time, but in no event later than 5 days (excluding legal public holidays, Saturdays, or Sundays) provide a notice to a borrower. The notice must state that the application is incomplete, identify the additional information or documents necessary to make the application complete, and provide a deadline by which the borrower must submit the additional information or documents.

The Bureau believes it is appropriate to require that servicers provide the notice within a reasonable time, but in no event later than 5 days (excluding legal public holidays, Saturdays, or Sundays) after receiving the incomplete application. Fannie Mae and Freddie Mac guidelines, as well as the national mortgage settlement, require servicers to provide a substantially similar but, in some cases more prescriptive, notice within 5 business days of receipt of an incomplete application.[184] When a servicer receives an application more than 5 days before the deadline the servicer has established for submitting a complete application, the servicer has sufficient opportunity to review the loss mitigation application, determine the information or documents that have not been provided and provide that information to the borrower. Further, even when a loss mitigation application is submitted less than 5 days (excluding legal public holidays, Saturdays, or Sundays) before the applicable deadline, a servicer must undertake reasonable diligence to obtain the information even if the servicer is not required to provide the notice contemplated by proposed § 1024.41(b)(2).

Proposed § 1024.41(b) does not require a servicer to stop foreclosure proceedings when a borrower submits an incomplete loss mitigation application. Further, unless an incomplete loss mitigation application is made complete by the deadline established by the servicer pursuant to proposed § 1024.41(f), a servicer is not required to comply with the loss mitigation procedures for an incomplete loss mitigation application. The Bureau requests comment regarding whether servicers should be required to undertake any further obligations in connection with an incomplete or substantially complete loss mitigation application and what any further obligations should be.

41(c) Review of Loss Mitigation Applications

Proposed § 1024.41(c) states that, within 30 days of receiving a complete loss mitigation application, a servicer must evaluate the borrower for all loss mitigation options available from the servicer for which the borrower may qualify and provide the borrower with a written notice stating the servicer’s determination of whether it will offer the borrower a loss mitigation option. The Bureau believes that it is appropriate to require servicers to evaluate complete loss mitigation applications within 30 days, which is an industry standard, as discussed above.

The Bureau further believes it is appropriate to require a servicer to evaluate a borrower for all loss mitigation options available from the servicer for which the borrower may qualify rather than to require borrowers to select options for which the borrower may be evaluated. A servicer is in a better position than a borrower to determine the loss mitigation programs for which a borrower may qualify. Currently, many investors and guarantors have established set priority orders for evaluating and offering loss mitigation options rather than requiring borrowers to select loss mitigation programs. While borrowers should not be required to select loss mitigation programs themselves for an evaluation, a consequence of ordering loss mitigation programs based on least cost to an investor is that a borrower that may qualify for a program farther down on the priority list may believe that the first option offered is the only option available to the borrower. This may lead to less effective programs, disparate outcomes for similarly situated borrowers, and longer timelines for effectuating loss mitigation options.

The Bureau has proposed that a servicer evaluate a borrower for all loss mitigation programs offered by the servicer for which the borrower may be eligible. The Bureau believes that this will ensure that all borrowers receive fair evaluations for all options available to them and will be able to identify options. Further, servicers will not be required to evaluate borrowers for any programs for which a borrower does not qualify based on eligibility criteria established by investors or guarantors. In sum, investors, guarantors, and servicers retain the ability to manage loss mitigation programs to ensure that borrower eligibility and program administration is consistent with investor and guarantor requirements, while borrowers will be able to understand all potential options that may be available.

