Home Mortgage Consumer Protection

§1. What’s going on here?

This is a summary of discussion on the “For All Borrowers: Who’s Servicing Your Loan?” post from August 10 to October 3, 2012. (On that date, the post was closed to further discussion.) It was written by the Regulation Room team. This version is a DRAFT. Please help make sure that nothing is missing, wrong, or unclear. You can propose changes to this version until October 8.

The goal is to give CFPB the best possible picture of the different views, concerns, and ideas that came out during the discussion. This is NOT the place to reargue your position or criticize a different one. Focus on whether anything is missing or unclear, not whether you agree or disagree.

On October 9, the Final Summary will be posted on Regulation Room and submitted to CFPB as a formal comment in the official rulemaking record. (October 9 is the last day of the official commenting period.)

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§2. Consumer confusion about servicing in general

Discussion among several commenters (some consumers, some industry) revealed confusion about when the company originating the mortgage could/would sell a loan, and what transfer of servicing rights actually means. Some participants advocated that borrowers should deal with a company that retains and services the loans it originates if they want to avoid problems. One industry commenter pointed out that lenders are now required to inform mortgage applicants whether their loan might be sold, and urged consumers to consider more than just the interest rate in choosing a lender.

One commenter (a consumer who got or refinanced a mortgage in the past 10 years), summed up: “The problem with all of this is that the consumer doesn’t understand all of the parties involved in his or her loan and might need that information in the case of a financial crisis of some kind.” S/he urged that “the mortgagee should receive a clear, concise picture of the situation” whenever there is any change in who owns or services the loan. This information should include a plain language explanation of what “owning” and “servicing” mean, as well as the identity and contact information of the companies involved. This commenter also suggested: “[E]ach mortgage loan should have a unique universal identifier so things can be tracked properly. I.e., when a loan is packaged and sold in a structured security, the paperwork would have the unique IDs of all loans included in the package.” Proposals for a more uniform system of identifying and tracking mortgage information were a minor theme in the comments and can be found in other posts.

There were suggestions that the number of possible servicing transfers be limited and that consumers be given a choice about who services their loan.

§3. Reaction to proposed transfer notice

In general, reaction to CFPB’s proposed notice was positive. In addition to support from consumer commenters, one commenter who self-identified as a mortgage originator whose company’s customers come from all over the country and/or other countries, supported the notice requirement. S/he argued that it creates a “paper trail” essential for keeping track of the transition process and for giving borrowers the information they need — which in turn helps ensure the mortgage owner gets paid. Another industry commenter, CEO of a small bank, said that CFPB’s proposals “appear to be good and are what small banks have been doing for years.” However, s/he has serious concerns about new regulations increasing costs to small banks; these are described below.

Commenters did suggest several changes/additions:

1. From the mortgage originator who supported the notice generally: The 15-day time frame is an unreasonably short time for consumers to adjust. Many borrowers only think about and pay their mortgages once a month. The notice should be sent 30 to 45 days in advance of the transfer.
2. Related to the focus on how consumers actually make mortgage payments, the notice should give both “the website address for the new servicer for account information” and “the proper address / flow for electronic payments (e.g. recurring mortgage payments from a checking account) [because] [c]ustomers need to know how to handle and timing of changes to regularly scheduled electronic mortgage payments.” This comment was from a consumer who had gotten or refinanced a mortgage in the past 10 years.
3. From the same commenter: The notice “should also state which servicer is responsible for making payments from any escrow account for property taxes and property insurance and the effective date.” This suggestion was based on personal experience with property tax payments that “slipped through the cracks” when servicers changed.

Finally, in a comment that applies more generally to borrowers’ ability to get information about their loan, one commenter (a consumer who has had, or someone in their family has had, a mortgage foreclosed, and whose household makes less than $100,000/yr) urged: “Lenders should be required to have people to assist you with your loan at the branch. When I arrive at the branch they should not dictate to me an 800 number that keeps me on hold.”

§4. Transferring loan information between servicers

Several commenters identified transfer of information between servicers as a major concern. Two consumers (one self-identifying as a household earning less than $100,000/yr) gave examples:

“We received our notice of servicing as outlined here, however, the company doing the servicing did not have all the correct information and did not honor the temporary modification outlined by the previous servicer causing us untold hardship and stress.

Because of their delay in information and application they immediately came after us for charges and late fees that we could not have avoided. It was unfair and predatory.

In addition, our previous lender did not work fairly with us, but now that they have sold our loan they no longer have to work with us to correct the flaws in our loan, they simply wash their hands and the new lender/servicer can truthfully say it was not ‘their’ fault.”

“I had 2 servicers at the same time, and both posted my payment only with different extra fees, so totals were not exact, and one servicer was not even hired yet, this was for 18 months overlapped, and [I] still can’t get to the bottom of it. I have never gotten answers to my questions, and they treat the homeowners like dirt. The last servicer on record, reported to IRS, that the entire principal was paid last year, and zeroed my account balance, but the lender still is collecting, I have no idea what is going on.”

Commenters specifically identified three kinds of information that resulted in harm to borrowers when not promptly and accurately transferred between servicers:

• Property tax payments due from escrow
• Loan modifications that had been negotiated
• Status of hazard insurance, leading to improper charging for force-placed insurance

One commenter urged that the rule set a specific deadline (e.g., 15 days) by which all information associated with a borrower’s account (loan origination documentation, servicing history, customer contact history, etc.) must be transferred to the new servicer. Borrowers don’t initiate or control servicer transfers, so it should not be their responsibility to resubmit to the new servicer information that the original servicer had.

