RESPA: Regulatory Analysis

In developing the proposed rule, the Bureau has considered potential benefits, costs, and impacts, and has consulted or offered to consult with the prudential regulators, HUD, the Federal Emergency Management Agency, FHFA, and the Federal Trade Commission, with respect to consistency with any prudential, market, or systemic objectives administered by such agencies.[193] The Bureau also held discussions with or solicited feedback from the United States Department of Agriculture Rural Housing Service, the Farm Credit Administration, the Federal Housing Administration, Ginnie Mae, and the Department of Veterans Affairs regarding the potential impacts of the proposed rule on those entities’ loan or securitization programs.

As discussed in greater detail elsewhere throughout this SUPPLEMENTARY INFORMATION, in this rulemaking, the Bureau proposes to amend Regulation X, which implements RESPA, as part of the Bureau’s implementation of the Dodd-Frank Act amendments to RESPA regarding mortgage loan servicing. The proposed amendments to Regulation X implement section 1463 of the Dodd-Frank Act, which imposes obligations on servicers with respect to resolving errors and responding to requests for information from mortgage loan borrowers, and to ensure that a reasonable basis exists to obtain force-placed insurance.

In addition, the proposal includes additional amendments to Regulation X to impose servicer obligations the Bureau has found, pursuant to authority under RESPA section 6, as amended by the Dodd-Frank Act, to be appropriate to carry out the consumer protection purposes of RESPA. These additional amendments are not specifically required by the Dodd-Frank Act and consist of obligations 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 follow certain procedures when evaluating loss mitigation applications.

The proposal would also reorganize and amend the mortgage servicing related provisions of Regulation X, currently published in 12 CFR 1024.21. Such amendments relate to, for example, disclosures of mortgage servicing transfers and servicer obligations to borrowers, and a servicer’s obligation to manage escrow accounts, including the obligation to advance funds to an escrow account to maintain a borrower’s hazard insurance coverage and to return escrow balances when a mortgage loan is paid off in full. Further, the Bureau also proposes to set forth a commentary that includes official Bureau interpretations of Regulation X.

Elsewhere in today’s Federal Register, the Bureau is also publishing a proposed rule under TILA to amend Regulation Z (12 CFR part 1026). The proposed amendments to Regulation Z implement the following sections of the Dodd-Frank Act: section 1418 (initial rate-adjustment notice for adjustable-rate mortgages (ARMs)), section 1420 (periodic statement), and section1464 (prompt crediting of mortgage payments and response to requests for payoff amounts). The proposed rule would also revise certain existing regulatory requirements in Regulation Z for disclosing rate and payment changes to ARMs in current § 1026.20(c).

As discussed in greater detail elsewhere in this SUPPLEMENTARY INFORMATION, the recent financial crisis exposed pervasive consumer protection problems across major segments of the mortgage servicing industry. As a result of these problems, Congress included in the Dodd-Frank Act the provisions that specifically address mortgage servicing. The new protections in the rules proposed under RESPA and TILA would significantly improve the transparency of mortgage loans after origination, provide substantive protections to consumers, enhance the ability of consumers to obtain information from and dispute errors with servicers, and provide consumers, particularly delinquent consumers, with better customer service when dealing with servicers.

A. Provisions to be Analyzed

The analysis below considers the potential benefits, costs, and impacts of the following major proposed provisions:

Requirements regarding obtaining force-placed insurance policies, including disclosures to borrowers.
Procedures regarding error resolution and requests for information.
Requirements to establish reasonable information management policies and procedures.
Procedures for early intervention with delinquent borrowers.
Procedures for continuity of contact with delinquent borrowers.
Requirements regarding loss mitigation procedures.

With respect to each major proposed provision, the analysis considers the benefits and costs to consumers and covered persons. The analysis also addresses certain alternative provisions that were considered by the Bureau in the development of the rule. The Bureau requests comment on the analysis of the potential benefits, costs, and impacts of the proposal.
B. Baseline for Analysis

The amendments to RESPA in section 1463 of the Dodd-Frank Act take effect automatically on January 21, 2013, unless final rules are issued on or before that date. However, no additional obligations are imposed under section 6(k)(1)(E) of RESPA, as amended by the Dodd-Frank Act, unless the Bureau adopts implementing regulations. Specifically, the provisions of the proposed rule that impose obligations on servicers to correct errors asserted by mortgage loan borrowers, to provide information requested by such borrowers, and to ensure that a reasonable basis exists to obtain force-placed insurance implement statutory amendments to RESPA that take effect automatically. Thus, many costs and benefits of the provisions of the proposed rule with respect to these self-executing provisions would arise largely or entirely from the statute, and not from the Bureau’s proposed provisions. These provisions of the proposed rule would provide substantial benefits compared to allowing the RESPA amendments to take effect automatically by clarifying parts of the statute that are ambiguous. Greater clarity on these issues should reduce the compliance burdens on covered persons by, for example, reducing costs for attorneys and compliance officers as well as potential costs of over-compliance and unnecessary litigation. Moreover, the costs that these provisions would impose beyond those imposed by the statute itself are likely to be minimal.

Section 1022 of the Dodd-Frank Act permits the Bureau to consider the benefits, costs and impacts of the proposed rule solely compared to the state of the world in which the statute takes effect without implementing regulations. To provide the public better information about the benefits and costs of the statute, however, the Bureau has chosen to consider the benefits, costs, and impacts of the major provisions of the proposed rule (i.e., the benefits, costs, and impacts of the relevant provisions of the Dodd-Frank Act and the regulation combined) against a pre-statutory baseline.

As discussed above, the Dodd-Frank Act also gives the Bureau discretionary authority to develop additional mortgage servicing rules in Regulation X, which the Bureau is relying on to propose to require servicers 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 follow certain procedures when evaluating loss mitigation applications. Since section 1463 of the Dodd-Frank Act does not specifically impose these obligations on servicers, the pre-statute and post-statute baseline are the same. The Bureau has discretion in future rulemakings to choose the most appropriate baseline for that particular rulemaking.

C. Coverage of the Proposal

Each proposed provision covers certain closed-end mortgages, as described further in each section below.

D. Data Limitations and Quantification of Benefits, Costs and Impacts

The analysis relies on data that the Bureau has obtained from industry, other regulatory agencies, and publicly available sources. However, as discussed further below, the data are generally limited with which to quantify the potential costs, benefits, and impacts of the proposed rule.

Regarding the costs to covered persons, the proposed rule generally establishes certain standards for servicer operations. In order to quantify the costs to covered persons, the Bureau would need representative data on the extent to which servicer operations currently do not comply with the proposed rule. The Bureau has little data on this issue, and does not believe that it is feasible to initiate a substantial collection of representative data in the time available for this rulemaking. However, the Bureau continues to seek data regarding the extent to which servicer operations currently do not comply with the proposed rule. Furthermore, even with this data, the Bureau would need information on the cost of changing current servicer practices in order to quantify the cost of closing any gaps between current practices and those mandated by the proposed rule. The Bureau has obtained some information about the cost of improving servicer operations, and the discussion below uses this information to quantify certain costs of the proposed rule, but these calculations do not fully quantify the costs to covered persons of the proposed rule. The Bureau continues to seek data from available sources regarding the costs of improving servicer operations, as specified by the proposed rule, in order to quantify the costs to covered persons of the proposed rule.

The lack of data on the extent to which servicer operations currently do not comply with the proposed rule also makes it difficult to quantify the benefits of the proposed rule to consumers. However, quantifying benefits presents additional challenges. As discussed further below, certain proposed provisions may directly save consumers time and money but others may benefit consumers in a more indirect way, by, for example, facilitating household budgeting, supporting the consumer’s ability to obtain credit, and reducing default and avoidable foreclosure. Quantifying these benefits and monetizing them would require a wide range of data that cannot be collected in the time frame for this rulemaking. The Bureau continues to seek data from available sources regarding the benefits to consumers of the proposed rule.

Similar issues to those just described arise in quantifying the benefits to covered persons of the proposed rule and in quantifying the costs to consumers. Certain benefits to covered persons are difficult to quantify. For example, as discussed in greater detail below in the discussion about force-placed insurance, it is difficult to quantify the benefit servicers receive from reduced interest expenses when they advance their own funds to pay for force-placed insurance. Certain costs to consumers are difficult to quantify, such as the extent to which costs imposed on servicers may be passed through to consumers.

In light of these data limitations, the analysis below generally provides a qualitative discussion of the benefits, costs, and impacts of the proposed rule. General economic principles, together with the limited data that are available, provide insight into these benefits, costs, and impacts. Where possible, the Bureau has made quantitative estimates based on these principles and the data that are available.

E. Potential Benefits and Costs to Consumers and Covered Persons

1. Requirements Regarding Obtaining Force-Placed Insurance Policies

Dodd-Frank Act section 1463 amends RESPA to prohibit a servicer of a federally related mortgage from 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. In addition, the statute sets forth a mandatory process servicers must follow when they force-place insurance. The process includes sending the borrower two written notices before imposing any charge on a borrower for force-placed insurance. The statute also provides process requirements for terminating force-placed insurance and refunding force-placed insurance premium charges and related fees paid during any period during which the borrower’s hazard insurance coverage and the force-placed insurance coverage were each in effect.

The Bureau is proposing model forms for the force-placed insurance notices to be sent to borrowers. The Bureau is also proposing requirements concerning: charges related to force-placed insurance, payment of the borrower’s hazard insurance premiums from escrow, and notice requirements when servicers renew existing force-placed insurance policies.

Benefits and costs to consumers. Borrowers pay for force-placed insurance but do not select the insurance provider. Thus, the market for force-placed insurance may not fully reflect the interests of borrowers in minimizing force-placement and the amount of time force-placed insurance is in effect. In particular, the proposed force-placed insurance disclosures and procedures may reduce borrowers paying for unnecessary force-placed insurance or the length of time during which borrowers pay for such insurance.

The Bureau does not have representative data with which to quantify the extent to which industry currently complies with the proposed force-placed insurance provisions or the extent to which additional compliance would reduce the need for force placement or the duration of force placement; however, as discussed in greater detail below, the Bureau understands that many servicers already comply with the proposed procedures with respect to sending borrowers notices before charging borrowers for force-placed insurance and canceling force-placed insurance after verifying that borrower has obtained hazard insurance coverage. Moreover, even a small reduction in force placement may provide consumers with substantial benefits. In 2009, the average premium for homeowner’s insurance was $880 while force-placed insurance cost about twice this amount.[194] Thus, a homeowner who pays force-placed insurance for one to six months pays an additional $73 to $440 dollars.[195] If the provisions of the proposed rule reduced force-placement by just 10%, approximately 171,000 homeowners would save between $7.6 million and $45.8 million in unnecessary premiums each year.[196]

The following discussion provides a qualitative analysis of the benefits to borrowers of the proposed force-placed insurance disclosures and procedures. In each case, as discussed previously, the Bureau understands that certain servicers may already comply with some of the proposed procedures. The Bureau believes that for a borrower in the specified situation and with a servicer that does not comply with some of the proposed procedures, full compliance would provide important additional consumer benefits.

For purposes of qualitative analysis, it is useful to first divide borrowers into those with insurance that has been force-placed by a servicer and those with hazard insurance coverage obtained by the borrower. Of those with borrower-obtained hazard insurance, it is useful to sub-divide this group into three additional groups: those with hazard insurance that is not about to lapse; those with hazard insurance that is about to lapse and who have the funds to renew (whether the funds are kept in an escrow account or elsewhere); and those with hazard insurance that is about to lapse and who do not have the funds to renew. The proposed force-placed insurance disclosures and procedures may provide different benefits to borrowers depending on the group to which they belong.

Borrowers with force-placed insurance would likely benefit from the proposed requirements regarding renewal of force-placed insurance, evidence of hazard insurance, cancellation of force-placed insurance, and limitations on charges related to force-placed insurance. The proposed rule would require servicers to send a renewal notice once every 12 months, accept insurance information provided by the borrower to verify whether or not the borrower has hazard insurance in place, cancel force-placed insurance and refund the borrower for any period of overlapping coverage within 15 days of receiving verification that the borrower has obtained hazard insurance. For a borrower in the situation described and with a servicer that does not currently comply with some of the proposed procedures, full compliance may reduce both the amount of time the borrower has force-placed insurance and the cost to the borrower of paying for force-placed insurance.

Consider next a borrower who has hazard insurance that is not about to lapse, but the servicer for some reason believes it is about to lapse and begins the process of force-placing insurance. The proposed rule would require the servicer to send the borrower two notices before charging the borrower for force-placed insurance. The proposed disclosures may prompt the borrower to contact the servicer with their insurance information. By possibly prompting the borrower to communicate with the servicer and provide the servicer with information to verify that the borrower has hazard insurance in place, the proposed rule may reduce the chance that a borrower in the situation described would pay for force-placed insurance.

Consider next a borrower who has a hazard insurance policy that is about to lapse and has the funds to renew the insurance. If the funds are not in an escrow account, then the borrower may fail to properly renew the insurance. The proposed force-placed insurance procedures would not require the servicer to renew the hazard insurance of a borrower who does not have an escrow account established to pay the borrower’s hazard insurance; however, the servicer would have to provide the two proposed notices before charging such borrower for force-placed insurance. The Bureau undertook three rounds of qualitative testing of the proposed notices, and participants said that if they received force-placed insurance notices like the ones the Bureau is proposing, they would immediately contact their insurance provider to find out whether or not their hazard insurance was still in force. For a borrower in this situation and for whom the mortgage loan is serviced by a servicer that does not currently provide notices that meet the proposed content and form requirements, full compliance with the proposed requirements may reduce the chance that the borrower would pay for unnecessary force-placed insurance. If the borrower’s insurance does lapse, full compliance with the proposed requirements regarding renewal of force-placed insurance, evidence of hazard insurance and cancellation of force-placed insurance may reduce both the amount of time the borrower has force-placed insurance and the cost to the borrower of paying for force-placed insurance.

