pwc cfpb national servicing standards proposal

8/13/2019 Pwc Cfpb National Servicing Standards Proposal

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www.pwc.com/consumerfinancewww.pwcregulatory.com

CFPB Nationalervicing Standardsroposaln analysis of the Consumer

Financial Protection Bureaus

proposed changes to the

Truth in Lending Act (TILA)

and the Real Estate Settlement

Procedures Act (RESPA)A joint point of view byPwCs Consumer FinanceGroup and FinancialServices Regulatory Group

September 2012


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CFPB National Servicing Standards Proposal

Contents

Overview of the proposal ................................................................ 1

CFPB proposal with TILA amendment .......................................... 6

CFPB proposal with RESPA amendments ................................... 10

Conclusion ..................................................................................... 19

Appendix ....................................................................................... 21

Contacts ......................................................................................... 25


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CFPB National Servicing Standards Proposal 1

Overview of the proposal

Following the financial crisis, there has been a heightened focus onincreasing the standards against which mortgage servicers are heldaccountable. Various standards intended to increase consumer protectionhave been rolled out by different regulatory bodies such as the Office of theComptroller of the Currency (OCC), and the Board of Governors of theFederal Reserve System (Fed) through the issuance of the April 2011Consent Orders to fourteen large mortgage servicers. More recently, theNational Mortgage Settlement (NMS) signed by the top five mortgageservicers and 49 state attorneys general and numerous federal agencies andthe California Homeowners Bill of Rights have begun the ground work for

what many regulators and politicians have been calling fora set of nationalstandards for mortgage servicers.

On August 9, 2012, the Consumer Financial Protection Bureau (CFPB)followed suit and released its proposed national servicing standards forcomment. The proposed standards are divided into two separate proposals,one proposing amendments to Regulation X under the Real EstateSettlement Procedures Act (RESPA) and the other proposing amendmentsto Regulation Z under the Truth in Lending Act (TILA). The proposals coverthe following nine aspects of mortgage servicing:

1. Periodic billing statements;2. Adjustable-rate mortgage interest-rate adjustment notices;3. Prompt payment crediting and payoff payments;4. Force-placed insurance;

5. Error resolution and information requests;6. Information management policies and procedures;7. Early intervention with delinquent borrowers;8. Continuity of contact with delinquent borrowers; and9. Loss mitigation procedures.

According to the CFPB press release1that announced these proposalswould offer consumers basic protections and put the serviceback intomortgage servicing ... to prevent mortgage servicers from giving theircustomers unwelcome surprises and run-arounds.

Servicers and the public will have 60 days, until October 9, 2012, to analyzeand provide comments on the proposed rules. The CFPB has stated that it

intends to issue final rules by January 2013 and that the final rules willspecify an implementation period.

The CFPB rules as proposed would generally apply to each mortgageservicer and would effectively extend many of the requirements contained inthe April 2011 Consent Orders and the NMS to each industry participant.

1CFPB Press Release, August 10: Consumer Financial Protection Bureau Proposes Rules to Protect

Mortgage Borrowers (http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-proposes-rules-to-protect-mortgage-borrowers/)


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The proposed rules do contain certain limited exceptions for smallerservicers, defined as those that service 1,000 or fewer mortgage loans andservice only loans they originated or own. The proposed rules generallyapply to closed-end mortgage loans with certain exceptions.

What can you do now?While the rules are currently in the proposal stage, there are several actionsthat servicers can take now to facilitate the process of adapting to these newrequirements, to better position themselves for future CFPB scrutiny, and toinfluence the substance of the final rules.

Develop an extensive approach

These proposals are significant, complex, and intertwined. Based on ourexperience helping servicers adapt to the consent orders and the NMS, werecommend that servicers start by developing an extensive approach toadjust their current practices to be compliant to the new guidance,including, for example:

Conducting gap analyses across servicing processes;

Increasing focus on capacity analysis and planning;

Improving servicing policies, procedures, and controls (both toachieve compliance objectives as well as increasing efficiencies);

Planning on upgrade of IT systems to address new requirements

(e.g., as necessary to provide statement and notice form changes;and to support requirements regarding error corrections,information requests, and continuity of contact with delinquent

borrowers and other loss mitigation requirements);

Enhancing staff skills through development of training programsand capacity analysis;

Establishing and communicating timely and transparent servicingcompliance attestation and testing;

Developing a robust complaint resolution process that includes afeedback loop; and

Enhancing compliance monitoring to prevent and/or detect controlbreakdowns and the implications on the control environment andrisk assessment.

Focus early on high-impact areas

Servicers also should focus early on the aspects of the proposals that arelikely to require the greatest magnitude of change in the servicing systemsand processes, which may include one or both of the areas described below.


