Microsoft Word - Mortgage Servicing Supervisory Highlights 11 Final

June 2016

Supervisory Highlights

Mortgage Servicing

Special Edition

Issue 11

1 SUPERVISORY HIGHLIGHTS MORTGAGE SERVICING SPECIAL EDITION (ISSUE 11)

Table of contents

1. Introduction ............................................................................................................. 2

2. Our approach to mortgage servicing examinations ............................................. 4

3. Supervisory observations ...................................................................................... 7

3.1 Loss mitigation acknowledgement notices .............................................. 7

3.2 Loss mitigation offer letters and related communications .................... 10

3.3 Loan modification denial notices ........................................................... 13

3.4 Servicing policies, procedures, and requirements ..................................15

3.5 Servicing transfers ................................................................................... 17

4. Conclusion ............................................................................................................. 19

Appendix A: ............................................................................................................... 21

2 SUPERVISORY HIGHLIGHTS MORTGAGE SERVICING SPECIAL EDITION (ISSUE 11)

1. Introduction

Mortgage servicers play a central role in homeowners’ lives by managing their mortgage loans.

Servicers collect and apply payments, work out modifications to loan terms, and handle the

difficult process of foreclosure. As the financial crisis made clear, weak customer support, lost

paperwork, and mishandled accounts can lead to many wrongful foreclosures and other serious

harm. Since consumers do not choose their mortgage servicers they cannot take their business

elsewhere.

To improve practices in the servicing market, the Dodd-Frank Act Wall Street Reform and

Consumer Protection Act (Dodd-Frank Act) imposed new requirements on servicers and gave

the Consumer Financial Protection Bureau (CFPB) the authority to implement those new

requirements and adopt additional rules to protect consumers. The CFPB released rules,

effective January 10, 2014, to improve the information consumers receive from their servicers,

to enhance the protections available to consumers to address servicer errors, and to establish

baseline servicing requirements that provide additional protections for consumers who have

fallen behind on their mortgage payments. Supervisory examinations of mortgage servicers now

generally focus on reviewing for compliance with these servicing rules and for unfair, deceptive,

and abusive acts or practices.

To assist industry in its efforts to comply Federal consumer financial law, this Special Edition of

Supervisory Highlights discusses recent supervisory examination observations in mortgage

servicing. To provide additional context for readers, we integrate these recent observations with

3 SUPERVISORY HIGHLIGHTS MORTGAGE SERVICING SPECIAL EDITION (ISSUE 11)

observations from previous editions of Supervisory Highlights by subject matter.

The magnitude and persistence of compliance challenges since 2014, particularly in the areas of

loss mitigation and servicing transfers, show that while the servicing market has made

investments in compliance, those investments have not been sufficient across the marketplace.

Outdated and deficient servicing technology continues to pose considerable risk to consumers in

the wider servicing market. These shortcomings are compounded by lack of proper training,

testing, and auditing of technology-driven processes, particularly to handle more individualized

situations related to delinquencies and loss mitigation processes. None of these problems is

insurmountable, however, with the proper focus on making necessary improvements, especially

in the information technology systems necessary for effective implementation. Supervisory

examinations do show that some servicers have significantly improved their compliance

positions, and this edition concludes by sharing how these servicers have strengthened their

compliance.

Observations shared in previous editions of Supervisory Highlights will be footnoted. Questions or comments may

be directed to CFPB_Supervision@cfpb.gov.

4 SUPERVISORY HIGHLIGHTS MORTGAGE SERVICING SPECIAL EDITION (ISSUE 11)

2. Our approach to mortgage

servicing examinations

To determine which mortgage servicers to examine, we use a prioritization framework that

considers a broad range of factors to predict the likelihood of consumer harm.

For instance,

because a servicer's market share corresponds to the number of consumers affected, we

prioritize relatively larger servicers with a more dominant market presence over comparatively

smaller servicers.

