On April 24, 2020, the Consumer Financial Protection Bureau (CFPB) issued CFPB Bulletin 2020-02 (2020 CFPB Bulletin or Bulletin) to provide residential mortgage servicers additional guidance. Specifically, this was regarding their obligation to have policies and procedures that are reasonably designed to achieve the objectives of the Real Estate Settlement Procedures Act, as implemented by Regulation X, regarding the servicing transfer of mortgage loans. This Bulletin is similar to one issued in 2014 but highlights new examples and underscores the CFPB’s plan to continue its focus on servicing transfers.
The COVID-19 pandemic is having an unprecedented impact on the economy, with many state governments requiring nonessential businesses to remain closed and near-record high unemployment claims. These negative economic factors will contribute to significant increases in mortgage defaults, which in turn will likely create liquidity issues for some mortgage servicers. Liquidity concerns of a federal regulator or a security issuer of a federally backed mortgage loan, as defined by the Coronavirus Aid, Relief and Economic Security Act (i.e., a loan that is purchased or securitized by Fannie Mae or Freddie Mac; or a loan that is guaranteed or insured by the Federal Housing Administration, the Department of Veterans Affairs, or the Department of Agriculture), will likely be the primary trigger for servicing transfers in the near term.
The CFPB recognizes that the COVID-19 pandemic is going to cause an increase in the volume of mortgage servicing transfers. During the presidentially declared national emergency that began March 13, 2020, and up to 120 days after its conclusion, the CFPB intends to consider the challenges that servicers may face, such as operational and time constraints related to servicing transfers. The CFPB will be sensitive to servicers’ good-faith efforts that are intended to execute servicing transfers without negative borrower impact. These considerations and sensitivities will be applied to servicing transfers that are requested or required by a federal regulator, or by a security issuer of a federally backed mortgage loan.
Given the expected increase in servicing transfers, below are some considerations for mortgage servicers.
What Are the Servicing Transfer Objectives of Regulation X?
Regulation X outlines servicing transfer objectives for both transferor and transferee servicers. These objectives were initially implemented when Regulation X became effective on Jan. 10, 2014. Regulation X was last amended on Aug. 4, 2016.
According to Regulation X, a transferor servicer is expected to have policies and procedures that are reasonably designed to ensure the servicer can “timely transfer all information and documents in the possession or control of the servicer relating to a transferred mortgage loan to a transferee servicer in a form and manner that ensures the accuracy of the information and documents transferred and that enables a transferee servicer to comply with the terms of the transferee servicer's obligations to the owner or assignee of the mortgage loan and applicable law.”
A transferee servicer is expected to have policies and procedures that are reasonably designed to ensure the servicer can “identify necessary documents or information that may not have been transferred by a transferor servicer and obtain such documents from the transferor servicer.”
What Should Mortgage Servicers Be Mindful of With the CFPB’s Renewed Focus?
CFPB examinations subsequent to Regulation X’s implementation have regularly identified violations and material weaknesses when examining servicers’ compliance management systems. Servicers often have inadequate policies and procedures around the transfer of loan documents and information to the transferee in an accurate and timely manner. As a result, some servicers have found themselves embroiled in lengthy regulatory investigations and costly litigation, as noted below:
In an ongoing lawsuit filed more than three years ago, the CFPB alleged that a large nonbank servicer violated Regulation X because the servicer’s policies and procedures failed to require the servicer to provide transferee servicers with a complete and accurate data dictionary that defined the data points used by the servicer. The CFPB also alleged the servicer’s policies and procedures were deficient because they failed to ensure the servicer disclosed known inaccuracies and errors that may have impacted the accuracy/completeness of the loan-level information transferred to new servicers.
A specialty mortgage servicer agreed to a Consent Order with the CFPB. The CFPB alleged the servicer’s policies and procedures violated Regulation X for several reasons, including it was the servicer’s practice to not review loss mitigation information received from transferor servicers for accuracy and completeness prior to boarding loans; it was the servicer’s practice not to deliver complete and accurate loss mitigation information to transferee servicers; and the servicer failed to ensure its escrow vendors properly entered property tax and homeowners insurance policy information in the servicer’s servicing system.
Another specialty mortgage servicer agreed to a Consent Order with the CFPB and thereby agreed to pay a $1.6 million judgment, following allegations the servicer failed to honor in-flight loan modifications from prior servicers.
The Bulletin highlights focus on areas that the CFPB may consider as contributing to a mortgage servicer’s policies and procedures being reasonably designed to achieve Regulation X’s servicing transfer requirements, which include:
Develop a servicing transfer plan that includes a communications plan, testing plan (for system conversion), a timeline with key milestones, and an escalation plan for potential problems.
Determine servicing responsibilities for legacy accounts, including tax reporting, credit bureau reporting, and other questions that may arise.
Identify any loans in default, active foreclosure and bankruptcy, or any forbearance agreements entered in with the borrower. Where applicable, include loss mitigation activity for each loan, including status and notes pertaining to the loss mitigation action.
Conduct a post-transfer review or debrief to determine effectiveness of the transfer plan and whether any gaps have arisen that require resolution.
Monitor consumer complaints and loss mitigation performance metrics. The CFPB emphasizes the importance of post-transfer monitoring to ensure that transferred data is complete, accurate, and functional for the transferee.
In addition to the examples above, the Bulletin also provides an example list of common data elements and information that the CFPB will likely use to assess compliance with Regulation X in future supervisory examinations. This list can be found in Appendix A of the Bulletin.
How is Guidehouse Helping Clients With Servicing Transfers?
Guidehouse combines both public and commercial sector expertise and can provide clients the full perspective on servicing transfers tailored for the COVID-19 pandemic environment. We have many years of experience supporting mortgage servicing transfers for both boarding and deboarding. Based on our experience, the following areas are usually the most problematic for servicing transfers:
In-flight loss mitigation
Data quality and mapping
Our experts can help mortgage servicers with the following:
Conduct current state assessment of servicing transfer operations that includes a policy and procedure gap analysis, and process walk-throughs to ensure all aspects of the servicing transfer process are documented and are compliant with the Bulletin (as well as other relevant federal and state laws).
Perform data analytics to search preliminary/final data for illogical values, confirm trial balances, and identify exclusions that have not been removed from final data.
Review servicing transfer agreement to ensure timelines and counterparty incentives/penalties are properly included.
Develop action plans to improve process deficiencies and track remediation of policy and procedure gaps.
Provide experienced staffing resources to help execute servicing transfers.
Work directly with lines of business to develop and implement enhanced monitoring programs for loss mitigation performance metrics and borrower complaints.
Perform automated continuous monitoring to profile data-mapping issues; confirm delivery and timing of required notices (pre- and posttransfer); verify payments are properly handled post transfer; and validate transferor or transferee servicer properly handles loans with active foreclosure, bankruptcy, loss mitigation, or complaints.
Develop comprehensive pretransfer plan to include a communications plan, system testing plan/schedule, data mapping, transfer timeline with key milestones, and an escalation plan to resolve potential problems.
Develop comprehensive post-transfer plan to include targeted high-risk loan testing (default, active foreclosure, bankruptcy, in-flight loss mitigation), enhanced monitoring of loss mitigation performance metrics, enhanced complaint monitoring program, and post-transfer review.
Special thanks to Jason Moore for contributing to this article.