The Bureau has received feedback that a requirement that servicers evaluate borrowers for all loss mitigation programs offered by the servicer will impact servicers’ ability to manage programs through priority ordering of loss mitigation options. The Bureau agrees that the proposed rules would impact the ability to manage programs through the use of a loss mitigation option priority order, as a servicer will be required to evaluate a borrower for all programs and provide a notice of the results of the evaluation for all programs. However, the Bureau believes that servicers will be able to achieve the similar controls through the use of more detailed and comprehensive evaluation criteria and that the requirement will not ultimately impair a servicer’s, investor’s, or guarantor’s ability to manage loss mitigation programs. The requirement that a servicer consider a borrower’s application for all loss mitigation programs for which a borrower may qualify is consistent with the national mortgage settlement, which states that “[u]pon timely receipt of a complete loan modification application, Servicer shall evaluate borrowers for all available loan modification options for which they are eligible . . . .”[185] Further, the Bureau’s proposed requirement eliminates the need for borrowers to submit multiple applications for different loss mitigation options and, thus, provides for more efficient compliance by servicers with the requirements of the rules.

Proposed comment 41(c)(1)-1 clarifies that the servicer’s evaluation of a borrower for a loss mitigation option is subject to the eligibility criteria for each loss mitigation option. For example, if a loss mitigation option is only available for military servicemembers, a servicer has conducted a proper evaluation if it determines that the borrower is not a servicemember and, therefore, as a threshold matter is ineligible for the program. Similarly, to the extent eligibility criteria for pilot programs, temporary programs, or programs that are limited by the number of participating borrowers, would exclude a borrower from eligibility, a servicer is not obligated to evaluate the borrower for any such loss mitigation option just as if the eligibility criteria did not exist. Because the requirements of proposed § 1024.41 are not intended to require that a borrower have a right to a loss mitigation option, nothing in proposed § 1024.41 should be construed to prohibit a servicer from imposing any eligibility criteria the servicer (or the investor or guarantor of a mortgage loan) determines is appropriate for a loss mitigation option.

Proposed § 1024.41(c) requires servicers to notify borrowers of the outcome of the servicer’s evaluation of the borrower for a loss mitigation option. Notice from the servicer provides certainty to the borrower regarding the outcome and serves as a basis for a borrower to accept, reject, or, where permitted, appeal, the servicer’s determination.

The Bureau requests comment regarding whether a servicer should be required to review a borrower for all loss mitigation options for which the borrower may be eligible. The Bureau further requests comment regarding what a servicer’s obligation to review a borrower’s complete application for a loss mitigation option should be if the obligation is not to review for all loss mitigation options for which the borrower may be eligible.

41(d) Denial of loan modification options

Proposed § 1024.41(d) imposes additional obligations on servicers that deny borrower loss mitigation applications with respect to trial or permanent loan modifications. When a servicer determines that a borrower is not eligible for a loan modification as a loss mitigation option, the written notice provided by the servicer to the borrower must state the specific reasons for the determination and inform the borrower of the right to appeal the servicer’s determination pursuant to proposed § 1024.41(h). The notice must include the deadline for filing the appeal and any requirements, such as, for example, forms or documents the borrower must file in connection with the appeal process.

Because the determination that a borrower does not qualify for a loan modification option has significant consequences, the Bureau believes that borrowers should receive accurate information regarding the basis for the servicer’s determination. In that regard, proposed comments 41(d)(1)-1 and 41(d)(1)-2 provide examples regarding the information that should be included in the specific reasons provided to the borrower in the notice when a borrower is denied a loan modification on the basis of an investor requirement or a net present value calculation. The Bureau believes this information can assist borrowers in providing appropriate and relevant information to servicers in connection with the appeal process. Further, these requirements are consistent with the national mortgage settlement.[186]

The Bureau requests comment regarding whether servicers should provide the basis for the servicer’s determination that a borrower does not qualify for each loan modification program. The Bureau further requests comment on whether servicers should be required to provide the information set forth in proposed comments 41(d)(1)-1 and 41(d)(1)-2 regarding investor requirements and net present value tests. In addition, the Bureau requests comment regarding whether servicers should be required to provide the basis for the servicer’s determination that a borrower does not qualify for each loss mitigation program, including non-loan modification programs.