Our prioritization approach counterbalances this size consideration with what we call field and

market intelligence. We consider qualitative and quantitative factors for each servicer such as

the strength of compliance management systems, the existence of other regulatory actions,

findings from our prior examinations, servicing transfer activity, the number, severity and

trends of consumer complaints, as well as input from housing counselors and other stakeholders

about institutional performance based on their experience.

In fall 2011, we published the initial mortgage servicing chapter of the CFPB Supervision and

Examination Manual. We update the manual periodically, most recently in May 2016, to reflect

regulatory changes, to make technical corrections and to update examination priorities.

In the

latest version, we enhance the section related to consumer complaints to highlight that for

mortgage servicers, examiners will be reviewing whether the servicer has an adequate process

See Supervisory Highlights: Summer 2013, Section 3.2.3, input from housing counselors and other stakeholders.

See CFPB Supervision and Examination Manual, available at

http://files.consumerfinance.gov/f/201401_cfpb_mortgage-servicing-exam-procedures.pdf

5 SUPERVISORY HIGHLIGHTS MORTGAGE SERVICING SPECIAL EDITION (ISSUE 11)

for expedited evaluation of complaints or notices of error for borrowers or borrower advocates

alleging regulatory compliance issues where the borrower is facing imminent foreclosure. The

possibility of foreclosure puts even more weight on the importance of an appropriate complaint

escalation process, which is essential to any compliance management system.

Generally, our examinations review compliance management systems and evaluate compliance

through transaction testing of specific loan files. In many instances, examiners conduct specific

transaction testing based on consumer complaints submitted to housing counselors or the

CFPB’s Office of Consumer Response, particularly where the servicer did not provide a sufficient

response or remedy. The scope for the content of our examinations reflects the size and risk

profile of each servicer, and as a result, the content of our transaction testing may vary across

market participants.

Our supervisory work also has included use of the Equal Credit Opportunity Act (ECOA)

Baseline Modules, which are part of the CFPB Supervision and Examination Manual.

Examination teams use these modules to conduct ECOA Baseline Reviews, which evaluate how

well institutions’ compliance management systems identify and manage fair lending risks. The

module 4, covering fair lending risks related to servicing, includes questions on such topics as

fair lending training of servicing staff, fair lending monitoring of servicing, and servicing

consumers with Limited English Proficiency. Based on the information gathered through these

ECOA Baseline Reviews, and other inputs used in our prioritization process, Supervision will be

conducting more comprehensive ECOA Targeted Reviews of mortgage servicers in 2016.

Where we observe more significant violations during an examination, we may refer matters to

our Action Review Committee.

The committee uses a deliberative and rigorous process to

determine whether matters that originate from our examinations will be resolved through

confidential supervisory action, such as a board resolution or memorandum of understanding,

Also see page CMR 10 “Consumer Complaint Response” in the CFPB Supervision and Examination Manual,

available at: http://files.consumerfinance.gov/f/201210_cfpb_supervision-and-examination-manual-v2.pdf

See Supervisory Highlights: Summer 2015, Section 3.1.4, available at

http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf.

6 SUPERVISORY HIGHLIGHTS MORTGAGE SERVICING SPECIAL EDITION (ISSUE 11)

or through a public enforcement action. In determining the appropriate action, the committee

considers a variety of factors, including the magnitude of consumer harm, whether the violation

was self-identified, and the timeliness and scope of remediation.

Additionally, we have identified potential risk areas and provided general compliance

suggestions related to mortgage servicing by publishing several compliance bulletins. The

bulletins issued to date have covered the following topics: Permanent Change of Station

Orders,

Mortgage Servicing Transfers,

and Private Mortgage Insurance Cancellation and

Termination.

See Interagency Guidance on Mortgage Servicing Practices Concerning Military Homeowners with Permanent

Change of Station Orders, available at

http://files.consumerfinance.gov/f/201206_cfpb_PCS_Orders_Guidance.pdf.

See CFPB Bulletin 2014-01 (Aug. 19, 2014), available at

http://files.consumerfinance.gov/f/201408_cfpb_bulletin_mortgage-servicing-transfer.pdf.