Another agreed that information transfer was the servicers’ responsibility and urged CPFB to require that the borrower be given copies within a reasonable period of time (e.g., 30 days) of all information the new servicer gets from the previous servicer. “This should enhance transparency by making all this available to the borrower, the party most involved and most isolated in this process.”

The importance of sufficiently itemized information, which was a general theme in the discussion, was raised here: failure of the old servicer to provide adequate details to the new servicer can result in, e.g., mistakes about the borrower’s insurance status.

§5. Payments made during the transition

Commenters also were concerned about payments made during a servicer transition. They agreed with the proposed 60-day grace period, although one commenter (a consumer who has had personal or family experience with foreclosure and whose household makes less than $100,000/yr) urged CFPB to give borrowers an unconditional right to continue to pay the old servicer during this period: “What if there is a dispute or issue with the new servicer at the time of transfer? … [T]he old servicer should still [accept] payments.” S/he supported this suggestion with details from personal experience:

“My old servicer did an excellent job of providing monthly statements as well as online access. The new servicer refuses to provide any loan information at all to me, not even what the payment is supposed to be. During this 60 day window I have paid the old servicer twice, once for July and once for August. As long as I pay before the first of September, I am still o.k. under the current RESPA rules. I will pay my old servicer one last time since the new servicer will not let me use my online bank bill pay. After that I will have to send checks via certified mail to a company that will not give me anything for information in return. The value in my story is that despite all the rules and regulations, you can not force a company to act in good faith, unless there is a law requiring them to. So to mitigate any harm to the borrower, who is at the mercy of the servicer, CFPB should err on the side of the consumer. Think of it as a 60 window of opportunity, one where the borrower has the ability to pay the old servicer until any issues with the new servicer can be worked out. My issue is not solved. Restricting the consumer’s ability to pay the old servicer has absolutely no benefit to the consumer, it only benefits the new servicer.”

Commenters strongly supported the idea of requiring the old servicer to transfer payments to the new servicer, rather than returning them to the borrower. The same commenter who argued for an unconditional 60-day window pointed out that the old and new servicer already have a contractual arrangement that should facilitate such transfers, and that returning payments only increases the risk that borrowers will incur late fees.

Another (self-identified as a mortgage originator whose company’s customers are from all over the country and/or other countries) emphasized that “[t]he borrower should not be caught up in an argument between seller and buyer” of servicing rights. S/he urged CFPB to require that “the servicer acquiring servicing become responsible for all outstanding payments as of the day of transfer and all payments received by either the selling or purchasing servicer on or after that date.” This would be implemented by:

1. A strict no-contact rule. “The selling servicer should be legally prohibited from contacting the borrower on a transferred loan for purposes of collecting a payment after the transfer date. This prohibition would apply to collecting on NSF [not sufficient funds] checks as well. The purchasing servicer should be obligated to reimburse the selling servicing for NSFs and perform the function of collecting NSF payments. If the borrower maintains that a payment was made to the prior servicer it is the responsibility of the purchasing servicer to collect from the selling purchaser.”
2. Restrictions on processing payments. “Fines and penalties should be incurred by the selling servicer if the servicer processes a payment on a transferred loan after the transfer date. Borrowers can obviously provide the necessary information as to who cashed their payment check and when. This can easily be enforced by review/audit of payment and cash deposit records. Any unprocessed payments held at the time of transfer or received after must be forwarded to the purchasing servicer for processing.”

This commenter argued, “Purchasing servicers should not be allowed to pass the buck to the prior servicer. They should be required to make good with the borrower and settle with the selling servicer however they can. The business risk of not being able to collect from the selling servicer should be taken into account as part of the purchase and sale contract.”

A third commenter (also a mortgage originator) suggested if the original servicer receives a borrower’s payment, it should call the borrower to remind them to send payments to the new servicer and explain the transfer process if needed.

§6. Concerns from small servicers

A commenter who self-identified as the CEO of a small bank for 16 years with a total of 30 years in banking, fears that “[r]ules like this one could make it harder on small banks to work with customers and more expensive to make mortgage loans.” His/her bank “keep[s] every loan we make.” Over half the bank’s loans are in home mortgages, and “[we] have not foreclosed on one in over 10 years.” Although s/he generally supports CFPB’s proposals, the problem, in his/her view, is that regulations tend to be complex, even to solve simple problems, and complexity raises costs. Asked by the moderator for specific suggestions, this commenter responded:

1. “The regulation should only apply to banks that sell loans and only on the loans that are sold.
2. Almost all new regulations require training for all employees, which is expensive and unnecessary. The regulation should always be simple enough that all bankers and consumers can understand it without having to pay someone to understand it.
3. All regulations now have a requirement that the regulation has to be audited at least on an annual basis and the findings reported to the board, even if the bank does not have anything to audit or report. 99% of all banks want to comply with all laws and regulations. It is either the expense involved or the misunderstanding of the reg. that causes them not to be in compliance. I am required to have three external audits done at my bank now. There is no reason this regulation cannot be short, simple, and easy to comply with. If you need help with it, call me.”

Reiterating the plea for simplicity, this commenter wrote: “I like the suggestions mentioned because we do these things anyway. It is in our best interest. I am not sure of the answer, but I know I will have to comply with all the rules, I just should not have to pay someone to explain the rules to me.”

Another commenter, self-identified as a mortgage originator whose company has customers all over the country and/or other countries, strongly disagreed, insisting that “ALL banks/lenders need to be held to the same regs regardless of size.” S/he argued that banks use depositors money to lend, and charge fees connected with loans; all lenders should have to conform to the Secure and Fair Enforcement (SAFE) for Mortgage Licensing Act and be tested to insure that loan officers know their legal responsibilities.