41(e) Borrower Response and Performance

Proposed § 1024.41(e) sets forth standards for when a borrower is considered to have accepted or rejected a loss mitigation option offered by a servicer. Proposed § 1024.41(e) provides that a servicer may impose requirements on the manner in which a borrower must accept or reject a loss mitigation option, subject to standards for acceptance and rejection set forth in the rule. The proposed rule provides that if a borrower does not satisfy the servicer’s requirements for accepting a loss mitigation option, but submits the first payment that would be owed pursuant to any such loss mitigation option within the deadline established by the servicer, the borrower shall be deemed to have accepted the offer of a loss mitigation option. This presumption is consistent with the terms of the National Mortgage Settlement. The Bureau recognizes that this proposed standard would set forth a presumption with respect to the parties’ intent to enter into an agreement on a loss mitigation option and requests comment regarding whether the Bureau should implement a presumption to establish when parties should be considered to have entered into an agreement on a loss mitigation option.

The Bureau further believes it is appropriate to allow a servicer that has not received a response from a borrower to an offer of a loss mitigation after 14 days to deem the borrower’s lack of a response as a rejection of the loss mitigation option. A 14-day timeframe for a borrower to respond to an offer of a loss mitigation option is consistent with GSE requirements, the National Mortgage Settlement, State law, and Federal regulatory agency requirements.[187]

The Bureau requests comment on whether servicers should be required to allow borrowers to accept or reject offers of loss mitigation options orally, including any compliance burdens imposed as a result of any such requirement.

41(f) Deadline for Loss Mitigation Applications

Proposed § 1024.41(f) states that a servicer may set a deadline by which a borrower must submit a complete loss mitigation application, so long as any such deadline is no earlier than 90 days before a scheduled foreclosure sale. A 90-day threshold appears to set an appropriate balance. A servicer that sets a deadline for complete loss mitigation applications of 90 days before a scheduled foreclosure sale will have 30 days to review a borrower’s application for a loss mitigation option, will be able to provide the borrower with 14 days to respond to the servicer’s offer of a loss mitigation option and/or to file an appeal, will be able to consider any timely appeal during a subsequent 30 day period, and will be able to provide the borrower with an additional 14 days to respond to any offer of a loss mitigation option after an appeal. A servicer’s decision on an appeal is not itself subject to appeal and a servicer is not required to consider any further appeals after the initial appeal. Thus, with the timeline set forth, a servicer must complete the entire process within 88 days. Because a servicer has the flexibility to establish a deadline that is no earlier than 90 days before foreclosure sale, the process can be completed without rescheduling the foreclosure sale.

Comment 41(f)-1 clarifies that where a foreclosure sale has not been scheduled, or where a foreclosure sale may occur less than 90 days after the sale is scheduled pursuant to State law, a servicer should establish a deadline that is no earlier than 90 days before the day that a servicer reasonably anticipates that a foreclosure sale will be scheduled.

41(g) Prohibition on Foreclosure Sale

Proposed § 1024.41(g) provides that if a servicer receives a complete loss mitigation application by the deadline established pursuant to proposed § 1024.41(f), the servicer may not proceed to foreclosure sale unless: (1) the servicer denies the borrower’s application for a loss mitigation option and the appeal process is inapplicable, the borrower has not requested an appeal, or the time for requesting an appeal has expired; (2) the servicer denies the borrower’s appeal; (3) the borrower rejects a servicer’s offer of a loss mitigation option; or (4) a borrower fails to perform pursuant to the terms of a loss mitigation option.

The Bureau believes it is appropriate to require that if a servicer offers loss mitigation options to borrowers in the ordinary course of business, and the borrower submits a complete application for a loss mitigation application by the deadline established by the servicer, a servicer should not proceed with a scheduled foreclosure sale until the servicer and borrower have terminated discussions regarding the loss mitigation option. The Bureau believes this point occurs when a borrower is denied for a loss mitigation option (and any appeal process has ended) or where a borrower rejects a servicer’s offer of a loss mitigation option.