See CFPB Bulletin 2015-03 (Aug. 4, 2015), available at

http://files.consumerfinance.gov/f/201508_cfpb_compliance-bulletin_private-mortgage-insurance-cancellation-

and-termination.pdf.

7 SUPERVISORY HIGHLIGHTS MORTGAGE SERVICING SPECIAL EDITION (ISSUE 11)

3. Supervisory observations

In examining for compliance with the servicing rules, Supervision has addressed issues across

servicing business areas, and most extensively in the areas of loss mitigation acknowledgement

notices (3.1); loss mitigation offers and related communications (3.2); loan modification denial

notices (3.3); policies and procedures (3.4); and servicing transfers (3.5). The following findings

reflect information obtained from supervisory activities as captured in examination reports or

supervisory letters. In some instances, not all corrective actions, including through

enforcement, have been completed at the time of this report’s publication.

3.1 Loss mitigation acknowledgement

notices

Before the new servicing rules, gaps in servicer communication and coordination kept many

distressed consumers in the dark about available options to avoid foreclosure. Consumers who

applied for such options sometimes found themselves stuck in a cycle of lost paperwork and

redundant document requests while their foreclosure dates grew nearer.

To address this set of issues, the servicing rules now require that if a servicer receives a loss

mitigation application 45 days or more before a foreclosure sale, it must notify the borrower in

writing within five days to acknowledge receipt of the application and whether it is complete or

8 SUPERVISORY HIGHLIGHTS MORTGAGE SERVICING SPECIAL EDITION (ISSUE 11)

incomplete.

If incomplete, the notice must state the additional documents and information the

borrower must submit to complete the application and a reasonable date by which the borrower

should submit those documents and information.

CFPB examiners have found multiple violations related to these critical process requirements.

Examiners found that one or more servicers failed to send any loss mitigation acknowledgment

notices due to a repeated loss mitigation processing platform malfunction over a significant

period of time. Supervision cited the servicer(s) for violating Regulation X and directed the

servicer(s) to remediate affected borrowers, including for interest, fees, and any additional harm

incurred.

Supervision also directed the servicer(s) to fix and monitor the servicing platform for

compliance weaknesses. Supervision later confirmed that the servicer(s) undertook appropriate

corrective actions.

Supervision also found deceptive statements in loss mitigation acknowledgement notices. One

or more servicers sent acknowledgement notices that represented homes would not be

foreclosed on before the deadline passed for submitting missing documents. But the servicer(s)

foreclosed on homes before the submission deadline. Supervision determined the

representations to be deceptive, independent of whether or not the servicing rules permitted the

servicer(s) to foreclose on the specific borrower(s) at that time. Supervision directed the

servicer(s) to undertake remedial and corrective actions which are under review.

Supervision also observed deficiencies with the timeliness and content of acknowledgment

notices. One or more servicers sent acknowledgement notices more than five days after

receiving a borrower’s loss mitigation application. And at one or more servicers, the

12 CFR 1024.41(b)(2)(i)(B).

Id. The acknowledgment notice also must include a statement that the borrower should consider contacting

servicers of any other mortgage loans secured by the same property to discuss available loss mitigation options.

12 CFR 1024.41(b)(2)(i)(B). Previously discussed in the Summer 2015 edition of Supervisory Highlights, available

at http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf

12 U.S.C. 5536(a)(1)(B).

9 SUPERVISORY HIGHLIGHTS MORTGAGE SERVICING SPECIAL EDITION (ISSUE 11)

noncompliant acknowledgment notices for incomplete loss mitigation applications:

 Failed to state the additional documents and information for borrowers to submit to

complete the application, such as income and tax forms that the servicer’s internal

records showed were necessary at that time,. Instead, the servicer(s) separately

requested the necessary documents several weeks after the acknowledgment notice.

 Requested documents, sometimes dozens in number, inapplicable to borrower

circumstances and which were not needed to evaluate borrowers for loss mitigation.