Finally, consider a borrower who has hazard insurance that is about to lapse and does not have the funds to renew the insurance. If this borrower has an escrow account with insufficient funds to pay his or her hazard insurance premium charges, the servicer is currently required under Regulation X to advance funds for the timely payment of escrowed items as long as the borrower’s payment is not more than 30 days overdue. For a borrower in the situation described and with a servicer that is not complying with the proposed procedure, full compliance would greatly reduce the possibility that the borrower’s hazard insurance was canceled for nonpayment and accordingly, the chance that the borrower would pay for force-placed insurance. If the borrower does not have an escrow account and the servicer obtains force-placed insurance, but the borrower later acquires the funds to obtain hazard insurance, full compliance with the proposed requirement to cancel force-placed insurance within 15 days of receiving verification that the borrower has obtained hazard insurance may reduce the amount of time force-placed insurance is in effect.

The proposed rule also provides requirements on the renewal or replacement of force-placed insurance, including a disclosure to consumers. Specifically, a servicer may not charge a borrower for renewing or replacing pre-existing force-placed insurance unless: (1) The servicer delivers or places in the mail a written notice to the borrower with specified disclosures 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. The proposed disclosure includes the cost of the insurance (or a good faith estimate) and statements to the effect that the servicer has previously obtained the insurance, charged the borrower for the insurance, and has the right to maintain the insurance. The proposed rule also provides certain formatting requirements on the disclosure.

The Bureau’s proposal may help borrowers avoid the cost associated with the renewal or replacement of pre-existing force-placed insurance by both alerting borrowers to the impending charge and conditioning the ability of servicers to charge borrowers for renewal or replacement of pre-existing force-placed insurance on properly providing the specified disclosures. The disclosures may benefit certain borrowers by providing them with the information they need to purchase hazard insurance before being charged for renewal or replacement of force-placed insurance. Conditioning the ability of servicers to charge borrowers for renewal or replacement on the provision of the disclosures facilitates compliance with the disclosure requirement. As discussed previously, incentives like commissions paid to servicers or their insurance affiliates may cause servicers to prefer renewing or replacing pre-existing force-placed insurance coverage over providing borrowers with an opportunity to obtain hazard insurance.

The Bureau does not believe that the requirements with respect to force-placed insurance will impose any significant costs to borrowers for the following reasons: (1) as discussed above, the Bureau understands that only approximately two percent of mortgages incur force-placed insurance annually; and (2) as discussed below, many servicers already comply with the proposed disclosures with respect to sending borrowers notices before charging borrowers for force-placed insurance and the proposed requirement that the they cancel force-placed insurance after verifying that the borrower has obtained hazard insurance coverage.

Benefits and costs to covered persons. The Bureau believes that the proposed force-placed insurance disclosures and procedures may provide certain benefits to servicers. For example, the model forms the Bureau is providing servicers may reduce servicers’ compliance cost. Servicers may also benefit from any reduction in the need to obtain force-placed insurance. Servicers advance their own funds to pay for force-placed insurance. While servicers have priority in recovering these funds either from the homeowner or when the property is sold in foreclosure, they do not recover interest on these advances, like the advances for the force-placed insurance premium charge.[197]

The Bureau notes that the owners or assignees of mortgage loans may also benefit from the proposed force-placed insurance disclosures and procedures. As discussed in part VI, above, force-placed insurance is often significantly more expensive than hazard insurance obtained by the borrower. If the property ultimately goes to foreclosure and the loan is liquidated, servicers get compensated for advancing charges related to force-placed insurance before owner or assignee of the mortgage loan is paid.[198] Thus, the additional cost of force-placed insurance produces an additional expense to such persons, who benefit when this additional expense is minimized. To the extent the proposed rule reduces the frequency and duration of lapses in hazard insurance obtained by the borrower, owners or assignees of mortgage loans benefit along with borrowers.

Based on discussions with industry, the Bureau understands that servicers generally provide borrowers with multiple notices before charging a borrower for force-placed insurance. Thus, the additional cost of the proposed force-placed insurance disclosures notice would most likely be the one-time cost of developing the form to conform with the Bureau’s proposed regulations. The force-placed insurance disclosure would require minimal customization to each loan, but there may be some additional cost associated with providing the borrower with the cost or a good faith estimate of the cost of force-placed insurance, stated as an annual premium. The Bureau requests additional information about the force-placed insurance disclosures that servicers currently provide and the incremental cost of complying with the proposed force-placed insurance disclosure requirement.

The Bureau understands that many servicers generally terminate force-placed insurance coverage and refund to borrowers any premiums charged during any period when the borrower had borrower-obtained insurance coverage in place. The Bureau does not believe that complying with the remaining proposed procedures—including the provision of the force-placed insurance renewal notice—would impose substantial incremental costs on servicers. However, the Bureau continues to examine this issue and to collect data and other relevant information.[199]

Finally, the Bureau recognizes that the proposed force-placed insurance provisions may produce a number of changes in how force-placed insurance is provided and paid for. The Bureau understands that currently some servicers incur all of the costs associated with providing force-placed insurance notices, tracking borrower coverage, and placing and terminating the insurance. For other servicers, the Bureau understands that the force-placed insurance provider handles these activities and absorbs the costs or passes them on to the borrower. The proposed force-placed insurance provisions may reduce the frequency with which servicers obtain force-placed insurance. This would most likely reduce total payments by borrowers to servicers and force-placed insurers, even if the cost to insure the remaining borrowers increased, since there would be fewer transactions and fees. On the other hand, a reduction in the frequency with which force-placed insurance is provided may also reduce commission income that in some cases is paid by insurers to servicers or their insurance affiliates, and a reduction in payments to force-placed insurance providers may reduce providers’ willingness to perform the tracking and other activities stated above as part of the service. The Bureau continues to examine how the proposed force-placed insurance provisions may affect covered persons. The Bureau asks interested parties to provide general information, data, and research results that are relevant to this issue.

2. Procedures Regarding Error Resolution and Requests for Information

Section 1463 of the Dodd-Frank Act amends section 6 of RESPA by adopting a number of servicer prohibitions with respect to handling asserted errors and inquiries. These include (1) servicer obligations to respond to certain types of errors, (2) amendments to the timeframe for responding to qualified written requests and associated penalties for failure to comply, and (3) a prohibition on servicers charging fees in connection with valid qualified written requests.

The Bureau is using its authority in RESPA to propose a comprehensive set of requirements for investigating and correcting errors and for responding to borrower inquiries that incorporates the amendments to RESPA in the Dodd-Frank Act. In addition to the current requirements to address errors relating to servicing through Qualified Written Requests, , servicers would be required to correct errors relating to, among other things, allocating payments, providing an accurate payoff balance, failure to suspend a scheduled foreclosure sale while, for example, the borrower is performing under an agreement on a loss mitigation options. Servicers also would be required to respond to inquiries about a borrower’s mortgage loan account, whether or not a borrower has complied with the requirements for submitting a Qualified Written Request.

Servicers would have to provide borrowers with a written acknowledgement of receiving a notice of error within five days (excluding legal public holidays, Saturdays and Sundays) of receipt of the notice of error, unless the servicer corrects the error within such time and the borrower is notified of the correction in writing. Servicers would have to correct the error and notify the borrower of such correction, or conduct a reasonable investigation and provide the borrower with written notification regarding the investigation and the documents relied upon by the servicer. Generally, with the exception of certain types of errors, the investigation would have to be completed and a response provided within 30 days (excluding legal public holidays, Saturdays and Sundays) after receipt of the notice of error.

The Bureau is proposing substantially similar requirements to apply to inquiries. For example, servicers would have to provide borrowers with written acknowledgement of receiving an information request, unless the servicer provides the borrower with the information requested and with contact information for further assistance within five days (excluding legal public holidays, Saturdays and Sundays). Servicers would have to provide the borrower with the requested information or conduct a reasonable search for the information and provide the borrower with a written notification regarding the search. Generally, with the exception of certain types of information requests, the information or a notification stating that the servicer has determined the requested information is not available to the servicer would have to be provided within 30 days after receipt of the information request.

Benefits and costs to consumers – error resolution. As explained in part VI, above, each of the nine proposed enumerated errors would results from a failure by the servicer to perform a typical servicer duty. The proposed error resolution procedures would require that servicers, in a timely manner, correct these errors or investigate and explain to the borrower why no error has occurred.

The Bureau has conducted outreach with servicers regarding alleged errors. One servicer estimates that it receives 1,850 allegations of error per month on a portfolio of about 300,000 loans; another estimates about the same number on a portfolio of about 1 million loans. However, the Bureau currently does not have data on the nature of the alleged errors, the extent to which servicers already comply with the proposed error resolution procedures, or the benefit to borrowers from full compliance. Thus, the Bureau does not have the data necessary to quantify the benefits to borrowers of the proposed error resolution procedures.[200]

Although the Bureau does not have the data necessary to quantify the benefits to borrowers of the proposed error resolution procedures, the Bureau believes that the benefits may be substantial. Some of the enumerated errors concern basic duties that servicers should generally perform every month for every borrower (e.g., accept conforming payments, properly apply payments as required under the terms of the mortgage loan, pay taxes and insurance, etc.). The Bureau understands that servicers currently perform them. Other enumerated errors, however, concern duties regarding delinquent borrowers and the transfer of mortgage loan account information to other servicers. Under the proposed rule, it would be an error for a servicer to fail to provide accurate information to a borrower with respect to loss mitigation options and foreclosure or to fail to suspend a scheduled foreclosure sale when, for example, the borrower is performing under a loss mitigation agreement. It also would be an error for a servicer to fail to transfer information to a transferee servicer relating to the servicing of a borrower’s mortgage loan account in an accurate and timely manner. Servicers may not have uniformly investigated and corrected these errors, as the proposal would require them to. These errors have the potential to impose substantial financial and other costs on consumers. Thus, the proposed requirements to investigate allegations that servicers have committed these errors and to correct these errors (when found) may provide substantial benefits to certain consumers.

More generally, the Bureau notes that borrowers do not choose their servicer, except indirectly by choosing their lender. Even if borrowers choose their servicer at origination, perhaps by seeking a lender that services the loans it originates, the borrower cannot subsequently choose a different servicer if the quality of servicing is unsatisfactory. Thus, the market for servicing may not fully reflect the interests of borrowers in having robust error resolution procedures. While certain servicers may nonetheless reliably perform their duties, the recent financial crisis suggests that for some, the incentives to do so were lacking.

Benefits and costs to consumers – requests for information. The Bureau has conducted outreach with servicers regarding requests for information. One servicer estimates that it receives 70,000 phone calls a month on portfolio of 300,000 loans; another estimates 160,000 phone calls per month on a portfolio of about 1 million loans. The vast majority of these calls are inquiries and the most common inquiry is whether the servicer has received the borrower’s payment. The Bureau currently does not have data on the nature of the other inquiries, the extent to which servicers already comply with the proposed procedures regarding inquiries, or the benefit to borrowers from full compliance. Thus, the Bureau does not have the data necessary to quantify the benefits to borrowers of the proposed procedures regarding inquiries.[201] The Bureau requests interested parties to provide data, research, and other information that may inform the further consideration of this issue.

The Bureau understands that the servicer is a convenient source of certain information (e.g., details about the terms of the loan, the annual amount of interest paid, the remaining mortgage balance) and may be the only source of other information (e.g., the date a payment was received or a disbursement from escrow was made, the new payment on an adjustable rate mortgage). This information provides many benefits to borrowers, both by facilitating household budgeting in the near term and over time and by allowing borrowers to forestall or correct problems (e.g., by verifying that payments were received or taxes and insurance were paid from escrow). The fact that borrowers go to the trouble of requesting information from servicers indicates that they recognize some benefit from having the information.

More generally, as discussed above, the Bureau notes that borrowers do not choose their servicer, except indirectly, by choosing their lender. Even if borrowers choose their servicer at origination, perhaps by seeking a lender that services the loans it originates, the borrower cannot subsequently choose a different servicer if the quality of servicing is unsatisfactory. Thus, the market for servicing may not fully reflect the interests of borrowers in having robust procedures for responding to inquiries. While certain servicers may nonetheless reliably perform their duties, the recent crisis suggests that for some, the incentives to do so were lacking.

Benefits and costs to covered persons. The Bureau understands that certain servicers may already comply with many of the proposed procedures regarding error resolution and response to inquiries.[202] Further, certain proposed provisions are intended to mitigate the costs of complying with the proposed procedures. The Bureau proposes that errors and information requests that are resolved within five days do not require written acknowledgement of receipt of a notice of error or information request. The Bureau believes that the proposed provisions, including the proposed finite list of errors, provide clarity regarding servicer duties. Clarity mitigates one-time compliance costs for servicers that would otherwise pay for additional legal advice regarding compliance with the rule or would perform activities that were not in fact required by the rule.

As discussed in part VI, above, the Bureau considered the impact of the proposed error resolution requirements if the types of errors were not 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 Bureau further 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 disclosure after the deadline, would not actually correct the 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.

Although certain servicers may already comply with many of the proposed procedures, the Bureau understands that some of these proposed procedures may impose one-time and ongoing compliance costs on servicers. The Bureau asks interested parties to provide specific information about the proposed requirements for error resolution and requests for information with which servicers are not already in compliance and the costs of coming into compliance.

3. Reasonable Information Management Policies and Procedures

The Bureau is using its authority in RESPA to propose requirements on the information management practices of servicers. The proposed rule specifies that a servicer’s information management practices need to address objectives broadly categorized as: accessing and providing accurate information relating to a borrower’s account; evaluating borrowers for loss mitigation options; facilitating oversight of, and compliance by, service providers; and facilitating servicing transfers. The reasonableness of a servicer’s policies and procedures would be determined in part by the nature and scope of the servicer’s operations, characteristics of the servicing portfolio, and the servicer’s history of consumer complaints.