Further, the Bureau believes it is appropriate to suspend a scheduled foreclosure sale when a borrower is performing under an agreement on a loss mitigation option. A servicer’s basis for servicing a mortgage loan, and undertaking actions to collect on an unpaid obligation, emanates from the contractual relationship between the owner or assignee of the mortgage loan and the borrower. A servicer’s determination to hold a scheduled foreclosure sale when a borrower is performing under an agreement that forestalls foreclosure violates the agreement entered into with the borrower. Additionally, it is already standard industry practice for a servicer to suspend a scheduled foreclosure sale during any period where a borrower is making payments pursuant to the terms of the trial loan modification.

In terms of workflow, when a servicer receives a complete loss mitigation application, it will either offer the borrower a loss mitigation option or deny the borrower’s request for a loss mitigation option. If the borrower’s request is denied, the borrower may file an appeal if the denial concerns a trial or permanent loan modification. Upon reviewing the appeal, a servicer will determine to either offer the borrower a loss mitigation option or, again, to deny the borrower’s request for a loss mitigation option. If the request is denied, then the servicer may proceed to a foreclosure sale. If a loss mitigation option is offered, either after the initial evaluation or after appeal, a borrower may either accept or reject the offer of the loss mitigation option. If the borrower rejects the loss mitigation option, the servicer may proceed to a foreclosure sale. If the borrower accepts the loss mitigation option, the borrower will either perform or fail to perform pursuant to the terms of the agreement on the loss mitigation option. If a borrower fails to perform pursuant to the terms of the agreement on the loss mitigation option, the servicer may proceed with the foreclosure sale.

Proposed comments 41(g)-1 and 41(g)-2 clarify the application of the borrower performance definitions with respect to short sales. Typically, a short sale will include a listing or marketing period during which a servicer will agree to postpone a foreclosure sale in order to allow a borrower to market a property for a short sale transaction. The proposed comments clarify that a borrower is performing under the terms of a short sale agreement or other similar loss mitigation agreement during the term of any such marketing or listing period, and any terms subsequent to such periods, if a short sale transaction is approved by all relevant parties, and the servicer has received proof of funds or financing.

Further, a servicer’s failure to suspend a scheduled foreclosure sale when a servicer has failed to comply with the requirements of proposed § 1024.41(g) is defined as a covered error in proposed § 1024.35(b)(9). A borrower will be able to assert this error and require a servicer to engage in the error resolution procedures to address this error. In order to avoid the use of this requirements, and the error resolution procedures, as a strategic tool to delay foreclosure, the Bureau has proposed § 1024.35(f)(2), which provides that if an error relating to a servicer’s failure to suspend a foreclosure sale is asserted seven days or less before a scheduled foreclosure sale, the servicer is not required to comply with the full error resolution procedures and may, alternatively, respond to the borrower orally or in writing in response to the notice of error. Because the requirements of proposed § 1024.41 are procedural in nature, the Bureau believes that servicers will be able to resolve and respond to any assertions of error on a very expedited basis by confirming that the appropriate procedure was followed.

By prohibiting a servicer from proceeding with a scheduled foreclosure sale until termination of loss mitigation discussion, the Bureau proposes to eliminate the clearest harms on borrowers resulting from servicers pursuing loss mitigation and foreclosure proceedings concurrently.

41(h) Appeal Process

Proposed § 1024.41(h) would require servicers to establish an appeals process to review denials of complete loss mitigation applications for loan modifications. Limiting the appeals process only to denials of loan modifications reduces burdens on servicers and maintains consistency with existing appeals and escalation processes established under State law or Federal regulatory agency requirements. For example, the appeal process established by the national mortgage settlement relates to denials of first lien loan modification denials.[188] Further, the recent California Homeowner Bill of Rights provides for an appeal process for denials of first lien loan modification.[189] Moreover, loan modifications are some of the most complex loss mitigation programs with respect to the evaluation of borrowers, and the Bureau believes that loan modification provides an appropriate scope for an appeal process.