 Requested documents that borrowers already submitted.

 Failed to include any reasonable date by which borrowers must return additional

documents and information.

 Gave borrowers 30 days to submit additional documents, but the servicer(s) then denied

borrowers’ applications for loss mitigation before 30 days.

 Failed to include a statement that borrowers should consider contacting servicers of any

other mortgage loans secured by the same property to discuss available loss mitigation

options.

Supervision cited the servicer(s) above for violating Regulation X and directed them to revise

deficient acknowledgement notices to meet Regulation X requirements.

Previously discussed in the Summer 2015 edition of Supervisory Highlights, available at

http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf

Previously discussed in the Fall 2015 edition of Supervisory Highlights, available at

http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf

12 CFR 1024.41(b)(2)(i)(B).

10 SUPERVISORY HIGHLIGHTS MORTGAGE SERVICING SPECIAL EDITION (ISSUE 11)

3.2 Loss mitigation offer letters and related

communications

Supervision also found serious violations of Federal consumer financial law with servicer loss

mitigation offer letters, loss mitigation offers, and related communications. In offering

proprietary modifications, one or more servicers engaged in deceptive and abusive practices in

connection with communicating whether and when outstanding fees, charges, and advances

would be assessed. Specifically, one or more servicers engaged in a deceptive practice by

misrepresenting to borrowers that it would defer such charges to the maturity date of the loan,

when in fact it often assessed hundreds of dollars in these charges after the borrowers signed

and returned the permanent modification agreements. Additionally, one or more servicers took

unreasonable advantage of borrowers’ lack of understanding of the material risks of the loan

modification and took unreasonable advantage of borrowers’ inability to protect their interests

in selecting or using the modification because the language in the proprietary modification offer

made it impossible for a borrower to understand the true nature of how and when these charges

would be assessed. Without such knowledge, a borrower could not have understood the

material risks of the modification, nor could he adequately protect himself from the potential

payment shock from the assessment of such charges. Supervision cited the servicer(s) for

deceptive and abusive practices and required the servicer(s) to provide accurate information

regarding fee assessment practices about its proprietary loss mitigation options to borrowers.

Furthermore, one or more servicers sent loss mitigation offer letters with response deadlines

that had already passed or were about to pass by the time the borrower received the letter. The

servicer(s) generated the letters in timely fashion, but delayed sending them to borrowers for a

substantial number of days. Supervision cited this practice as unfair and directed the servicer(s)

to undertake remedial and corrective actions which are under review.

With respect to permanent modification agreements, one or more servicers sent agreements to

12 U.S.C.5536(a)(1)(B).

11 SUPERVISORY HIGHLIGHTS MORTGAGE SERVICING SPECIAL EDITION (ISSUE 11)

some borrowers that did not match the terms approved by its underwriting software. Many

borrowers signed and returned the agreements, but then the agreements were not executed by

the servicer(s). Instead, after substantial delays, the servicer(s) sent updated modification

agreements with materially different terms to the borrowers. These misrepresentations about

the available terms affected the ultimate payments the borrowers would make, influencing both

whether they would accept the modification and how they could subsequently budget based on

their expected payment. Supervision determined that the servicer(s) engaged in a deceptive

practice in connection with these modifications and directed the servicer(s) to undertake

remedial and corrective actions.

One or more servicers represented in loan modification trial period plans that borrowers would

receive a permanent modification after making three trial payments. However, after borrowers

made the required trial payments, the servicer(s) could still deny the permanent modification

based on the results of a title search. The servicer(s) did not communicate to borrowers that

permanent loan modifications were contingent on a title search in the trial period offer letter.

Supervision determined the practice to be deceptive and directed the servicer(s) to provide

accurate information to borrowers about loss mitigation options.

Against investor guidelines, one or more servicers treated borrower self-employed gross income

as net income when evaluating loss mitigation applications. The practice inflated borrower

income and may have led to less affordable modifications. Supervision traced the practice to an

underwriting error and cited the servicer(s) for violating Regulation X.