Benefits and cost to consumers. The Bureau recognizes that borrowers who make timely and conforming payments every period and whose payments are correctly and timely posted by the servicer and disbursed to third parties as appropriate may rarely need any new information from the servicer. The servicer of these loans generally requires only enough information about the loan to properly credit the payment to principal, interest, taxes and insurance; or in the case of adjustable rate mortgages, to change the amount due and change the crediting to principal and interest. However, a substantial number of borrowers do not make timely and conforming payments. One large database of first-lien residential mortgages shows that in each of the five quarters ending with the last quarter of 2011, between 10% and 15% of mortgages failed to be current and performing.[203] This represents between 3.1 million and 4.7 million loans.[204] The borrowers with these mortgages likely face difficult decisions about budgeting limited household resources and may require detailed and accurate information about what they owe, their loss mitigation options, and the consequences of different choices.

For reasons discussed above, the Bureau does not have representative data with which to quantify the extent to which industry currently complies with the proposed reasonable information management procedures, the extent to which additional compliance would provide additional benefits to consumers, or the monetary value of those additional benefits to consumers. However, it is possible to provide a rough estimate of a key consumer benefit—a reduction in avoidable default (i.e., 90 day delinquency)—that may be attributed collectively to the proposed provisions regarding error resolution and requests for information, reasonable information management, early intervention, and continuity of contact.

These benefits are discussed as part of reasonable information management for two reasons. First, the proposed provisions on reasonable information management include a requirement that a borrower must be able to receive an accurate and timely evaluation for a loss mitigation option. Thus, reasonable information management may reduce avoidable or unnecessary foreclosures. Second, reasonable information management facilitates compliance with the other proposed provisions listed above, all of which could help delinquent borrowers. A servicer that could not access accurate and timely information relating to a borrower’s account would likely have difficulty providing accurate information with respect to loss mitigation options and foreclosure (consistent with the proposed provisions on error resolution), notifying a borrower that he or she is late with a payment (as would be required by the proposed provisions on early intervention), and accessing a complete record of the borrower’s payment history (as required by the proposed provisions on continuity of contact).

The estimate of avoidable default relies on a study of the performance of approximately 28,000 housing loans tracked from September 1998 to December 2004 (and originated prior to December 2003).[205] Most of the loans were serviced by eight servicers. After restricting the sample to loans that at some point experience a 30-day delinquency, the authors use regression analysis to isolate the impact each servicer has on the probability a loan ever reaches 90-day delinquency (which they define as “default”). The authors show that there are significant differences among the services in the probability a loan defaults, even after controlling for borrower credit score and income, certain characteristics of the property, and other factors.[206] The best servicing (servicing performed by servicers with the highest cure rates with respect to loans that have become 30 days delinquent) achieves approximately a 41 percent reduction in the probability that a loan that becomes 30 days delinquent will eventually default, relative to the worst servicing (servicing performed by servicers with the lowest cure rates with respect to loans that have become 30 days delinquent).[207]

To translate this figure into an estimate of avoidable default, suppose that over 1 million mortgages become 30-60 days late each year. If they all receive the worst servicing and about 20% default, then a switch to the best servicing would reduce the default rate to about 12% (a reduction of 41%).[208] Thus, 80,000 mortgages would no longer default if they had the best servicing. If 30% default, then about 120,000 would no longer default if they had the best servicing. These defaults are avoidable with better servicing. Furthermore, a substantial number of these defaults will ultimately go to foreclosure, perhaps 70 percent.[209]

The Bureau does not currently have data that would allow it to further monetize the cost of default and foreclosure on borrowers or other consumers. Some recent research that controls for economic conditions documents the persistent negative effects of foreclosure on borrower’s credit scores.[210] Other work establishes substantial negative effects that foreclosed homes have on nearby homes.[211] The Bureau continues to examine how reasonable information management policies and procedures and other provisions of the proposed rule may affect default and foreclosure and the costs of these outcomes on borrowers and other consumers. The Bureau asks interested parties to provide general information, data, and research results that address these issues.

More generally, as noted above, servicers may not have sufficient incentives to provide reasonable information management policies and procedures absent the proposed rule. As discussed in the Background section, mortgage servicing is to a large extent a high-volume, low-margin business that encourages servicers to provide minimal levels of service to borrowers. While certain servicers may nonetheless have reasonable information management policies and procedures, the mortgage crisis demonstrated that for some servicers the incentives to have these practices were lacking.

Benefits and costs to covered persons. The Bureau understands that certain servicers already comply with many of the proposed procedures.[212] Servicers that service mortgage loans subject to investor or guarantor loss mitigation requirements, such as requirements imposed on Fannie Mae, Freddie Mac, and Ginnie Mae, or servicers subject to regulatory consent orders or the national mortgage settlement, must already comply with policies regarding evaluation for a loss mitigation option. Further, the Bureau is proposing to mitigate the cost of the proposed procedures by providing that the reasonableness of a servicer’s policies and procedures would be determined in part by the nature and scope of the servicer’s operations, characteristics of the servicing portfolio, and the servicer’s history of consumer complaints. The Bureau believes that the performance-based approach of the proposed information management provisions coupled with the flexible requirement for reasonableness will allow each servicer to comply with the proposed provisions in ways that best suit its particular circumstances.

4. Procedures for Early Intervention with Delinquent Borrowers.

As discussed in greater detail elsewhere in this SUPPLEMENTARY INFORMATION, Dodd-Frank Act section 1463 amends RESPA to authorize the Bureau to impose on servicers obligations the Bureau finds appropriate to carry out the consumer protection purposes of RESPA. The Bureau is using this authority to propose early intervention provisions regarding delinquent borrowers. The Bureau proposes to require servicers to provide two notices (one oral and one written) to delinquent borrowers. Generally, the Bureau proposes to require servicers to make a good faith effort to contact delinquent borrowers no later than 30 days after the payment due date, and not later than 40 days after a missed payment, the proposed rule would require servicers to provide the delinquent borrower a written notice about loss mitigation and the foreclosure process.

Benefits and costs to consumers. The proposed provisions on early intervention with delinquent borrowers are intended to spur the engagement between servicers and borrowers that is necessary for avoiding foreclosure. In one study using data from September 2005 through August 2007, Freddie Mac servicers reported that for 53.3% of the total number of loans that went into foreclosure, the borrower never responded to the servicer.[213] Of course, this means that 47% of borrowers did respond to the servicer. The proposed provisions may benefit borrowers, possibly by reducing the number of borrowers who never respond to the servicer, but in any case ensuring that those who would respond have the opportunity to do so.

The Bureau also understands that borrowers may benefit from the proposed provisions by taking corrective action more quickly. In one study using data from 2000 through 2006, the re-default rate was about 27 percent (15 percentage points) lower on repayment plans established when a loan was 30 days late instead of 60 days late.[22] Early intervention may generally benefit borrowers by reducing avoidable interest costs, limiting the impact on borrowers’ credit reports, and facilitating household budgeting and planning.

Finally, it is essential to note that the repayment plans, loan modifications and other alternatives to default or foreclosure that servicers offer change regularly, often to make additional borrowers eligible. For example, a number of TARP funded housing programs have been developed since the initial HAMP first-lien modification program was implemented in April 2009. Programs now exist that provide principal reduction for HAMP-eligible borrowers with high loan-to-value ratios, provide temporary principal forbearance for unemployed borrowers, and provide incentives for short-sales.[215] Furthermore, the eligibility criteria for these programs change regularly.[216] The changing set of alternatives to default and foreclosure and eligibility for these alternatives mean that delinquent borrowers who have not had recent contact with their servicer regarding the alternatives for which they qualify are probably uninformed or misinformed about the options available to them. The proposed provisions for early intervention benefit borrowers by providing them with information they probably do not have.

Benefits and Costs to Covered Persons. Through industry outreach, the Bureau understands that many servicers already comply with the proposed early intervention procedures. As stated above, most servicers should be familiar with the early intervention standards for delinquent borrowers issued by private mortgage investors, the GSEs, Ginnie Mae, or government agencies offering guarantees or insurance for mortgage loans, such as FHA, the VA, or Rural Housing Servicer. Servicers of FHA and VA loans are generally required to take action within the first 20 days of a delinquency, such as making telephone calls, and sending written delinquency notifications. Similarly, servicers of loans purchased by the GSEs are encouraged to contact borrowers within several days of a delinquency. Freddie Mac recommends that servicers begin initial call campaigns on the third day of delinquency, and Fannie Mae recommends that servicers take similar actions with respect to borrowers having a high risk of default. The Bureau understands, however, that some GSE servicers may not provide written notifications to certain lower-risk delinquent borrowers until the 65th day of delinquency. In addition, Federal agencies and the GSEs have established requirements and recommended practices with respect to written notifications that are similar to the Bureau’s proposal under proposed § 1024.39(b).

Furthermore, the Bureau is proposing to mitigate the cost of the written notice provision by providing servicers with model clauses and by limiting the written notice to be sent once every 180 days. The model clauses provide servicers with examples of language explaining the foreclosure process and encouraging the borrower to contact the servicer. The Bureau intends for the model clauses to provide servicers with examples of the level of detail that the Bureau expects servicers to provide in their written notice.

5. Procedures for Continuity of Contact with Delinquent Borrowers

Dodd-Frank Act section 1463 requires servicers to comply with any obligation the Bureau finds appropriate to carry out the consumer protection purposes of RESPA. The Bureau is using this authority to propose continuity of contact provisions regarding delinquent borrowers.

The Bureau proposes to require servicers to assign personnel to delinquent borrowers for whom servicers are required to notify pursuant to the proposed oral notification requirement under its early intervention proposal, discussed above. Additionally, the servicers would be required to provide such borrowers with live, telephonic response to inquiries and, as applicable, assist the borrower with loss mitigation options. Servicers would be required to establish policies and procedures reasonably designed to ensure that the personnel they assign to delinquent borrowers perform an enumerated list of functions where applicable, including, for example, providing the borrower with accurate information about loss mitigation options available to the borrower and actions the borrower must take to be evaluated for such options.

Benefits and costs to consumers. As discussed above in greater detail in part VI, above, the onset of the mortgage crisis revealed that many servicers did not have the infrastructure, trained staff, controls, and procedures needed to handle the high volumes of delinquent mortgages, loan modification requests, and foreclosures they were required to process. One study of complaints to the HOPE Hotline reported that over half were from borrowers who could not reach their servicers and obtain information about the status of their applications for HAMP modification.[217] Other complaints concerned lost documentation and that the borrower was not able to speak with a representative who was knowledgeable about the status of their application. While certain servicers may nonetheless have provided delinquent borrowers with the services described in the proposed continuity of contact provisions, such as, for example, access to personnel who could provide the borrower with accurate information about the status of a loss mitigation application, the mortgage crisis demonstrated that for a number of servicers did not.

As discussed in part VI, above, the Bureau believes that these problems may have had a significant adverse impact on borrowers seeking alternatives to foreclosure. While the Bureau does not have the data with which to quantify the effects, the inability of a borrower to speak with personnel knowledgeable about the status of a loss mitigation application creates delay in rectifying problems (including problems with lost documentation) that may lead to avoidable foreclosure. Similarly, the inability of borrowers to obtain a complete record of his payment history with the servicer or of servicer personnel to access all documents the borrower has submitted to the servicer in connection with an application for a loss mitigation option may impair the ability of borrowers to generally advocate for themselves regarding loss mitigation and possibly to slow or halt foreclosure. Conversely, the ability of borrowers to speak with personnel knowledgeable about loss mitigation options available to the borrower and the actions the borrower must take to be evaluated for such options make it easier for borrowers to effectively pursue these options. These provisions therefore increase the chances that certain delinquent borrowers are able to obtain a loss mitigation plan and avoid foreclosure.[218]

Benefits and costs to covered persons. The Bureau understands that many servicers are already in compliance with the proposed requirements. As discussed in part VI, above, in response to reported problems with respect to how servicers to respond to delinquent borrowers, other regulators and the GSEs have responded by establishing staffing standards for servicers to meet when they assist delinquent borrowers. Accordingly, the Bureau believes that any additional costs of the proposed continuity of contact provisions would be minimal.

6. Loss Mitigation Procedures

The proposed provisions on loss mitigation would require 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. These servicers would have a duty to evaluate borrowers that apply for loss mitigation within specific timeframes and to inform borrowers about the status of their application and the servicer’s decision. These servicers would also be prohibited from completing a foreclosure sale unless certain conditions held.[219]

Benefits and costs to consumers. The proposed procedures in 1024.41 provide a minimal structure to the process and decision-making around loss mitigation. Borrowers who submit complete applications may benefit from the proposed requirement on servicers to review and respond within a fixed period of time (30 days). Those who are denied loan modifications may benefit from the proposed requirement to disclose the reasons for the denial and the consumer’s rights to appeal the decision, and from the appeal itself.

The Bureau is aware that a mandatory timeline may have unintended consequences for borrowers in certain circumstances. For example, one study of the loan-level data from the OCC-OTS Mortgage Metrics database studied 1.8 million mortgages that were current in the last quarter of 2007 and became “troubled” at some point between January 2008 and May 2009.[220] About 300,000 loans became troubled in each quarter of 2008. The researchers found that servicers made decisions very slowly and did not take any action, even after 6 months, in about half the cases.[221] The timeline in the proposed provisions would have been binding on a large number of loans during this period, and it is difficult to predict how the servicers would have responded.

One feature of the proposed provisions mitigates concerns about unintended consequences for borrowers. Servicers would be required to make a decision about whether to grant a loss mitigation option within 30 days. They would not, however, have to move to foreclosure just because they decline to provide a loss mitigation option. Servicers would be required to make a decision, but they would not be required to take any action that they would not have taken absent the proposed loss mitigation provisions, and through continuity of contact they could alert borrowers to the possibility of a different decision at a later date. Servicers would, however, be required to produce a record of decisions and, in the case of loan mitigation the reasons for denial, that record may provide greater accountability to both borrowers and investors. This argument also mitigates concerns that borrowers who may benefit from a long foreclosure timeline would necessarily need to leave their homes sooner than they otherwise would.