Pursuant to proposed § 1024.41(h), if a servicer reviews an appeal and determines to offer a loss mitigation option, the servicer shall not foreclose on a borrower unless the borrower rejects the offer of the loss mitigation option or fails to comply with terms of the loss mitigation option. If a servicer denies a borrower’s appeal of a loss mitigation option, the servicer may proceed with a foreclosure sale.

Proposed § 1024.41(h) would provide that an appeal must be reviewed by servicer personnel that were not directly involved in the initial evaluation. The Bureau believes that this basic safeguard would help to reduce the risk of bias in the appeals process, since the person who made the initial decision may have a particularly strong interest in upholding that decision. Proposed comment 41(h)(3)-1 clarifies that supervisory personnel that supervised the personnel that conducted the initial evaluation may conduct the appeal evaluation if they were not directly involved in the initial evaluation. Proposed § 1024.41(h)(4) provides for the servicer to provide a written notice to the borrower stating the servicer’s determination.

The Bureau requests comment on whether to require servicers to engage in an appeals process. Further, the Bureau requests comment on whether the appeals process should be limited to denials of loan modifications and other similar loss mitigation options. Further, the Bureau requests comment regarding the impact on small servicers (as that term is defined in the 2012 TILA Servicing Proposal) of the requirement that the appeal must be evaluated by servicer personnel that were not directly involved in the initial loss mitigation application evaluation, and where such requirement should be modified or eliminated for small servicers.

41(i) Duplicative Requests

Proposed § 1024.41(i) provides that a servicer is only required to comply with the requirements of proposed § 1024.41 if a borrower has not previously been evaluated for loss mitigation options for the borrower’s mortgage loan account by that servicer. Thus, a servicer is not required to apply the requirements of § 1024.41 to a subsequent complete application for a loss mitigation option. In situations where servicing has transferred after the borrower received an evaluation on a complete loss mitigation application from the transferor servicer, the transferee servicer may be required to comply with the requirements of proposed § 1024.41. The Bureau believes that when an investor is transferring servicing to a new servicer, which may have been driven by owner or assignee’s determination that the new servicer can better achieve loss mitigation options with borrowers, borrowers should be able to renew an application for a loss mitigation option with the transferee servicer, subject to the applicable deadlines and requirements in proposed § 1024.41.

The Bureau requests comment regarding whether a borrower should be entitled to renewed evaluation for a loss mitigation option if an appropriate time period has passed since the initial evaluation or if there is a material change in the borrower’s circumstances. If so, the Bureau requests comment on what should constitute appropriate time periods and requirements applicable to such reviews.

41(j) Other Liens

Proposed § 1024.41(j) provides that any servicer that receives a complete loss mitigation application shall (1) within 5 days, determine if any other servicers service mortgage loans that have senior or subordinate liens encumbering the property that is the subjection of the loss mitigation application, and (2) provide the loss mitigation application received from the borrower to the other servicer.

Loss mitigation applications for properties encumbered by multiple liens present some of the most difficult loss mitigation situations for investors and borrowers. The Bureau believes it is appropriate to impose on servicers the obligation (1) to identify other servicers that may be impacted by loss mitigation evaluation for a property and (2) to provide the loss mitigation application from the borrower to the other servicers. When the other servicer receives the loss mitigation application, that servicer shall be required to comply with the requirements of proposed § 1024.41 if the servicer offers loss mitigation options to borrowers in the ordinary course as required by proposed § 1024.41(a). Further, the servicer that receives the loss mitigation application from another servicer shall be required to comply as if the servicer received the application from the borrower. For example, if the initial servicer passes an application to the other servicer that is incomplete under the other servicer’s guidelines, the other servicer would be required pursuant to proposed § 1024.41(b)(2)(ii) to provide the borrower with the incomplete loss mitigation application notice.