It directed the

servicer(s) to conduct training for loss mitigation personnel to calculate self-employment

income according to investor guidelines.

One or more servicers failed to convert a substantial number of trial modifications to permanent

12 U.S.C.5536(a)(1)(B). Previously discussed in the Fall 2014 edition of Supervisory Highlights, available at

http://files.consumerfinance.gov/f/201410_cfpb_supervisory-highlights_fall-2014.pdf

12 U.S.C.5536(a)(1)(B).

12 CFR 1024.41(c)(1)(i).

12 SUPERVISORY HIGHLIGHTS MORTGAGE SERVICING SPECIAL EDITION (ISSUE 11)

modifications timely after borrowers successfully completed trial modifications. The delays

harmed borrowers who then owed higher amounts of accrued interest under the finalized

permanent modifications than they would have owed under a timely conversion. During the

delay, the interest accrued at the original contractual rate, rather than at the lower rate provided

under the modification’s terms. The servicer then capitalized the additional interest into the

principal balance owed under the permanent modification. The servicer(s) also continued to

report borrowers that had been delinquent at the beginning of their trial modifications as

delinquent to the consumer reporting agencies during the length of the delay. Some affected

borrowers filed complaints with the CFPB’s Office of Consumer Response describing how the

uncertainty of the loan modification decisions hurt their ability to plan for the future.

Supervision determined that the substantial delays, combined with the negative consequences

attributable to the delays, constituted an unfair practice and directed the servicer(s) to

undertake remedial and corrective actions.

Supervision found a deceptive practice related to how one or more servicers disclosed the terms

of a payment plan that deferred mortgage payments for daily simple interest mortgage loans.

The communications included misleading representations about the deferments, which

represented that deferred interest would be repayable at the end of the loan term when, in fact,

the servicer collected the deferred interest from consumer immediately after the deferment

ended. Supervision directed the servicer(s) to clearly disclose how interest accrues while on the

plan and its impact on monthly payments after the deferment period concludes.

Supervision found that one or more servicers sent notices warning that foreclosure would be

imminent to borrowers who were current on their low-balance home equity lines of credit

(HELOCs) and no monthly payment due. Supervision cited the practice as deceptive and

12 U.S.C.5536(a)(1)(B). Previously discussed in the Fall 2014 edition of Supervisory Highlights, available at

http://files.consumerfinance.gov/f/201410_cfpb_supervisory-highlights_fall-2014.pdf

12 U.S.C.5536(a)(1)(B). Previously discussed in the Summer 2015 edition of Supervisory Highlights, available at

http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf

13 SUPERVISORY HIGHLIGHTS MORTGAGE SERVICING SPECIAL EDITION (ISSUE 11)

directed servicer(s) to cease sending collection letters that misled consumers into believing that

the loans were delinquent.

Additionally, Supervision has repeatedly identified waivers of consumer rights in loss mitigation

agreements. Regulation Z states that a “contract or other agreement relating to a consumer

credit transaction secured by a dwelling . . .may not be applied or interpreted to bar a consumer

from bringing a claim in court pursuant to any provision of law for damages or other relief in

connection with any alleged violation of any Federal law.”

Examiners found one or more

servicers required borrowers to sign waivers agreeing that they would have no “defenses, set-

offs, or counterclaims to the indebtedness of borrowers pursuant to the Loan Document” in

order to enter mortgage repayment and loan modification plans. Defenses, set-offs, and

counterclaims pertain to a contract or other agreement to a consumer credit transaction secured

by a dwelling. As borrowers were likely to read the waiver as barring them from bringing claims

— including Federal claims — related to their mortgage, Supervision cited the waiver language

as deceptive and directed the servicer(s) to remove it from all loss mitigation agreements.