More generally, borrowers applying for a loss mitigation option are in a high-stakes and unfamiliar situation. They may have no clear understanding of what to expect and what is expected of them. Federal rules on loss mitigation may make key decision points more salient and credible to borrowers and motivate them, for example, to provide complete applications to servicers in a timely manner. Borrowers may also be able to draw more directly on the experiences of other borrowers who were successful in loss mitigation since all would have been through a similar process.

Borrowers may also benefit from the proposed restrictions on the timing of foreclosure sales. As discussed above, there is substantial anecdotal evidence that borrowers have been foreclosed upon despite working in good faith for a loss mitigation option. The proposed restrictions would not prevent foreclosures that occur from the failure of servicers to comply with basic servicer duties, like maintaining proper records of payments and agreements. However, the proposed restrictions would define a clear set of circumstances under which discussions regarding loss mitigation options have ended. This certainty and clarity should make it less likely that borrowers will be foreclosed upon unexpectedly and makes clear to borrowers what is expected from them to avoid foreclosure.

Benefits and costs to covered persons. The proposed provisions on loss mitigation may impose some costs on servicers. For example, servicers who make loss mitigation options available in the ordinary course of business may need to employ additional staffing in order to meet the proposed 30 day timeline for evaluation when large numbers of borrowers submit applications. Servicers would also need to allow 90 days between the time a borrower submits a complete loss mitigation application and the servicer conducts a foreclosure sale. This builds in time for consideration of the application and an appeal, but it also may delay foreclosures that servicers, based on their experience, recognize as inevitable. Any lengthening of time until foreclosure sale will also increase the time during which servicers will have the expense of providing borrowers with continuity of contact. On the other hand, the amount of time required for a successful modification may be shorter, and the cost to servicers lower, if the timelines and other proposed provisions for loss mitigation encourage borrowers to work more effectively with servicers.

The costs to covered person of the proposed loss mitigation provisions depend on the extent to which servicers already comply with the proposed provisions and, for those not in compliance, the cost of making necessary changes. The Bureau asks interested parties to provide data and other information about current compliance with the proposed provisions, the challenges of coming into compliance, and the benefits and costs to covered persons from any interactions between these provisions and other provisions of this proposed rule.

E. Potential Specific Impacts of the Proposed Rule

1. Depository Institutions and Credit Unions with $10 Billion or Less in Total Assets

Regarding the provisions for force-placed insurance, the Bureau understands within the group of depository institutions and credit unions with $10 billion or less in total assets, as described in section 1026 of the Dodd-Frank Act, the larger depositories and credit unions generally have contracts with force-placed insurance providers under which the providers would absorb the costs of the proposed provisions. Thus, the Bureau believes there would be little impact of the proposed provisions on these institutions. But for smaller depository institutions or credit unions, the Bureau understands that providers may pass along certain costs to such institutions. The impact of these provisions on small depository institutions and credit unions, including a discussion of input from small entity representatives in the SBREFA process, is discussed in further detail in the Regulatory Flexibility Analysis in part VIII below. Based on feedback received from the SERs, The Bureau understands that small mortgage servicers engage in relatively little force-placement. The Bureau asks interested parties to provide general information, data, and research results that are relevant to understanding the impact of the proposed provisions for force-placed insurance on depository institutions and credit unions considered in this section.

Regarding the other proposed provisions, the Bureau believes that the consideration of benefits and costs of covered persons presented above provides a largely accurate analysis of the impacts of the proposed rule on depository institutions and credit unions with $10 billion or less in total assets. About 90% of all servicers are depository institutions and the vast majority of these institutions adhere to the servicing guidelines established by the GSEs. There is a substantial overlap between these guidelines and provisions of the proposed rule, especially in regards to early intervention with delinquent borrowers and loss mitigation. Thus, the Bureau believes that the consideration of benefits and costs to covered persons given above provides a general description of the impacts to depository institutions and credit unions considered in this section. However, the Bureau seeks comment on this conclusion and asks interested parties to provide general information, data, and research results that are relevant to understanding the impact of the proposed provisions on depository institutions and credit unions considered in this section.

2. Impact of the Proposed Provisions on Consumers in Rural Areas

Consumers in rural areas may experience benefits from the proposed rule that are different in certain respects from the benefits experienced by consumers in general. Consumers in rural areas may be more likely to obtain mortgages from small local banks and credit unions that either service the loans in portfolio or sell the loans and retain the servicing rights. These servicers may already provide most of the benefits to consumers that the proposed rule is designed to provide, including, for example, getting errors corrected promptly or getting access to personnel to assist them with their application for loss mitigation options. On the other hand, it is also possible that a lack of alternatives in some rural areas among lenders who also service may make it possible for the proposed rule to provide rural consumers with greater benefits.

The Bureau will further consider the impact of the proposed rule on consumers in rural areas. The Bureau therefore asks interested parties to provide data, research results and other factual information on the impact of the proposed rule on consumers in rural areas.

F. Additional Analysis Being Considered and Request for Information

The Bureau will further consider the benefits, costs, and impacts of the proposed provisions before finalizing the proposal. At various points in the analysis above, the Bureau asks interested parties to provide data, research results and other information relating to particular issues. The Bureau is generally interested in the impact of the proposed provisions on consumers, covered persons and markets in order to further understand and quantify the benefits and costs to consumers and covered persons. The Bureau generally requests interested parties to provide data, research, and other information that may inform the further consideration of benefits, costs and impacts of the proposed provisions.

To supplement the information discussed in this preamble and any information that the Bureau may receive from commenters, the Bureau is currently working to gather additional data that may be relevant to this and other mortgage related rulemakings. These data may include additional data from the National Mortgage License System (NMLS) and the NMLS Mortgage Call Report, loan file extracts from various lenders, and data from the pilot phases of the National Mortgage Database. The Bureau expects that each of these datasets will be confidential. This section now describes each dataset in turn.

First, as the sole system supporting licensure/registration of mortgage companies for 53 regulatory agencies for states and territories and mortgage loan originators under the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act), NMLS contains basic identifying information for non-depository mortgage loan origination companies. Firms that hold a State license or State registration through NMLS are required to complete either a standard or expanded Mortgage Call Report (MCR). The Standard MCR includes data on each firm’s residential mortgage loan activity including applications, closed loans, individual mortgage loan originator (MLO) activity, line of credit, and other data repurchase information by State. It also includes financial information at the company level. The expanded report collects more detailed information in each of these areas for those firms that sell to Fannie Mae or Freddie Mac.[222] To date, the Bureau has received basic data on the firms in the NMLS and de-identified data and tabulations of data from the MCR. These data were used, along with HMDA data, to help estimate the number and characteristics of non-depository institutions active in various mortgage activities. In the near future, the Bureau may receive additional data on loan activity and financial information from the NMLS including loan activity and financial information for identified lenders. The Bureau anticipates that these data will provide additional information about the number, size, type, and level of activity for non-depository lenders engaging in various mortgage origination and servicing activities. As such, it supplements the Bureau’s current data for non-depository institutions reported in HMDA and the data already received from NMLS. For example, these new data will include information about the number and size of closed-end first and second loans originated, fees earned from origination activity, levels of servicing, revenue estimates for each firm, and other information. The Bureau may compile some simple counts and tabulations and conduct some basic statistical modeling to better model the levels of various activities at various types of firms. In particular, the information from the NMLS and the MCR may help the Bureau refine its estimates of benefits, costs, and impacts for the proposed new servicing requirements in this proposed rule and the companion 2012 TILA Servicing Proposal, as well as other proposed rules to make revisions to the RESPA Good Faith Estimate and settlement statement forms, changes to the HOEPA thresholds, changes to requirements for appraisals, updates to loan originator compensation rules, and impose new ability-to-repay standards.

Second, the Bureau is working to obtain a random selection of loan-level data from several lenders. The Bureau intends to request loan file data from lenders of various sizes and geographic locations to construct a representative dataset. In particular, the Bureau will request a random sample of RESPA GFE and RESPA settlement statement forms from loan files for closed-end loans. These forms include data on some or all loan characteristics including settlement charges, origination charges, appraisal fees, flood certifications, mortgage insurance premiums, homeowner’s insurance, title charges, balloon payments, prepayment penalties, origination charges, and credit charges or points. Through conversations with industry, the Bureau believes that such loan files exist in standard electronic formats allowing for the creation of a representative sample for analysis. The Bureau may use these data to further measure the impacts of certain proposed changes. Calculations of various categories of settlement and origination charges may help the Bureau calculate the various impacts of proposed changes in other proposals to the definition of finance charge, including proposed changes in the number and characteristics of loans that exceed the HOEPA thresholds, loans that would meet the high-rate or high-risk definitions mandating additional consumer protections, and loans that meet the points and fees thresholds contained in the ability-to-repay provisions of the Dodd-Frank Act.

Third, the Bureau may also use data from the pilot phases of the National Mortgage Database (NMDB) to refine its proposals and/or its assessments of the benefits, costs, and impacts of these proposals. The NMDB is a comprehensive database, currently under development, of loan-level information on first lien single-family mortgages. It is designed to be a nationally representative sample (1 percent) and contains data derived from credit reporting agency data and other administrative sources along with data from surveys of mortgage borrowers. The first two pilot phases, conducted over the past two years, vetted the data development process, successfully pre-tested the survey component and produced a prototype dataset. The initial pilot phases validated that sampled credit repository data are both accurate and comprehensive and that the survey component yields a representative sample and a sufficient response rate. A third pilot is currently being conducted with the survey being mailed to holders of 5,000 newly originated mortgages sampled from the prototype NMDB. Based on the 2011 pilot, a response rate of 50% or higher is expected. These survey data will be combined with the credit repository information of non-respondents, and then de-identified. Credit repository data will be used to minimize non-response bias, and attempts will be made to impute missing values. The data from the third pilot will not be made public. However, to the extent possible, the data may be analyzed to assist the Bureau in its regulatory activities and these analyses will be made publically available.

The survey data from the pilots may be used by the Bureau to analyze consumers’ shopping behavior regarding mortgages. For instance, the Bureau may calculate the number of consumers who use brokers, the number of lenders contacted by borrowers, how often and with what patterns potential borrowers switch lenders, and other behaviors. Questions may also assess borrowers’ understanding of their loan terms and the various charges involved with origination. Tabulations of the survey data for various populations and simple regression techniques may be used to help the Bureau with its analysis.

The Bureau requests commenters to submit data and to provide suggestions for additional data to assess the issues discussed above and other potential benefits, costs, and impacts of the proposed rule. The Bureau also requests comment on the use of the data described above.

VIII. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA), as amended by SBREFA and the Dodd-Frank Act, requires each agency to consider the potential impact of its regulations on small entities, including small businesses, small governmental units, and small not-for-profit organizations. 5 U.S.C. 601 et seq. The RFA generally requires an agency to conduct an initial regulatory flexibility analysis (IRFA) and a final regulatory flexibility analysis (FRFA) of any rule subject to notice-and-comment rulemaking requirements, unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. 5 U.S.C. 603, 604. The Bureau also is subject to certain additional procedures under the RFA involving the convening of a panel to consult with small business representatives prior to proposing a rule for which an IRFA is required. 5 U.S.C. 609.

The Bureau has not certified that the proposed rule would not have a significant economic impact on a substantial number of small entities within the meaning of the RFA. Accordingly, the Bureau convened and chaired the Small Business Review Panel to consider the impact of the proposed rule on small entities that would be subject to that rule and to obtain feedback from representatives of such small entities. The Small Business Review Panel for this rulemaking is discussed below in part VIII.A.

The Bureau is publishing an IRFA. Among other things, the IRFA estimates the number of small entities that will be subject to the proposed rule and describe the impact of that rule on those entities. The IRFA for this rulemaking is set forth below in part VIII.A.

A. Small Business Review Panel

Under section 609(b) of the RFA, as amended by SBREFA and the Dodd-Frank Act, the Bureau seeks, prior to conducting the IRFA, information from representatives of small entities that may potentially be affected by its proposed rules to assess the potential impacts of that rule on such small entities. 5 U.S.C. 609(b). Section 609(b) sets forth a series of procedural steps with regard to obtaining this information. The Bureau first notifies the Chief Counsel for Advocacy (Chief Counsel) of the SBA and provides the Chief Counsel with information on the potential impacts of the proposed rule on small entities and the types of small entities that might be affected. 5 U.S.C. 609(b)(1). Not later than 15 days after receipt of the formal notification and other information described in section 609(b)(1) of the RFA, the Chief Counsel then identifies individuals representative of affected small entities for the purpose of obtaining advice and recommendations from those individuals about the potential impacts of the proposed rule (referred to previously as SERs). 5 U.S.C. 609(b)(2) The Bureau convenes a review panel for such rule consisting wholly of full time Federal employees of the office within the Bureau responsible for carrying out the proposed rule, the Office of Information and Regulatory Affairs (OIRA) within OMB, and the Chief Counsel, which constitutes the Small Business Review Panel. 5 U.S.C. 609(b)(3). The Panel reviews any material the Bureau has prepared in connection with the SBREFA process and collects advice and recommendations of each individual small entity representative identified by the Bureau after consultation with the Chief Counsel on issues related to sections 603(b)(3) through (b)(5) and 603(c) of the RFA.[223] 5 U.S.C. 609(b)(4). Not later than 60 days after the date the Bureau convenes the Small Business Review Panel, the Panel reports on the comments of the SERs and its findings as to the issues on which the Panel consulted with the SERs, and the report is made public as part of the rulemaking record. 5 U.S.C. 609(b)(5). Where appropriate, the Bureau modifies the rule or the IRFA in light of the foregoing process. 5 U.S.C. 609(b)(6).