The Bureau notes that the Gramm-Leach-Bliley Act as implemented by Regulation P does not require provision of an initial notice and opt-out in connection with providing the loss mitigation application submitted by a borrow to another servicer under the exception set forth in 12 CFR 1016.15(a)(7).

Small servicers. The Bureau is conscious of the potential impacts of the loss mitigation requirements on small servicers. In order to gain feedback on small servicer impacts, the Bureau participated in a Small Business Review Panel and conducted outreach with small entity representatives. At the time the panel process was conducted, the Bureau had not decided to include a separate provision concerning loss mitigation procedures. Rather, the Bureau solicited feedback from the small entity representatives on many elements of the loss mitigation process in conjunction with other elements of the servicing proposals, including impacts on loss mitigation processes of small servicers from proposed rules relating to error resolution, reasonable information management policies and procedures, early intervention for troubled or delinquent borrowers, and continuity of contact. In particular, the Bureau requested feedback from small servicers on the following: (1) a duty to suspend a foreclosure sale while a borrower is performing as agreed under a loss mitigation option or other alternative to foreclosure; (2) the ability to adopt policies and procedures to facilitate review of borrowers for loss mitigation options; (3) the ability to provide information regarding loss mitigation early in the foreclosure process to borrowers; and (4) the ability to provide borrowers with the opportunity to discuss evaluations for loss mitigation options with designated servicer contact personnel.[190]

The small entity representatives generally informed the Small Business Review Panel that they engaged in individualized contact with borrowers early in the foreclosure process, that some servicers completed discussions of loss mitigation options with borrowers prior to a point in time when borrowers should receiving significant foreclosure related information, and generally worked closely with foreclosure counsel such that foreclosure processes and loss mitigation could be easily conducted simultaneously without prejudice to the loss mitigation process. Further, the small entity representatives explained that they were willing to communicate with borrowers about loss mitigation contemporaneously with the foreclosure process, and one small entity representative indicated that it would be willing to bring a mortgage file back to the servicer for consideration of a modification and halt the foreclosure process, if appropriate.[191]

Based in part on the outreach with the small entity representatives on April 24, 2012, as well as other feedback obtained by the Bureau after that outreach meeting, the Bureau considered proposing clearer and more detailed requirements relating to loss mitigation practices. The Bureau determined, for the sake of clarity and consistency, to include loss mitigation obligations as a separate section, rather than embedding the requirements within the provisions relating to error resolution, reasonable information management policies and procedures, early intervention for troubled or delinquent borrowers, and continuity of contact.

The Bureau believes that adding a separate section to address loss mitigation builds upon the feedback received by the Bureau as set forth in the Small Business Review Panel Report, although that report and the outreach meeting with small entity representatives were not structured around the discussion of regulations relating to loss mitigation obligations as a separate section and did not focus in significant detail on some of the specific measures proposed here such as, for example, appeals of loss mitigation determinations. The Bureau also believes that adding a separate section to address loss mitigation provides greater regulatory clarity to servicers, including small servicers. Therefore, the Bureau specifically requests comment from small servicers (as that term is defined in the 2012 TILA Servicing Proposal) regarding the potential impacts of the loss mitigation requirements in proposed § 1024.41 on small servicers. Specifically, as set forth above, the Bureau requests comment of the requirement that an appeal must be evaluated by servicer personnel that were not directly involved in the initial loss mitigation application evaluation.

Legal authority. In proposing § 1024.41, the Bureau relies on its authority in section 6(k)(1)(E) of RESPA to set forth obligations appropriate to carry out the consumer protection purposes of RESPA and section 6(j)(3) of RESPA to set forth requirements necessary to carry out section 6 of RESPA. Further, proposed § 1024.41 implements, in part, a servicer’s obligation to take timely action to correct errors relating to avoiding foreclosure in section 6(k)(1)(C) of RESPA by establishing servicer duties to avoid foreclosure that are the subject of the error resolution provisions in proposed § 1024.35.