3.3 Loan modification denial notices

Where servicers deny complete loss mitigation applications for any trial or permanent loan

modification option, denial notices help borrowers understand the reasons and, where

appropriate, provide relevant information about the appeals process. Generally, the servicing

rules require that denial notices provide the specific reason or reasons for denying the borrower

the trial or permanent loan modification option and, if applicable, that the borrower was not

evaluated on other criteria. The rules enable a borrower to appeal a denial of a trial or

12 U.S.C.5536(a)(1)(B). Previously discussed in the Summer 2015 edition of Supervisory Highlights, available at

http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf

12 CFR 1026.36(h)(2).

12 U.S.C.5536(a)(1)(B). Previously discussed in the Fall 2015 edition of Supervisory Highlights, available at

http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf

14 SUPERVISORY HIGHLIGHTS MORTGAGE SERVICING SPECIAL EDITION (ISSUE 11)

permanent loan modification option so long as the borrower’s complete loss mitigation

application is received 90 days or more before a foreclosure sale or during the pre-foreclosure

review period.

Supervision found that denial notices at one or more servicers failed to state the correct

reason(s) for denying a trial or permanent loan modification option as required by Regulation

For example, the notices’ denial reason stated that the borrower “did not provide the

requested additional information needed to complete the workout review.” However, the

servicer(s) platform indicated that the borrower’s application was complete and was instead

denied for a specific reason related to the borrower’s income.

One or more servicers’ notices also stated “Not Available*” as the reason for denying loss

mitigation applications. The asterisk elaborated: “Not Available means this program was not

considered due to an eligibility requirement or requirements not met.”

Supervision cited the two practices above for violating Regulation X and directed the servicer(s)

to state the specific reason or reasons for its denial of each trial or permanent loan modification

option and, if applicable, that the borrower was not evaluated on other criteria.

When a borrower has the right to appeal the denial of a trial or permanent loan modification, a

servicer must, in its notice after evaluating the borrower’s complete loss mitigation application,

inform the borrower of the appeal right and the amount of time the borrower has to file the

appeal.

One or more servicers sent denial notices that failed to communicate a borrower’s

specific right to appeal. The notices instead generically stated that the borrower may have a

right to appeal if the borrower met certain requirements. Supervision cited servicer(s) for

violating Regulation X and directed the servicer(s) to include more specific appeal language in

12 CFR 1024.41(d), (h).

12 CFR 1024.41(d).

12 CFR 1024.41(c)(1)(ii).

15 SUPERVISORY HIGHLIGHTS MORTGAGE SERVICING SPECIAL EDITION (ISSUE 11)

their denial letters where appropriate, rather than only generic appeal language in all

instances.

3.4 Servicing policies, procedures, and

requirements

To undergird the loss mitigation application process, Regulation X requires servicers to

maintain policies and procedures reasonably designed to achieve specific objectives that

include: providing timely and accurate information; properly evaluating loss mitigation

applications; facilitating oversight of and compliance by service providers; and facilitating

transfer of information during servicing transfers.

In reviewing for these requirements,

Supervision found that one or more servicers violated Regulation X because their policies and

procedures were not reasonably designed to achieve the following objectives:

 Providing a borrower with accurate and timely information and documents in response

to the borrower's requests for information with respect to the borrower's mortgage loan.

One or more servicers failed to provide information and loss mitigation application

forms to a substantial number of borrowers who called in to request such information.

 Upon the death of a borrower, promptly identifying and facilitating communication with

the successor in interest of the deceased borrower with respect to the property secured

by the deceased borrower’s mortgage loan.

One or more servicers required probate for

12 CFR 1024.41(c)(1)(ii). Previously discussed in the Fall 2015 edition of Supervisory Highlights, available at

http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf

12 CFR 1024.38(a), (b).

12 CFR 1024.38(b)(1)(iii).

12 CFR 1024.38(b)(1)(vi).

16 SUPERVISORY HIGHLIGHTS MORTGAGE SERVICING SPECIAL EDITION (ISSUE 11)

borrowers to establish themselves as successors in states where probate was not

required.

 Identifying with specificity all loss mitigation options for which a borrower may be

eligible pursuant to any requirements established by an owner or assignee of the

borrower’s mortgage loan.