On April 9, 2012, the Bureau provided the Chief Counsel with the formal notification and other information required under section 609(b)(1) of the RFA. To obtain feedback from small entity representatives to inform the Panel pursuant to sections 609(b)(2) and 609(b)(4) of the RFA, the Bureau, in consultation with the Chief Counsel, identified five categories of small entities that may be subject to the proposed rule for purposes of the IRFA: commercial banks/savings institutions, credit unions, non-depositories engaged primarily in lending funds with real estate as collateral (included in NAICS 522292), non-depositories primarily engaged in loan servicing (included in NAICS 522390), and certain non-profit organizations. Section 3 of the IRFA, in Part VIII.B.3, below, describes in greater detail the Bureau’s analysis of the number and types of entities that may be affected by the proposed rule. Having identified the categories of small entities that may be subject to the proposed rule for purposes of an IRFA, the Bureau, in consultation with the Chief Counsel, selected 16 small entity representatives to participate in the SBREFA process. As described in chapter 7 of the Small Business Review Panel Report (described below), the SERs selected by the Bureau in consultation with the Chief Counsel included representatives from each of the categories identified by the Bureau and comprised a diverse group of individuals with regard to geography and type of locality (i.e., rural, urban, suburban, or metropolitan areas).

On April 10, 2012, the Bureau convened the Small Business Review Panel pursuant to section 609(b)(3) of the RFA. To collect the advice and recommendations of the SERs under section 609(b)(4) of the RFA, the Panel held an outreach meeting/teleconference with the small entity representatives on April 24, 2012 (the “Panel Outreach Meeting”). To help the small entity representatives prepare for the Panel Outreach Meeting, the Panel circulated briefing materials prepared in connection with section 609(b)(4) of the RFA that summarized the proposals under consideration at that time, posed discussion issues, and provided information about the SBREFA process generally.[224] All 16 small entity representatives participated in the Panel Outreach Meeting either in person or by telephone. The Panel also provided the small entity representatives with an opportunity to submit written feedback until May 1, 2012. In response, the Panel received written feedback from 5 of the representatives.[225]

On June 11, 2012, the Panel submitted to the Director of the Bureau, Richard Cordray, the written Small Business Review Panel Report, which includes the following: background information on the proposals under consideration at the time; information on the types of small entities that would be subject to those proposals and on the small entity representatives who were selected to advise the Panel; a summary of the Panel’s outreach to obtain the advice and recommendations of those small entity representatives; a discussion of the comments and recommendations of the small entity representatives; and a discussion of the Small Business Review Panel findings, focusing on the statutory elements required under section 603 of the RFA. 5 U.S.C. 609(b)(5).[226]

In preparing this proposed rule and the IRFA, the Bureau has carefully considered the feedback from the small entity representatives participating in the SBREFA process and the findings and recommendations in the Small Business Review Panel Report. The section-by-section analysis of the proposed rule in Part VI, above, and the IRFA discuss this feedback and the specific findings and recommendations of the Small Business Review Panel, as applicable. The SBREFA process provided the Small Business Review Panel and the Bureau with an opportunity to identify and explore opportunities to mitigate the burden of the rule on small entities while achieving the rule’s purposes. It is important to note, however, that the Small Business Review Panel prepared the Small Business Review Panel Report at a preliminary stage of the proposal’s development and that the report—in particular, the findings and recommendations—should be considered in that light. Also, any options identified in the Small Business Review Panel Report for reducing the proposed rule’s regulatory impact on small entities were expressly subject to further consideration, analysis, and data collection by the Bureau to ensure that the options identified were practicable, enforceable, and consistent with RESPA, TILA, the Dodd-Frank Act, and their statutory purposes. The proposed rule and the IRFA reflect further consideration, analysis, and data collection by the Bureau.

B. Initial Regulatory Flexibility Analysis

Under section 603(a) of the RFA, an IRFA “shall describe the impact of the proposed rule on small entities.” 5 U.S.C. 603(a). Section 603(b) of the RFA sets forth the required elements of the IRFA. An IRFA shall contain (1) a description of the reasons why action by the agency is being considered; (2) a succinct statement of the objectives of, and the legal basis for, the proposed rule; (3) a description of and, where feasible, provision of an estimate of the number of small entities to which the proposed rule will apply; (4) a description of the projected reporting, recordkeeping, and other compliance requirements of the proposed rule, including an estimate of the classes of small entities that will be subject to the requirement and the types of professional skills necessary for the preparation of the report or record; and (5) identification, to the extent practicable, of all relevant Federal rules which may duplicate, overlap, or conflict with the proposed rule. The Bureau, further, must describe any significant alternatives to the proposed rule which accomplish the stated objectives of applicable statutes and which minimize any significant economic impact of the proposed rule on small entities. Finally, as amended by the Dodd-Frank Act, section 603(d) of the RFA requires that the IRFA include a description of any projected increase in the cost of credit for small entities, a description of any significant alternatives to the proposed rule which accomplish the stated objectives of applicable statutes and which minimize any increase in the cost of credit for small entities (if such an increase in the cost of credit is projected), and a description of the advice and recommendations of representatives of small entities relating to the cost of credit issues. 5 U.S.C. 603(d)(1); Dodd-Frank Act section 1100G(d)(1).

1. Description of the Reasons Why Agency Action Is Being Considered

As discussed in the Part I, mortgage servicing has been marked by pervasive and profound consumer protection problems. As a result of these problems, Congress included a number of provisions in the Dodd-Frank Act specifically to address mortgage servicing. One of these provisions is section 1463 of the Dodd-Frank Act, which amends RESPA. This provision puts new disclosure requirements and limitations on servicers obtaining force-placed insurance, and it establishes obligations for servicers to respond to requests from borrower to correct errors or provide certain information. Section 1463 of the Dodd-Frank Act also authorizes the Bureau, by regulation, to impose other obligations on servicers that it finds appropriate to carry out the purposes of the statute.

These new statutory requirements take effect automatically on January 21, 2013, as written in the statute, unless final rules are issued prior to that date. If the Bureau adopts implementing regulations no later than January 21, 2013, the Bureau may establish an effective date for the rules. The statutory requirements implemented by the rules then take effect on the same date. The Bureau intends to exercise its authority to adopt regulations to clarify new consumer protection obligations under the statute, to adopt additional consumer protections not required by the statute, and to give servicers sufficient time to come into compliance. The Bureau is also considering adjusting servicers’ legal obligations, including the obligations of small servicers, in certain circumstances to ease burden without sacrificing adequate protection of consumers.

The Bureau is proposing additional standards to improve the way servicers treat borrowers, particularly delinquent borrowers. Some servicers have made it very difficult for delinquent borrowers to understand, 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 loan modifications or other options offered by servicers, and forced borrowers who have invested substantial time communicating with an employee of the servicer to repeat the process with different employees that lack information about the substance of prior communications. The Bureau is proposing new servicing regulations to address these concerns.

When finalized, the Bureau’s rules will constitute the first truly national mortgage servicing standards. Other federal regulatory agencies have issued guidance on mortgage servicing and loan modifications and taken enforcement actions against mortgage servicers. The State attorneys general, joined by numerous Federal agencies including the Bureau, entered into the National Mortgage Settlement with the nation’s five largest servicers in February 2012. The National Mortgage Settlement applies to portfolio loans serviced by the five largest servicers. Borrowers of mortgage loans owned by GSEs or private investors may not necessarily gain the benefit of the protections set forth in that settlement.

These varied regulatory responses are understandable when viewed as a response to an unprecedented mortgage crisis and significant problems in the servicing of mortgage loans. Ultimately, however, both borrowers and mortgage servicers will be better served by having uniform minimum national standards that govern mortgage servicing. 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 – except to the extent the Bureau adopts exemptions for smaller servicers.

2. Succinct Statement of the Objectives of, and Legal Basis for, the Proposed Rule

This rulemaking has multiple objectives. The proposed provisions on force-placed insurance should reduce the likelihood that servicers purchase force placed insurance without a reasonable basis. This will reduce instances of servicers charging borrowers for force-placed insurance they do not need or charge more than is bona fide and reasonable. The proposed provisions on error resolution and requests for information would require servicers to promptly investigate alleged errors and, as appropriate, correct them. Servicers would also be required to conduct reasonable and timely searches for certain types of information.

The proposed provisions on maintaining reasonable information management policies and procedures address wide-spread problems reported across the mortgage servicing industry with regard to management of borrower documents and information. Compliance with the rule will require providing accurate information to borrowers, correcting errors where they occur, evaluating borrowers for loss mitigation options, facilitating oversight of, and compliance by, service providers, and facilitating servicing transfers.

The proposed provisions on early intervention with delinquent borrowers are intended to spur the engagement between servicers and borrowers that is necessary for avoiding foreclosure. Early intervention may also generally benefit borrowers by reducing avoidable interest costs, limiting the impact on borrowers’ credit reports, and facilitating household budgeting and planning.

The proposed provisions on continuity of contact ensure that servicer personnel have access to information about delinquent borrowers so that the servicer can appropriately assist the borrower in exploring loss mitigation options.

Finally, the proposed provisions on loss mitigation would require 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. These servicers would have a duty to evaluate borrowers that apply for loss mitigation within specific timeframes and to inform borrowers about the status of their application and the servicer’s decision. These servicers would also be prohibited from completing a foreclosure sale unless certain conditions held.[227]

3. Description and, Where Feasible, Provision of an Estimate of the Number of Small Entities to which the Proposed Rule Will Apply

As discussed in the Small Business Review Panel Report, for purposes of assessing the impacts of the proposed rule on small entities, “small entities” is defined in the RFA to include small businesses, small nonprofit organizations, and small government jurisdictions. 5 U.S.C. 601(6). A “small business” is determined by application of SBA regulations and reference to the North American Industry Classification System (NAICS) classifications and size standards.[228] 5 U.S.C. 601(3). Under such standards, banks and other depository institutions are considered “small” if they have $175 million or less in assets, and for most other financial businesses, the threshold is average annual receipts (i.e., annual revenues) that do not exceed $7 million.[229]

During the Small Business Review Panel process, the Bureau identified five categories of small entities that may be subject to the proposed rule for purposes of the RFA: commercial banks/savings institutions[230] (NAICS 522110 and 522120), credit unions (NAICS 522130), firms providing real estate credit (NAICS 522292), firms engaged in other activities related to credit intermediation (NAICS 522390), and small non-profit organizations. Commercial banks, savings institutions and credit unions are small businesses if they have $175 million or less in assets. Firms providing real estate credit and firms engaged in other activities related to credit intermediation are small businesses if average annual receipts do not exceed $7 million.

A small non-profit organization is any not-for-profit enterprise which is independently owned and operated and is not dominant in its field. Small non-profit organizations engaged in mortgage servicing typically perform a number of activities directed at increasing the supply of affordable housing in their communities. Some small non-profit organizations originate and service mortgage loans for low and moderate income individuals while others purchase loans or the servicing rights on loans originated by local community development lenders. Servicing income is a substantial source of revenue for some small non-profit organizations while others receive most of their income from grants or investments.[231]

The following table provides the Bureau’s estimate of the number and types of entities that may be affected by the proposals under consideration:

Estimated number of affected entities and small entities by NAICS code and engagement in closed-end mortgage loan servicing

Category	NAICS	Small entity threshold	Total entities	Small entities	Entities engaged in mortgage loan servicing	Small entities engaged in mortgage loan servicing
Commercial banks & savings institutions	522110 522120	$175,000,000 assets	7,724	4,250	7,502	4,098
Credit unions	522130	$175,000,000 assets	7,491	6,568	5,190	4,270
Real estate credit	522292	$7,000,000 revenues	5,791	5,152	1,388	800
Other activities related to credit intermediation (includes loan servicing)	522390	$7,000,000 revenues	5,494	5,319	1,388	800

For commercial banks, savings institutions and credit unions, the number of entities and asset sizes were obtained from December 2010 Call Report data as compiled by SNL Financial. Banks and savings institutions are counted as engaging in mortgage loan servicing if they hold closed-end loans secured by 1-to-4 family residential property or they are servicing mortgage loans for others. Credit unions are counted as engaging in mortgage loan servicing if they have closed-end 1-to-4 family mortgages on portfolio, or hold real estate loans that have been sold but remain serviced by the institution.

For firms providing real estate credit and firms engaged in other activities related to credit intermediation, the total number of entities and small entities comes from the 2007 Economic Census. The total number of these entities engaged in mortgage loan servicing is based on a special analysis of data from the Nationwide Mortgage Licensing System and Registry and is as of Q1 2011. The total equals the number of non-depositories that engage in mortgage loan servicing, including tax exempt entities, except for those mortgage loan servicers (if any) that do not engage in any mortgage-related activities that require a state license. The estimated number of small entities engaged in mortgage loan servicing is based on predicting the likelihood that an entity’s revenue is less than the $7 million threshold based on the relationship between servicer portfolio size and servicer rank in data from Inside Mortgage Finance.[232]

4. Projected Reporting, Recordkeeping, and Other Compliance Requirements of the Proposed Rule, Including an Estimate of the Classes of Small Entities Which Will Be Subject to the Requirement and the Type of Professional Skills Necessary for the Preparation of the Report

The proposed rule does not impose new reporting requirements.

The possible recordkeeping and compliance costs for small entities from each major component of the proposed rule are presented below. The Bureau presents these costs against a pre-statute baseline. This baseline includes the costs of complying with the Federal rules that overlap with the proposed rule, as described in Section 5 below. The Bureau expects that the costs of complying with the proposed rule relative to the pre-statute baseline are lower than these costs would be if not for the costs of complying with the existing Federal rules. In particular, certain one-time and ongoing costs regarding error resolution, early intervention and loss mitigation will have generally been incurred and budgeted for by servicers. These expenses will facilitate and thereby reduce the cost of compliance with the proposed rule.

Benefits to consumers from the proposed rule are discussed in the section 1022 analysis in Part VII above.

(a) Force-Placed Insurance

Dodd-Frank Act section 1463 amends RESPA to prohibit a servicer of a federally related mortgage 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 requirements to maintain property insurance. The statute sets forth a mandatory process servicers must follow, which includes sending two notices to the borrower, before imposing any charge on a borrower for force-placed insurance. The statute also provides process requirements about terminating force-placed insurance and refunding force-placed insurance premiums paid during any period during which the borrower’s insurance coverage and the force-placed insurance coverage were each in effect.