The Bureau further relies on its authority in section 19(a) of RESPA to make such rules and regulations and to make such interpretations as may be necessary to achieve the consumer protection purposes of RESPA.

Appendix MS

Appendix MS to part 1024 sets forth model forms, model clauses that servicers may use to comply with the mortgage servicing requirements of Regulation X. As discussed in detail below, the Bureau proposes to modify the model form applicable to servicing transfer disclosure requirements, to add a new model for force-placed insurance disclosure requirements, and to add new model clauses for early intervention notice requirements. The Bureau is proposing official commentary that would apply to existing model forms MS-1 and MS-2, as well as a proposed model form MS-3 for the proposed force-placed insurance disclosure and proposed model clauses at MS-4 for the proposed early intervention written notice. The Bureau is proposing these comments to provide guidance that would be generally applicable for the mortgage servicing model forms and clauses. The Bureau solicits comment on the appropriateness of this guidance for the mortgage servicing disclosures.

Proposed comment MS-1 explains that appendix MS contains model forms and clauses for mortgage servicing disclosures. Each of the model forms is designated for use in a particular set of circumstances as indicated by the title of that model form or clause. Although use of the model forms and clauses is not required, servicers using them properly will be deemed to be in compliance with the regulations with regard to those disclosures. To use the forms appropriately, information required by regulation must be set forth in the disclosures.

Proposed comment MS-2 explains that servicers may make certain changes to the format or content of the forms and clauses and may delete any disclosures that are inapplicable without losing the protection from liability so long as those changes do not affect the substance, clarity, or meaningful sequence of the forms and clauses. Servicers making revisions to that effect will lose their protection from civil liability. Except as otherwise specifically required, acceptable changes include, for example: (1) use of “borrower” and “servicer” instead of pronouns; (2) substitution of the words “lender” and “servicer”; and (3) addition of graphics or icons, such as the servicer’s corporate logo.

Appendix MS-2—Model Form for Mortgage Servicing Transfer Disclosure

Appendix MS-2 to part 1024 sets forth the format for the servicing transfer disclosure required pursuant to section 6(a)(3) of RESPA and proposed § 1024.33(b)(5). The Bureau proposes to revise the model form in Appendix MS-2 to significantly reduce the length of the require disclosure to borrowers in connection with mortgage servicing transfers.

As a preliminary matter, the Bureau observes that unless a transferor and transferee servicer coordinate to provide a consolidated disclosure, a borrower will receive substantially similar disclosures in the form of Appendix MS-2 from both a transferor servicer and a transferee servicer. The Bureau is concerned that the volume of the disclosure may overwhelm borrowers, who will not focus on the information set forth in the form, while also imposing a burden on servicers to provide lengthy and unnecessary disclosures.

The Bureau proposes to streamline the language of the model form to focus on only the elements of information that a borrower needs in connection with a mortgage servicing transfer, specifically (1) the date of the transfer, (2) contact information for the transferor servicer, (3) contact information for the transferee servicer, (4) applicable dates for when each of the servicers will begin or cease to accept payments, (5) the impact of the transfer on any insurance products and (6) a statement that the transfer does not otherwise affect the terms or conditions of the mortgage loan.

The Bureau proposes to remove significant discussion in the model form regarding the availability of the qualified written request process and the borrower’s rights pursuant to RESPA. Information regarding the qualified written request process is likely to confuse borrowers in light of the proposed error resolution and information requirements set forth in this proposal. Further, the Bureau believes that error resolution and information request requirements are more effective by requiring servicers to respond to the notices of error and inquiries they receive as a result of having provided the appropriate contact information on the form. Further, the Bureau observes that this additional content is not required by section 6(a)(3) of RESPA. In light of these obligations, the Bureau does not believe the added discussion of the qualified written request process and RESPA provided additional practical value to consumers and detract from other important content of the form.