One or more servicers sent letters to borrowers soliciting

loss mitigation applications when internal records showed that the borrowers were not

eligible for any loss mitigation option.

 Providing prompt access to all documents and information submitted by a borrower in

connection with a loss mitigation option to servicer personnel assigned to assist the

borrower under the rules.

One or more servicers failed to identify and process material

submitted by borrowers to complete a loss mitigation application. The servicer(s)

permitted borrowers to send material through fax, but lacked policies and procedures for

date-stamping, cataloging and distributing loss mitigation material to appropriate

departments, which resulted in servicer personnel assigned to assist the borrower under

the rules being unable to access relevant information in a timely way.

 Properly evaluating a loss mitigation application for all options for which the borrower

may be eligible based on the loan owner’s requirements.

One or more servicers

evaluated applications only for the loss mitigation options preselected by servicer

personnel and not for all options available to the borrower.

 Facilitating the sharing of accurate and current information regarding the status of any

12 CFR 1024.38(b)(2)(ii).

Reported in the Fall 2015 edition of Supervisory Highlights, available at

http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf

12 CFR 1024.38(b)(2)(iii).

12 CFR 1024.38(b)(2)(v).

Reported in the Fall 2015 edition of Supervisory Highlights, available at

http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf

17 SUPERVISORY HIGHLIGHTS MORTGAGE SERVICING SPECIAL EDITION (ISSUE 11)

evaluation of a borrower’s loss mitigation application and the status of any foreclosure

proceeding among appropriate servicer personnel, including service provider personnel.

One or more servicer(s)’ foreclosure attorneys sent a foreclosure referral letter to the

borrower after the borrower entered into a loss mitigation agreement with the servicer.

 As a transferee servicer, ensuring that it can identify necessary documents or

information that may not have been transferred by a transferor and obtain such

documents from the transferor servicer. One or more transferee(s) failed to identify

necessary documents, including loss mitigation agreements and mortgage notes not

transmitted by the transferor.

In the above cases where Supervision detected policies, procedures, or requirements not in

compliance with Regulation X, Supervision directed servicers to implement policies, procedures,

and requirements compliant with the Rule and to monitor for their effectiveness.

3.5 Servicing transfers

Transferring loans during the loss mitigation process heightens risks to consumers, including

the risk that documents and information might not be accurately transferred.

While

Supervision has observed more attention to pre-transfer planning by transferor and transferee

servicers since 2014, Supervision found that at one or more servicers incompatibilities between

servicer platforms led, in part, to transferees failing to identify and honor in-place loss

mitigation after receiving the loans.

Additionally, one or more servicers failed to honor the terms of in-place trial modifications after

12 CFR 1024.38(b)(3)(iii). Reported in the Fall 2015 edition of Supervisory Highlight, available at

http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf.

12 CFR 1024.38(b)(4)(ii).

See CFPB Bulletin 2014-01 (Aug. 19, 2014), available at

http://files.consumerfinance.gov/f/201408_cfpb_bulletin_mortgage-servicing-transfer.pdf.

18 SUPERVISORY HIGHLIGHTS MORTGAGE SERVICING SPECIAL EDITION (ISSUE 11)

transfer. Some borrowers who completed trial payments with the new servicer nevertheless

encountered substantial delays before receiving a permanent loan modification. Supervision

concluded that the delay caused substantial injury as trial payments were less than the amounts

required by the promissory note, and consumers continuing to make trial payments while

waiting for the permanent modification accrued interest on the unpaid principal balance. Such

delays were exacerbated by the transferee(s)’ failure to obtain timely access to an online workout

tool required by the investor. Supervision cited this practice as unfair and directed the

transferee servicers(s) to develop and implement policies, procedures, training, and audits to

promptly identify and honor prior loss mitigation agreements, whether completed or in-flight at

the time of transfer.

Supervision also observed some servicers improve transfer policies, procedures, and practices.