The Bureau is proposing forms for the force-placed insurance notices to be sent to borrowers. The Bureau is also proposing requirements concerning: charges related to force-placed insurance, payment of insurance from escrow, and notice requirements when servicers renew existing insurance policies.

Based on discussions with industry and the SERs, the Bureau understands that the proposed force-placed insurance provision may not have the same impact on all small servicers. Some small servicers incur all of the costs associated with providing notices, tracking borrower coverage, and placing and terminating the insurance. For other small servicers, the force-placed insurance provider handles these activities and absorbs the costs or passes them on to the consumer indirectly through the insurance premium.

Based on discussions with the SERs, the Bureau currently understands that many small servicers already comply with most of the force-placed insurance provisions of the proposed rule. Two SERs stated that they already provide two or more notices of pending force placed insurance and others stated that they already refund premiums back to borrowers for periods of overlapping coverage. Other SERs noted that they already provide refunds for overlapping coverage.

If small servicers in general already comply with the force-placed insurance provisions of the proposed rule, then the impact of the proposed rule will likely come from the one-time cost of developing disclosures that would meet the proposed disclosure requirements and the ongoing costs of providing information in the disclosures that they do not already provide. For example, one SER stated that their current notice does not include an estimate of force-placed insurance costs. In addition, some small servicers who very rarely need to force-place insurance and therefore use informal procedures may need to develop written procedures to ensure they comply with the proposed rule. The Bureau believes the one-time cost of developing these policies will be minimal.

When the Bureau convened its SBREFA panel on mortgage servicing, the Bureau learned that several of the small servicers that participated on the panel obtained force-placed insurance policies that must be renewed monthly. The Bureau proposes to mitigate the cost of these disclosures by providing that a servicer is not required to send more than one renewal notice during any 12-month period.

One SER raised a different concern regarding notice and process costs associated with borrowers who have chronic lapses in hazard insurance coverage. This SER said that there would be labor costs associated with managing a process in which notices must be delivered at required intervals, setting up escrows for the premium, refunding premiums, and repeating the process when insurance lapses again. The Bureau believes that most small servicers already incur most of these costs. However, the Bureau is interested in data and other factual information about the likely compliance costs associated with borrowers who have chronic lapses in hazard insurance coverage and requests comment on this issue.

Finally, most SERs did not raise specific concerns with the proposal to expand existing requirements, in regards to disbursements from a borrower’s escrow account to pay the borrower’s hazard insurance premium, to borrower’s whose mortgage payments are more than 30 days past due. Two SERs that expressed concern about advancing funds to renew a borrower’s hazard insurance because the borrower could cancel the insurance and keep the refund.[233] The SBREFA panel recommended that the Bureau reduce the incentives for borrowers to take such action by allowing servicers to advance premium payments in 30-day installments. Proposed comment 17(k)(5)-3 reflects the panel’s recommendation, and the Bureau believes that small servicers would not be unduly burdened by the Bureau’s proposal.

(b) Error Resolution and Response to Inquiries

Dodd-Frank Act section 1463 amends section 6 of RESPA by adopting a number of servicer prohibitions with respect to handling alleged errors and inquiries, including revising the timeframe to respond to qualified written requests, and prohibiting the charging of fees in connection with qualified written requests.

The Bureau is proposing a comprehensive set of requirements for investigating and correcting errors and for responding to borrower inquiries. Servicers would be required to correct errors relating to allocation of payments, provision of final balances for purposes of paying off the loan, avoiding foreclosures, or other standard servicer duties. Servicers also would be required to respond to inquiries about certain topics.

Servicers would have to provide borrowers with a written acknowledgement of receiving a notice of error, unless the servicer resolves the error within five days and the borrower is notified of the resolution in writing. Servicers would have to correct the error and provide the borrower with written notification of the correction or conduct a reasonable investigation and provide the borrower with written notification regarding the investigation and the documents relied upon by the servicer. Generally, the investigation would have to be completed and a response provided within 30 days after receipt of the notice of error.

Substantially similar requirements apply to inquiries. Servicers would have to provide borrowers with written acknowledgement of receiving an information request, unless the servicer provides the borrower with the information requested and with contact information for further assistance within five days, which can be provided orally or in writing. Servicers would have to provide the borrower with the requested information, either orally or in writing, or conduct a reasonable search for the information and provide the borrower with a written notification regarding the search. Generally, with the exception of requests for certain types of information, the information or the notice would have to be provided within 30 days after receipt of the information request.

Aside from the requirement to respond in writing to notices of error and inquiries, servicers not in compliance with the other provisions would need to develop compliance procedures and train staff and may need new or updated software and hardware in order to access the information required to address notices of error and inquiries. However, the Bureau understands that most small servicers already comply with these proposed provisions. SERs had no objection to the proposed response timeframes. SERs emphasized that their borrowers demanded immediate resolution of errors and response to inquiries and their high-touch customer service model was designed to meet the demands of these borrowers.

SERs did generally object to the proposed written response requirements. Several SERs stated that having to respond in writing to every notice of error would be burdensome. Further, SERs argued that there would be no consumer benefit, since errors are generally asserted orally and resolved quickly, if not immediately, and orally. The Bureau notes that the proposed provision regarding inquiries does not require a written response if the servicer provides the information requested to the borrower within five days. Nevertheless, the Bureau understands that small servicers, as defined above, have an incentive to provide protections to consumers that may not exist for other servicers.

(c) Reasonable Information Management Policies and Procedures

Section 1463 of the Dodd-Frank Act requires servicers to comply with any obligation the Bureau finds appropriate to carry out the consumer protection purposes of RESPA. The Bureau is using this authority to propose a requirement that servicers establish reasonable information management policies and procedures. This provision would impose a recordkeeping burden on small servicers.

The proposed provisions specify certain objectives for servicers’ information management practices. These practices should facilitate: accessing and providing accurate information; investigating and correcting errors and providing requested information; evaluating loss mitigation options; oversight of, and compliance by, service providers; facilitating servicing transfers; and providing access to information about actions taken by the servicer.

Servicers that maintain reasonable information management policies and procedures may incur a cost to review and document their policies and procedures, obtain legal advice, train their staff to follow the policies and procedures, and monitor staff adherence to the policies and procedures. The proposal mitigates all of these costs for small servicers through the provision that the “reasonableness” of a servicer’s policies and procedures would depend upon the size of the servicer and the nature and scope of its activities. Further, depository institutions already are subject to interagency guidelines relating to safeguarding the institution’s safety and soundness that facilitate reasonable information management for purposes of mortgage servicing.

The SERs appreciated the flexibility of the proposal and thought it was good that “reasonable” depends on the size, nature, and scope of the entity. The SERs emphasized that small firms do not necessarily use automated or online systems to record and track all borrower communications. They urged the Bureau to avoid structuring the requirement in such a way as to require expensive system upgrades.
(d) Early Intervention for Delinquent Borrowers

Section 1463 of the Dodd-Frank Act requires servicers to comply with any obligation the Bureau finds appropriate to carry out the consumer protection purposes of RESPA. The Bureau is using this authority, among others, to propose early intervention and continuity of contact provisions regarding delinquent borrowers.

The Bureau is generally proposing to require servicers to make two contacts with delinquent borrowers. The Bureau proposes to require servicers to make a good faith effort to contact delinquent borrowers orally no later than 30 days after the payment due date. The Bureau also proposes to require servicers to provide delinquent borrowers with a written notice with information about loss mitigation options and foreclosure. This second contact must be provided no later than 40 days after the payment date that the borrower missed.

The Bureau is proposing to mitigate the cost of the written notice provision by providing servicers with model clauses and by limiting the written notice to be provided once every 180-day period. The Bureau’s model clauses provide servicers with examples of language explaining the foreclosure process and encouraging the borrower to contact the servicer. The Bureau intends for the model clauses to provide servicers with examples of the level of detail that the Bureau expects servicers to provide in their written notice.

The SERs explained that they generally contact delinquent borrowers well before the 45th day of a borrower’s delinquency. One SER mentioned that the GSEs require contact with delinquent borrowers at day 16. The SERs stated that they had relatively low numbers of delinquent borrowers; however, one SER expressed concern about borrowers who were frequently delinquent. This SER did not want to have to send information every month. The Bureau notes that under the proposal, a servicer is not required to provide the written notice to a borrower more than once during any 180-day period.

Some SERs did object to the proposed written notice requirement. The SERs generally stated that they tailor the information they provide to the specific situation of the borrower. One SER objected to a process that the SER regarded as unnecessary and which would require sending yet another notice to the borrower.

(e) Continuity of Contact

Section 1463 of the Dodd-Frank Act requires servicers to comply with any obligation the Bureau finds appropriate to carry out the consumer protection purposes of RESPA. The Bureau is using this authority, among others, to propose requiring servicers to assign personnel to respond to inquiries of certain delinquent borrowers and, as applicable, assist them with loss mitigation options.

The Bureau is proposing that borrowers who meet the requirements for the proposed oral notification under the Bureau’s proposed early invention provision must be provided with live phone access to the assigned personnel. The proposal would require that servicers maintain reasonable policies and procedures designed to ensure that the assigned personnel perform an enumerated list of functions, such as having access to certain information about the borrowers (e.g., a complete record of the borrower’s payment history in the servicer’s possession). The proposal provides conditions that define the duration of continuity of contact, and the proposal provides that certain delays and failures that disrupt continuity of contact do not violate the rule.

The Bureau believes that small servicers generally meet the proposed provisions for continuity of contact. SERs generally stated that with their small staffs, everyone had access to files and would be able to assist borrowers in delinquency. One SER noted that originating officials handle the collections for the loans they originated. This SER noted that borrowers have ready access to the originator and the originator has full access to all loan documents and payment history.

(f) Loss Mitigation

Section 1463 of the Dodd-Frank Act requires servicers to comply with any obligation the Bureau finds appropriate to carry out the consumer protection purposes of RESPA. The Bureau is using this authority, among others, to propose requirements on servicers that offer loss mitigation options to borrowers in the ordinary course of business.

As discussed above, the Bureau is aware of the potential impacts of the loss mitigation requirements on small servicers. As discussed above for proposed § 1024.41, while the Small Business Review Panel Report and the outreach meeting did not focus in significant detail on some of the specific measures proposed here such as, for example, appeals of loss mitigation determinations, the SERs provided feedback on many elements of the loss mitigation process. 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.[234]

The SERs said that they generally engaged in individualized contact with borrowers early in the foreclosure process, completed discussions of loss mitigation options with borrowers prior to a point in time when borrowers should have significant foreclosure related information, and generally worked closely with foreclosure counsel so that foreclosure processes and loss mitigation could be easily conducted simultaneously without prejudice to the loss mitigation process. Further, the SERs 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.[235]

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 delinquent borrowers, and continuity of contact.

(g) Estimate of the Classes of Small Entities Which will be Subject to the Requirement and the Type of Professional Skills Necessary for the Preparation of the Report or Record

Section 603(b)(4) of the RFA requires an estimate of the classes of small entities which will be subject to the requirement. The classes of small entities which will be subject to the reporting, recordkeeping, and compliance requirements of the proposed rule are the same classes of small entities that are identified above in part VIII.B.3.

Section 603(b)(4) of the RFA also requires an estimate of the type of professional skills necessary for the preparation of the reports or records. The Bureau anticipates that the professional skills required for compliance with the proposed rule are the same or similar to those required in the ordinary course of business of the small entities affected by the proposed rule. Compliance by the small entities that will be affected by the proposed rule will require continued performance of the basic functions that they perform today: generating disclosure forms, addressing errors and providing information to borrowers, managing information about borrowers, contacting delinquent borrowers, providing continuity of contact for delinquent borrowers, and (as applicable) reviewing applications by borrowers for loss mitigation.

5. Identification, to the Extent Practicable, All Relevant Federal Rules which May Duplicate, Overlap, or Conflict with the Proposed Rule.

The Dodd-Frank Act codified certain requirements contained in existing regulations and in some cases imposed new requirements that expand or vary the scope of existing regulations. The Bureau is working to eliminate conflicts and to harmonize the earlier rules with the new statutory requirements.

RESPA 6(e) contains procedures for qualified written requests that overlap with section 1463 of the Dodd-Frank Act to provide additional procedures for resolving errors and responding to inquiries. The Bureau is proposing broader, more consumer-friendly error resolution and information request procedures that cover wider topics than the current qualified written request procedures and will subsume the qualified written request procedures. The Bureau believes that a common minimum set of procedures applicable to all assertions of errors or information requests, whether in the form of a qualified written request or not, will benefit both borrowers and servicers. Further, as noted in the preamble, depending on the circumstances, the error resolution procedures in this rule may overlap with the direct dispute procedures under FCRA where the dispute involves erroneously furnishing negative information to a consumer reporting agency. See 15 U.S.C. 1681s-2(a)(8); 12 CFR 1022.43.

As noted in the preamble, the early intervention and loss mitigation procedures in this rule may overlap with existing Federal law codifying requirements of FHA, VA, and the Rural Housing Service with respect to mortgages insured by those agencies. 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. To the extent requirements proposed by Bureau overlap with existing Federal rules, the Bureau expects servicers would abide by the stricter standard in order to comply with all requirements.

Apart from this overlap, the Bureau is not aware of any other Federal regulations that currently duplicate, overlap, or conflict with the proposals under consideration.[236] The Bureau requests comment to identify any additional such Federal rules that impose duplicative, overlapping, or conflicting requirements on servicers and potential changes to the proposed rules in light of duplicative, overlapping, or conflicting requirements.

The SERs expressed general concern about the costs to small entities of regulation, but the SERs also stated that they were already in compliance with most of the provisions of the proposed rule. Where the SERs expressed concern about the costs of complying with a proposed provision, the Bureau considered alternatives that might impose lower costs on small servicers, but does not believe that these alternatives would accomplish the stated objectives of the applicable statute.