The Bureau relies on its authority in sections 6(a)(3), 6(j)(3), and 19(a) of RESPA to set forth requirements on servicers with respect to providing the mortgage servicing transfer notices required by section 6(a)(3) of RESPA.

Appendix MS-3—Model Force-Placed Insurance Notice Forms

Appendix MS-3 to part 1024 sets forth model forms that mortgage servicers may use to comply with the Bureau’s force-placed insurance disclosure requirements. As discussed previously in the Bureau’s discussion of proposed appendix MS, servicers are not required to use model forms to comply with the mortgage servicing disclosures of Regulation X, including the disclosures set forth in proposed § 1024.37. Using the model forms properly, however, will be deemed to be in compliance with regulation with regard to those disclosures.

Proposed comment MS-3-1 provides that the model form MS-3(A) illustrates how a servicer may comply with § 1024.37(c)(2). Proposed comment MS-3-2 provides that the model form MS-3(B) illustrates how a servicer may comply with § 1024.37(d)(2)(i). Proposed comment MS-3 provides that the model form MS-3(C) illustrates how a servicer may comply with § 1024.37(d)(2)(ii). Proposed comment MS-3-4 provides that model MS-3(D) illustrates how a servicer may comply with § 1024.37(e)(2). Proposed comment MS-3-5 provides that where the model forms MS-3(A), MS-3(B), MS-3(C), and MS-3(D) use the term “hazard insurance,” the servicer may substitute “hazard insurance” with, as applicable, “homeowner’s insurance” or “property insurance.” The Bureau, however, notes that proposed MS-3-5 does not permit the servicer to use the term “homeowner’s insurance” to describe force-placed insurance.

As discussed previously, the Bureau believes that it is necessary and appropriate to carry out and achieve the purposes of RESPA section 6, and the consumer protections of RESPA, to facilitate compliance with the new Dodd Frank Act requirements about advance notification before servicers charge borrowers for force-placed insurance. The Bureau’s proposed force-placed insurance notice requirements are set forth in the model forms in proposed Appendix MS-3. The Bureau proposes to exercise its authority under RESPA sections 6(j)(3), 6(k)(1)(E), and 19(a) to add new Appendix MS-3 to Regulation X. Also as discussed previously, the Bureau has additional authority pursuant to Dodd-Frank Act section 1032 to provide model forms by adding new Appendix MS-3.

Appendix MS-4—Model Clauses for the Written Early Intervention Notice

Model clauses in proposed appendix MS-4 illustrate the disclosures that would be required under proposed § 1024.39(b)(1). They encourage the borrower to contact the servicer and provide information about loss mitigation options, foreclosure, and housing counselors. Clauses in Model MS-4(A) illustrate how a servicer may provide its contact information and how a servicer may request that the borrower contact the servicer, as would be required under proposed § 1024.39(b)(2)(i) and (ii).

Clauses in Model MS-4(B) illustrate how the servicer may inform the borrower of loss mitigation options that may be available, as would be required under proposed § 1024.39(b)(2)(iii). Model MS-4(B) does not contain sample clauses for all loss mitigation options that may be available; they illustrate only four commonly offered examples: (1) forbearance, (2) mortgage modification, (3) short-sale, and (4) deed-in-lieu of foreclosure. These examples of loss mitigation options may not necessarily accurately reflect the servicer’s loss mitigation programs. Thus, proposed comment MS-4-2 explains that the language in proposed Model MS-4(B) is optional, and that a servicer may add or substitute any examples of loss mitigation options the servicer offers, as long as the information required to be disclosed is accurate and clear and conspicuous. Clauses in Model MS-4(C) illustrate how the servicer may inform the borrower how to obtain additional information about loss mitigation options, as would be required under proposed § 1024.39(b)(2)(iv). If the servicer offers no loss mitigation options, a servicer may not include Models MS-4(B) and MS-4(C) because including those statements would be misleading. The Bureau solicits comment on the examples of loss mitigation options and the descri