For example, in response to Supervision’s direction to one or more transferee servicers to

identify in-flight modifications, the transferee(s) began to use certain tools generally available to

industry participants ̶ the HomeSavers Solutions Network and the HAMP Reporting Tool ̶ to

reconcile loan data during transfer. Supervision noted that this approach gave transferee(s) the

ability to identify more in-flight modifications. Despite this improvement, Supervision observed

that transferee(s) still failed to recognize modifications not registered by the transferor or not

otherwise in the databases and could benefit from conducting a post-transfer review for in-flight

loss mitigation. The transferee(s) agreed to further enhance transfer protocols.

Also in connection with servicing transfers, one or more transferee(s) found that delays in

honoring in-flight modifications were caused by their dependence on the information

technology department to manually override data fields whenever the servicing platform

rejected transferor data. By granting override authority to loss mitigation staff, the transferee(s)

reduced the time required to honor in-flight modifications.

12 U.S.C.5536(a)(1)(B). Previously discussed in the Sumer 2015 edition of Supervisory Highlights , available at

http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf

19 SUPERVISORY HIGHLIGHTS MORTGAGE SERVICING SPECIAL EDITION (ISSUE 11)

4. Conclusion

While Supervision continues to be concerned about the range of legal violations identified at

various mortgage servicers, it also recognizes efforts made by certain servicers to properly staff

effective compliance management programs. Some servicers have made significant

improvements in the last several years, in part by enhancing and monitoring their servicing

platforms, staff training, coding accuracy, auditing, and allowing for greater flexibility in

operations. More generally, Supervision found compliance audits that thoroughly assessed the

business unit’s internal control environment, clearly identified issues with compliance, detailed

management’s response, set a target date for resolving the identified issues, and completed the

necessary adjustments promptly. At one or more servicers, these audits included reviews of

service providers and were part of a wider and appropriately resourced compliance framework.

One or more servicers also conducted formal reviews of information technology structures that

identified the root causes of earlier compliance weaknesses, including platform outages. These

reviews led the servicer(s) to replace outdated technology, such as document management

systems.

Supervision also observed that servicers are actively reviewing complaints for allegations of law

violations. One or more servicers used analytic tools to search, review, and track complaint

records with content indicating regulatory violations. One or more servicers also created a

complaint governance committee to oversee all customer complaints to ensure they receive

appropriate engagement, including remediation as appropriate. One or more servicers also

designated management level employees as primary contacts for Federal and State regulators

and other government bodies for discussing complaints and inquiries from borrowers who are in

default or have applied for loan modifications.

As the above observations show, improvements and investments in servicing technology, staff

training, and monitoring can be essential to achieving an adequate compliance position.

20 SUPERVISORY HIGHLIGHTS MORTGAGE SERVICING SPECIAL EDITION (ISSUE 11)

However, such improvements have not been uniform across market participants and

Supervision continues to observe compliance risks, particularly in the areas of loss mitigation

and servicing transfers. A growing point of emphasis for Supervision in achieving needed

improvements in servicer compliance will be to require servicers to submit specific and credible

plans describing how changes in their information technology systems will offer assurance that

they can systematically and effectively implement the changes made to resolve the issues

identified by Supervision.

21 SUPERVISORY HIGHLIGHTS MORTGAGE SERVICING SPECIAL EDITION (ISSUE 11)

APPENDIX A:

Other Supervisory Highlights

This is the 11th edition of CFPB’s Supervisory Highlights publication. The following editions of

Supervisory Highlights have content specific to mortgage servicing examinations:

 Fall 2015

http://files.consumerfinance.gov/f/201510_cfpb_supervisory-highlights.pdf

 Summer 2015

http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf

 Fall 2014

http://files.consumerfinance.gov/f/201410_cfpb_supervisory-highlights_fall-2014.pdf

 Summer 2013

http://files.consumerfinance.gov/f/201308_cfpb_supervisory-highlights_august.pdf

 Winter 2013

http://files.consumerfinance.gov/f/201401_cfpb_supervision-highlights.pdf