Regarding the proposed disclosures for force-placed insurance, the Bureau understands that small servicers may incur costs for providing these disclosures that large servicers do not. Providers may be more likely to charge small servicers for new or changed disclosures than they are to charge large servicers. Small servicers are also more likely to produce the disclosures in-house. The Bureau believes that the proposed force-placed insurance disclosures would be an effective and important component of a statutory regime intended to reduce or prevent unnecessary force-placement of hazard insurance. The Bureau does not believe that less costly alternatives to the proposed rule for small servicers would accomplish this objective. The Bureau notes that most SERs did not raise concerns with the proposal. The Bureau proposes to mitigate the cost of the disclosures to all servicers by providing that a servicer is not required to send more than one renewal notice during any 12-month period.

Regarding the proposed provisions for reasonable information management policies and procedures, the Bureau provides flexibility for small servicers by providing for servicers to design policies and procedures that are appropriate for their servicing businesses 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. As noted above, the SERs appreciated the flexibility of the proposal and thought it was good that reasonableness would depends on the size, nature, and scope of the entity.

The SERs did express concern in regards to the error resolution procedures. In particular, several SERs stated that having to respond in writing to every notice of error would be burdensome. The Bureau notes that the proposal includes a provision that minimize the burden on servicers from the error resolution requirements if a notice of error is overbroad or unduly burdensome.

The Bureau considered providing small servicers with an alternative method of compliance with two of the proposed provisions for error resolution. Under the alternative considered, small servicers would not have needed to comply with the proposed acknowledgement of receipt requirement or the proposed response to notice of error requirement if (a) the small servicer provided notification of the correction orally if the error was asserted orally by the borrower and (b) the small servicer indicated in its records both the error asserted by the borrower and the action taken by the servicer to correct the error. The Bureau believes, however, that there is substantial consumer protection in the acknowledgement of receipt and response to notice of error requirements and that the alternative may diminish these protections for borrowers with mortgages that happen to be serviced by small servicers. The Bureau solicits comment on whether the Bureau should further consider alternative means of compliance with the proposed error resolutions procedures.

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. Based on this information, the Bureau has not proposed to provide small servicers an exemption from the proposed notification requirements under proposed § 1024.39(a) and (b). However, the Bureau solicits comment on whether the Bureau should consider alternative means of compliance with proposed § 1024.39(a) and (b), such as by permitting small servicers to develop a more streamlined written notice under proposed § 1024.39(b).

7. Discussion of Impact on Cost of Credit for Small Entities

Section 603(d) of the RFA requires the Bureau to consult with small entities regarding the potential impact of the proposed rule on the cost of credit for small entities and related matters. 5 U.S.C. 603(d). To satisfy these statutory requirements, the Bureau provided notification to the Chief Counsel on April 9, 2012 that the Bureau would collect the advice and recommendations of the same SERs identified in consultation with the Chief Counsel through the Small Business Review Panel process concerning any projected impact of the proposed rule on the cost of credit for small entities as well as any significant alternatives to the proposed rule which accomplish the stated objectives of applicable statutes and which minimize any increase in the cost of credit for small entities.[237] The Bureau sought to collect the advice and recommendations of the SERs during the Small Business Review Panel outreach meeting regarding these issues because, as small financial service providers, the SERs could provide valuable input on any such impact related to the proposed rule.[238]

At the time the Bureau circulated the SBREFA materials to the SERs in advance of the Small Business Review Panel outreach meeting, it had no evidence that the proposals under consideration would result in an increase in the cost of business credit for small entities. Instead, the summary of the proposals stated that the proposals would apply only to mortgage loans obtained by consumers primarily for personal, family, or household purposes and the proposals would not apply to loans obtained primarily for business purposes.[239]

At the Panel Outreach Meeting, the Bureau asked the SERs a series of questions regarding cost of business credit issues.[240] The questions were focused on two areas. First, the SERs from commercial banks/savings institutions, credit unions, and mortgage companies were asked whether, and how often, they extend to their customers closed-end mortgage loans to be used primarily for personal, family, or household purposes but that are used secondarily to finance a small business, and whether the proposals then under consideration would result in an increase in their customers’ cost of credit. Second, the Bureau inquired as to whether, and how often, the SERs take out closed-end, home-secured loans to be used primarily for personal, family, or household purposes and use them secondarily to finance their small businesses, and whether the proposals under consideration would increase the SERs’ cost of credit.

The SERs had few comments on the impact on the cost of business credit. While they took this time to express concerns that these regulations would increase their costs, they said these regulations would have little to no impact on the cost of business credit. When asked, one SER mentioned that at times people may use a home-secured loan to finance a business, which was corroborated by a different SER based on his personal experience with starting a business. The Bureau is generally interested in the use of personal credit to finance a business and invites interested parties to provide data and other factual information on this issue.

Based on the feedback obtained from SERs at the Small Business Review Panel outreach meeting, the Bureau currently does not anticipate that the proposed rule will result in an increase in the cost of credit for small business entities. To further evaluate this question, the Bureau solicits comment on whether the proposed rule will have any impact on the cost of credit for small entities.

IX. Paperwork Reduction Act

The collection of information contained in this proposal, and identified as such, has been submitted to OMB for review under section 3507(d) of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.) (Paperwork Reduction Act or PRA). Under the Paperwork Reduction Act, the Bureau may not conduct or sponsor, and a person is not required to respond to, an information collection unless the information collection displays a valid OMB control number.

This proposed rule would amend 12 CFR part 1024 (Regulation X). Regulation X currently contains collections of information approved by OMB, and the Bureau’s OMB control number for Regulation X is 3170-0016. The collection title is: Real Estate Settlement Procedures Act (Regulation X) 12 CFR 1024. As described below, the proposal would amend the collections of information currently in Regulation X.

The title of this information collection is 2012 Real Estate Settlement Procedures Act (Regulation X) Mortgage Servicing. The frequency of response is on-occasion. These information collection requirements would be required to provide benefits for consumers and would be mandatory. See 15 U.S.C. 1601 et seq.; 12 U.S.C. 2601 et seq. Because the Bureau does not collect any information, no issue of confidentiality arises. The likely respondents would be federally insured depository institutions (such as commercial banks, savings banks, and credit unions) and non-depository institutions (such as mortgage brokers, real estate investment trusts, private-equity funds, etc.) that service consumer mortgages.[241]

Under the proposal, the Bureau would account for the paperwork burden for respondents under Regulation X. Using the Bureau’s burden estimation methodology, the Bureau believes the total estimated one-time industry burden for the approximately 12,813 respondents subject to the proposed rule would be approximately 570,000 hours for one time changes and 2.4 million hours annually.[242] The estimated burdens in this PRA analysis represent averages for all respondents. The Bureau expects that the amount of time required to implement each of the proposed changes for a given institution may vary based on the size, complexity, and practices of the respondent.

For purposes of this PRA analysis, the Bureau estimates that there are 11,425 depository institutions and credit unions subject to the proposed rule, and an additional 1,388 non-depository institutions. Based on discussions with industry, the Bureau assumes that all depository respondents except for one large entity and 95% of non-depository respondents (and 100% of small non-depository respondents) use third-party software and information technology vendors. Under existing contracts, vendors would absorb the one-time software and information technology costs associated with complying with the proposal for large- and medium- sized respondents but not for small respondents.

A. Information Collection Requirements

The Bureau is proposing six changes to the information collection requirements in Regulation X:

Provisions regarding mortgage servicing transfer notices: The Bureau’s proposal would substantially reduce the length and complexity of the mortgage servicing transfer notice but would expand coverage from closed-end first-lien mortgages to closed-end subordinate-lien mortgages as well.
Provisions regarding the placement and termination of force-placed insurance, including three notices: The Bureau’s proposal for force-placed insurance would require servicers to provide two notices to a borrower at least 45 days and 15 days before charging the borrower for force-placed insurance. In addition to the two notices, the Bureau is proposing to require servicers to provide borrowers a written notice before charging a borrower for renewing or replacing existing force-placed insurance on an annual basis.
Provisions regarding error resolution and requests for information: The Bureau’s proposals for error resolution would include a requirement on servicers generally to provide written acknowledgement of receipt of a notice of error and to provide a written response to the stated error. The Bureau’s proposal for response to information requests would require servicers to provide a written response acknowledging receipt of an information request. Servicers would also be required to provide the borrower with the requested information either orally or in writing, or a written notification that the information requested is not available to the servicer.
Requirements for early intervention with delinquent borrowers: The Bureau’s proposals would require servicers to provide oral and written notices upon a borrower’s reaching certain stages of delinquency.
Requirements regarding loss mitigation: Under the Bureau’s proposals, servicers that offer loss mitigation options in the ordinary course of business would be required to follow certain procedures when evaluating loss mitigation applications, including (1) providing a notice telling the borrower if the loss mitigation is incomplete, approved, or denied (and, for denials of loan modification requests, a more detailed notice of the specific reason for denial and appeal rights), (2) providing a notice of the appeal determination, and (3) providing servicers of senior or subordinate liens encumbering the property that is the subject of the loss mitigation application copies of the loss mitigation application.

B. Analysis of Proposed Information Collection Requirements[243]

1. Mortgage Servicing Transfers

The Bureau’s proposal would substantially reduce the length and complexity of the mortgage servicing transfer notice but would expand coverage to closed-end second lien mortgages, in addition to closed-end first-lien mortgages.

Currently, lenders are required to notify closed-end first lien borrowers at origination whether their loan may be sold and the servicing transferred. Upon any mortgage transfer, the transferor servicer is required to provide written notice to the borrower notifying them of the transfer, while the transferee servicer is required to provide notification to the borrower that it will servicer the borrower’s mortgage. The Bureau’s proposed provision would substantially reduce the length and complexity of the existing mortgage servicing transfer disclosure. The Bureau is expanding coverage from closed-end first-lien mortgages to also include closed-end second lien mortgages.

Certain Bureau respondents would have ongoing burden in hours or vendor costs associated with the information technology used in producing the disclosure. All Bureau respondents would have ongoing vendor costs associated with distributing (e.g., mailing) the disclosure. The Bureau estimates this ongoing burden to be 2 hours and $215, on average, for each respondent.

2. Force-Placed Insurance Disclosures

The Bureau’s proposal for force-placed insurance would require servicers to provide two notices to a borrower at least 45 days and 15 days before charging the borrow for force-placed insurance. In addition to the two notices, the Bureau is proposing to require servicers to provide borrowers a written notice before charging a borrower for renewing or replacing existing force-placed insurance on an annual basis.

The Bureau understands the proposed requirement that servicers provide borrowers with two written notices prior to charging borrowers for force-placed insurance reflects common practices (i.e., “usual and customary” business practices) today for the majority of mortgage servicers. However, the Bureau understands that the proposed requirement that servicers provide a written notice prior to charging borrowers for the renewal or replacement of existing force-place insurance does not reflect common practices.

All respondents would have a one-time burden under this requirement associated with reviewing the regulation. Certain respondents would have one-time burden in hours or vendor costs from creating software and information technology capability to produce the new renewal disclosure. Furthermore, while the Bureau considers borrower notifications of force-placed insurance prior to placement as the normal course of business, institutions may still have to incur one-time costs associated with modifying their existing disclosures to comply with the Bureau’s proposed disclosure provisions. As a result, the Bureau’s one-time burden incorporates these costs. The Bureau estimates this one-time burden to be 45 minutes and $90, on average, for each respondent.[245]

Certain respondents would have ongoing burden in hours or vendor costs associated with the information technology used in producing the disclosure. All respondents would have ongoing vendor costs associated with distributing (e.g., mailing) the renewal disclosure. The Bureau estimates this ongoing burden to be 15 minutes and $23, on average, for each respondent.

3. Error Resolution and Requests for Information

The Bureau’s proposals for error resolution and requests for information would require written acknowledgement of receiving a notice of error or an information request, written notification of correction of error, and oral or written provision of the information requested by the borrower or a written notification that the information requested is not available to the servicer, and an internal record of engagement with the borrower, which are forms of information collection.

The Bureau estimates that one-time hourly burden to provide training for relevant staff to comply with the proposed disclosure requirements to be 43 hours, on average, per respondent.

Respondents would have ongoing burden in hours and/or vendor costs associated with the information technology used in producing the disclosure. All respondents would have ongoing vendor costs associated with distributing (e.g., mailing) the disclosure and some will have production costs associated with the new disclosure. The Bureau estimates this ongoing burden to be 50 hours and $87, on average, for each respondent.

4. Early Intervention with Delinquent Borrowers

An information collection would be created by the Bureau’s proposal to require servicers to provide an oral and written notice upon a borrower’s reaching certain stages of delinquency. Most respondents currently provide some form of delinquency notice, and thus the expenses associated with this information collection are from the one-time costs to incorporate the Bureau’s required information.

Fannie Mae, Freddie Mac, FHA, and the VA generally recommend that all institutions that service any of their guaranteed mortgages to perform duties similar to those set forth in the Bureau’s proposed provisions regarding early intervention with delinquent borrowers; the Bureau estimates that 80 percent of outstanding mortgages are guaranteed by one of these institutions. The Bureau estimates that 75 percent of loans that are not guaranteed by one of these institutions are serviced by a servicer that is currently providing delinquency notices that would comply with the proposal. The Bureau estimates the one-time burden to be 0.4 hours, on average, for each institution. The Bureau estimates the ongoing burden to be 3 hours and $3, on average for each respondent.

5. Loss Mitigation

Under the Bureau’s proposals, servicers that offer loss mitigation options in the ordinary course of business would be required to follow certain procedures when evaluating loss mitigation applications, including (1) providing a notice telling the borrower if the loss mitigation is incomplete, approved, or denied (and, for denials of loan modification requests, a more detailed notice of the specific reason for denial and appeal rights), (2) providing a notice of the appeal determination, and (3) providing servicers of senior or subordinate liens encumbering the property that is subject of the loss mitigation application copies of the loss mitigation application.

The loss mitigation provision would create an information collection by requiring servicers to notify borrowers who submit loss mitigation applications and any servicers of senior or second liens encumbering the property that is the subject of the loss mitigation application where a applications have been submitted. Servicers may be required to send up to three notices per loss mitigation application. For incomplete applications, servicers would be required to notify the borrower that their application is incomplete and explain the steps needed to complete. For complete applications, the servicer is required to notify the borrower of their decision and provide a copy of the application to any servicers of senior or subordinate liens encumbering the property that is the subject of the loss mitigation application. For incomplete applications that resubmit, and possess second-lien loan on their property, the provision would require three notices.

All respondents would have a one-time burden under this requirement associated with reviewing the regulation. Certain respondents would have one-time burden in hours or vendor costs from creating software and information technology costs associated with changes in the payoff statement disclosure. The Bureau estimates this one-time burden to be 20 minutes and $90, on average, for each respondent. The Bureau estimates the ongoing burden to be 135 hours and $229, on average, for each respondent.

C. Summary of Burden Hours

	Respondents	Disclosures per Respondent	Hours Burden per Disclosure	Total Burden Hours	Total Vendor Costs

Ongoing
Notice of Mortgage Service Transfer	12,813	726	0.003	26,000	$2,760,000
Force-Placed Insurance	12,813	77	0.003	3,000	$290,000
Error Resolution & Response to Inquiries	12,813	300	0.167	642,000	$1,110,000
Early Intervention for Delinquent Borrowers	12,813	12	0.250	37,000	$40,000
Loss Mitigation	12,813	810	0.161	1,670,000	$2,930,000

One-Time
Notice of Mortgage Service Transfer	12,813	1	0.495	6,000	$1,160,000
Force-Placed Insurance	12,813	1	0.740	9,000	$1,160,000
Error Resolution & Response to Inquiries	12,813	1	43	547,000	$0
Early Intervention for Delinquent Borrowers	12,813	1	0.400	5,000	$0
Loss Mitigation	12,813	1	0.295	4,000	$1,160,000

Totals may not be exact due to rounding.

D. Comments

Comments are specifically requested concerning: (1) whether the proposed collections of information are necessary for the proper performance of the functions of the Bureau, including whether the information will have practical utility; (2) the accuracy of the estimated burden associated with the proposed collections of information; (3) how to enhance the quality, utility, and clarity of the information to be collected; and (4) how to minimize the burden of complying with the proposed collections of information, including the application of automated collection techniques or other forms of information technology. All comments will become a matter of public record. Comments on the collection of information requirements should be sent to the Office of Management and Budget (OMB), Attention: Desk Officer for the Consumer Financial Protection Bureau, Office of Information and Regulatory Affairs, Washington, DC, 20503, or by the internet to http://oira_submission@omb.eop.gov, with copies to the Bureau at the Consumer Financial Protection Bureau (Attention: PRA Office), 1700 G Street NW, Washington, DC 20552, or by the internet to CFPB_Public_PRA@cfpb.gov.

[193] Specifically, section 1022(b)(2)(A) of the Dodd-Frank Act calls for the Bureau to consider the potential benefits and costs of a regulation to consumers and covered persons, including the potential reduction of access by consumers to consumer financial products or services; the impact on depository institutions and credit unions with $10 billion or less in total assets as described in section 1026 of the Dodd-Frank Act; and the impact on consumers in rural areas.

[194] For the average homeowner’s insurance premium, see data provided by Insurance Institute of America, available at http://www.iii.org/facts_statistics/homeowners-and-renters-insurance.html. For information on the cost of force-placed insurance, see http://newsroom.assurant.com/releasedetail.cfm?ReleaseID=645046&ReleaseType=Featured%20News (reporting force-placed insurance costs 1.5 to 2 times hazard insurance).

[195] That is to say, the homeowner pays one-twelfth to one-half of the additional $880.

[196] Discussions with industry suggest that 2% of mortgages incur force-placement each year and there are approximately 52 million first liens, so about 1.04 million homeowners incur force-placement each year. Ten percent of this figure multiplied by $73 (or $440) gives $7.6 million (or $45.8 million).

[197] See e.g., Levitin and Twomey, 28 Yale J. on Reg. 48 (2011) (explaining that servicing advances, which include advances for taxes and insurance, are costly to servicers because they are do not recover interest on the advances) .

[198] See supra note 113 (Thompson, at 816-20),

[199] Furthermore, as discussed in greater detail in part VI, above, servicers already are subject to a disclosure regime with some similar characteristics when obtaining force-placed flood insurance as required by the FDPA. The presence of these systems may make it less costly for servicers to comply with the Bureau’s proposed procedures for force-placed insurance, since systems are in place that could be adapted outside the force-placed flood insurance context.

[200] See, however, the general discussion of servicing operations and avoidable foreclosure in the analysis of the proposed provisions on reasonable information management, infra.

[201] See, however, the general discussion of servicing operations and avoidable foreclosure in the analysis of the proposed provisions on reasonable information management.

[202] For example, erroneous information furnished by servicers to a consumer reporting agency are a type of covered error specifically included in the proposed rule. See proposed § 1024.35(b)(iii). Servicers who furnish erroneous information to a consumer reporting agency are already required to handle disputes about this information under the Fair Credit Reporting Act. These preexisting obligations under the Fair Credit Reporting Act will make it less costly for servicers to implement the changes in this rule since they should already have systems in place that can be adapted outside the context of errors about information furnished to consumer reporting agencies.

[203] See Office of the Comptroller of Currency, OCC Mortgage Metrics Report, Fourth Quarter 2011, at 12 (Table 1) (2012).

[204] There are 31.4 million loans in the database, which is 60 percent of all first-lien residential mortgages outstanding. See id., at 8.

[205] See Michael A. Stegman et al., Preventative Servicing is Good for Business and Affordable Homeownership Policy, 18 Housing Policy Debate 243, 257 (2007).

[206] Other authors have also noted substantial differences in loss mitigation practices by servicers that are not accounted for by differences in borrowers, types of mortgages and other observable factors. See e.g., Sumit Agarwal et al., Market-Based Loss Mitigation Practices for Troubled Mortgages Following the Financial Crisis, Federal Reserve Bank of Chicago, (2010) (Agarwal et al).

[207] Specifically, the probability that a loan cures increases from .815 with the worst performing servicer (Servicer #2) to .8902 with a high-performing reference group of servicers. The figure .815 is the solution to ln[.8902/(1-.8902)]-.61=ln[x/(1-x)], where -.61 is the regression coefficient on Servicer #2 given on page 265 and .8902 is discussed on page 263. Thus, the probability a loan that is 30 days late actually defaults decreases from .185 (=1-.815) to .1098 (=1-.8902), which is approximately a 41 percent reduction.

[208] The 20% default rate is consistent with the data in Stegman et al. but may underestimate the default rate in more recent data.

[209] In one study, only 30% of loans that were 90 days late and began a repayment plan were reinstated or paid in full during the period of the study. Presumably, loans that are 90 days late and never begin a repayment plan have an even lower success rate. See Amy Crews Cutts & William A. Merrill, Interventions in Mortgage Default: Policies and Practices to Prevent Home Loss and Lower Costs 11-12 and Table 2 (Freddie Mac, Working Paper No. 08-01, Mar. 2008).

[210] See Kenneth P. Brevoort &Cheryl R. Cooper, Foreclosure’s Wake: The Credit Experiences of Individuals Following Foreclosure (2010), available at http://www.federalreserve.gov/pubs/feds/2010/201059/201059pap.pdf.

[211] Foreclosure itself may lead to a 27% reduction in the value of a house (possibly due to losses associated with abandonment) and a 1% reduction in the value of every other house within 5 tenths of a mile. See John Y. Campbell, Stefano Giglio, & Parag Pathak, Forced Sales and House Prices, American Economic Review, 101(5) (2011), abstract available at http://www.aeaweb.org/articles.php?doi=10.1257/aer.101.5.2108.

[212] For example, servicers are already subject to record keeping requirements under current § 1024.17(l) of Regulation X. This will make it less costly for servicers to implement the changes in this rule since they should already have systems in place that can be adapted to the new requirements.

[213] See Amy Crews Cutts & William A. Merrill, Interventions in Mortgage Default: Policies and Practices to Prevent Home Loss and Lower Costs 10 (Freddie Mac, Working Paper No. 08-01, Mar. 2008).

[214] Id., Table 2. This statistic is merely suggestive of a benefit to early intervention, since borrowers who are willing to begin a repayment plan at 30 days may be more likely to become current even without a repayment plan.

[215] See General Accounting Office, Actions Needed by Treasury to Address Challenges in Implementing Making Home Affordable Programs, Table 1 (2011).

[216] For a discussion of recent changes, including the implementation of the new “HAMP Tier 2” alternative, see Making Home Affordable Supplemental Directive 12-02, March 9, 2012, available at https://www.hmpadmin.com/portal/programs/docs/hamp_servicer/sd1202.pdf

[217] See General Accounting Office, Troubled Asset Relief Program: Further Actions Needed to Fully and Equitably Implement Foreclosure Mitigation Programs, at 15 (2010).

[218] See also the general discussion of servicing operations and avoidable foreclosure in the analysis of the proposed provisions on reasonable information management.

[219] Specifically, as specified in proposed § 1024.41(g), if a servicer received a timely and complete loss mitigation application, a servicer could not proceed to foreclosure sale unless: (1) the servicer denied 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 denied the borrower’s appeal; (3) the borrower rejected a servicer’s offer of a loss mitigation option; or (4) a borrower failed to perform pursuant to the terms of a loss mitigation option.

[220] Mortgages were troubled if they were ever 60+ days past due or the borrower contacted the lender asking to renegotiate the loan.

[221] See supra note 193 (Agarwal et al, at 7-10, Table 2).

[222] More information about the Mortgage Call Report can be found at http://mortgage.nationwidelicensingsystem.org/slr/common/mcr/Pages/default.aspx.

[223] As described in the IRFA in part VIII.B, below, sections 603(b)(3) through (b)(5) and section 603(c) of the RFA, respectively, require a description of and, where feasible, provision of an estimate of the number of small entities to which the proposed rule will apply; a description of the projected reporting, record keeping, and other compliance requirements of the proposed rule, including an estimate of the classes of small entities which will be subject to the requirement and the type of professional skills necessary for preparation of the report or record; an identification, to the extent practicable, of all relevant Federal rules which may duplicate, overlap, or conflict with the proposed rule; and a description of any significant alternatives to the proposed rule which accomplish the stated objectives of applicable statutes and which minimize any significant economic impact of the proposed rule on small entities. 5 U.S.C. 603(b)(3), 603(b)(4), 603(b)(5), 603(c).

[224]The Bureau posted these materials on its website and invited the public to email remarks on the materials. See http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-outlines-borrower-friendly-approach-to-mortgage-servicing/ (the materials are accessible via the links within this document).

[225] This written feedback is attached as appendix A to the written report of the Panel, discussed below.

[226] See Final Report of the Small Business Review Panel on the CFPB’s Proposals Under Consideration for Mortgage Servicing Rulemaking, (June 11, 2012), available at: www.consumerfinance.gov.

[227] As specified in proposed § 1024.41(g), if a servicer receives a timely and complete loss mitigation application, a 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.

[228] The current SBA size standards are found on SBA’s website at http://www.sba.gov/content/table-small-business-size-standards.

[229] See id.

[230] Savings institutions include thrifts, savings banks, mutual banks, and similar institutions.

[231] The Bureau is continuing to refine its description of small non-profit organizations engaged in mortgage loan servicing and working to estimate the number of these entities, but it is not possible to estimate the number of these entities at this time. Non-profits and small non-profits engaged in mortgage loan servicing would be included under real estate credit if their primary activity is originating loans and under other activities related to credit intermediation if their primary activity is servicing.

[232] The Bureau is continuing to refine its estimate of the number of firms providing real estate credit and engaging in other activities related to credit intermediation that are small and which engage in mortgage loan servicing.

[233] Small Business Review Panel Report, at 22.

[234] See Small Business Review Panel for Mortgage Servicing Rulemaking, Outline of Proposals Under Consideration and Alternatives Considered, at 19, 22, 24-26.

[235] See Final Report of the Small Business Review Panel on CFPB’s Proposals Under Consideration for Mortgage Servicing Rulemaking (June 11, 2012), at 26.

[236] The RFA requires identification of duplicative, overlapping, or conflicting Federal regulation. Consent orders, settlement agreements with Federal agencies, and investor requirements of Fannie Mae and Freddie Mac do not constitute federal regulations for purposes of the IRFA.

[237] See 5 U.S.C. 603(d)(2). The Bureau provided this notification as part of the notification and other information provided to the Chief Counsel with respect to the Small Business Review Panel process pursuant to RFA section 609(b)(1) .

[238] See 5 U.S.C. 603(d)(2)(B).

[239] See TILA § 104(1); RESPA § 7(a)(1).

[240] See the Panel Report, appendix D, pp. 154-155 (PowerPoint slides from the Panel Outreach Meeting, “Topic 7: Impact on the Cost of Business Credit”).

[241]For purposes of this PRA analysis, references to “creditors” or “lenders” shall be deemed to refer collectively to commercial banks, savings institutions, credit unions, and mortgage companies (i.e., non-depository lenders), unless otherwise stated. Moreover, reference to “respondents” shall generally mean all categories of entities identified in the sentence to which this footnote is appended, except as otherwise stated or if the context indicates otherwise.

[243] A detailed analysis of the burdens and costs described in this section can be found in the Paperwork Reduction Act Supporting Statement that corresponds with this proposal. The Supporting Statement is available at www.reginfo.gov.

[244] Dollar figures are vendor costs and do not include the dollar value of burden hours.

[245] Dollar figures are vendor costs and do not include the dollar value of burden hours.

Home Mortgage Consumer Protection

RESPA: Regulatory Analysis

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