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Error correction and information requests

One requirement likely to require substantial changes across industryparticipants is the requirement related to error correction and responding toinformation requests. The CFPB has proposed an extensive set ofrequirements for investigating and correcting errors and for responding to

borrower inquiries. This approach would incorporate, but not be limited to,RESPAs use of the qualified written request to address servicingissues, asdefined by RESPA. While it may be tempting to view this as a narrowprocedural requirement, compliance with the error correction andinformation request requirements will take time to implement and likelyrequire substantial servicing systems improvements. For example, servicingsystems will need to be able to support and track responses to information

requests, and to provide for auditable means of correcting errors. Moreover,to reduce the risk of non-compliance to acceptable levels and to reduce theoperational burden of managing the error correction processes, companiesalso should identify and address the root causes of errors that could have anegative impact on consumers.

In addition, compliance with this requirement likely will include a large andongoing staffing component. That component will need to be supported, forexample, by recruiting, training, policies and procedures, and alignment ofcompensation and/or performance management with compliance with therequirement.

Loss mitigation requirements

A set of requirements likely to require substantial attention, particularly bynon-consent order/non-NMS industry participants, is the set of lossmitigation proposals, i.e., early intervention with delinquent borrowers;continuity of contact with delinquent borrowers; and loss mitigationprocedures. As with the error correction requirement above, meeting theseprocedural requirements may require both servicing systems and staffingchanges. For example, servicers will have to develop approaches toproviding contact continuity, and then will have to address fully theassociated staffing issues including recruiting, training, policies andprocedures, and alignment of compensation and/or performancemanagement with compliance with the requirement. Servicing systems willthen need to be upgraded to provide the information the entire contactpersonnel need to maintain continuity, including timely access to each of theprior communications, each of the documents previously submitted, and thestatus of any pending applications.

Compliance with the notice, application processing, and denial appealsprocesses may also include a large staffing component, as well as theservicing systems changes that will be necessary to trigger, track, andfacilitate each of the of those processes.


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Demonstrate good faith

Taking action before the rules become final could provide a helpful fact tohave in hand if the CFPB ever identified non-compliance with the finalservicing rules. The factors the CFPB must consider when determining

whether to impose civil money penalties include the size of financialresources, good faith, the gravity of the violation, the severity of risk to theconsumer, the history of prior violations, and such other matters as justicemay require.2Notably, good faith is the only favorable factor among them.

Taking early, proactive steps to comply with new regulatory requirementswhile they are still in the proposed stage can demonstration a servicers good

faith. Such a demonstration of good faith could, under the statutory factors,mitigate the risk that the CFPB would try to get the companys attention byimposing large civil money penalties if it later found that the company wasnot fully compliant with those requirements.

Taking an early, proactive approach can also be helpful in getting the CFPBanalysis process started on a good footing. A proactive approachdemonstrates commitment to compliance and will produce documentationthat can give confirmation to examiners that the firm is aware of itsservicing compliance issues and is already taking steps to address them.

Comment on the proposals

Industry participants may want to submit comments on the loss mitigationprovisions, or any other aspects of the proposals that they believe the CFPBshould reconsider.

The loss mitigation proposals largely codify across the servicing industrysome of the requirements that various servicers have agreed to underconsent orders and the NMS, Servicers that are operating under the consentorders or NMS may have views on the appropriateness of making failures tocomply with those agreed-upon requirements into RESPA violations, whichmake them subject to possible private actions for violations as well as toadverse regulatory action. Servicers that are not operating under the consentorders and the NMS may have views on the appropriateness of alsoimposing those requirements on them without their consent.

The loss mitigation provisions may be candidates for change because,unlike most of the other proposals, the requirements under loss mitigationproposals are not specified under any provision of Dodd-Frank. Rather, theloss mitigation provisions are proposed under the CFPBs general authorityunder Dodd-Frank to impose any obligation on mortgages servicers that theCFPB finds, by regulation, to be appropriate to carry out the purposes of

2See Dodd-Frank, 1055(c)(3).


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RESPA.3As a result, the CFPB has far more flexibility to make changes tothe loss mitigation provisions than it does to make changes to most of theother provisions of the proposals.

Industry participants also may wish to comment on the implementationperiod. The CFPB has stated that it plans to finalize these and othermortgage-related rules by January 2013, and the CFPB is requestingcomment on the length of the implementation period it should include inthe final rules. The CFPB believes that while the final rules should be madeeffective immediately, some of these standards may require moresubstantial changes and hence may require more time to roll out. Dodd-Frank permits the CFPB to provide for an implementation period of up to 12

months, but the CFPB will likely want a factual basis for whateverimplementation period or periods it adopts in the final rules. Therefore, theCFPB is more likely to provide an implementation period approaching 12months if it receives strong, factual industry comments supporting such aperiod.

312 U.S.C. 2606(k)(1)(C).


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CFPB proposal with TILA

amendments

The CFPB is proposing to amend Regulation Z, which provides the Truth inLending Act (TILA), and to also amend the official interpretation of theregulation4. The proposed amendments roll out the Dodd-Frank Wall StreetReform and Consumer Protection Act (the Dodd-Frank Act or DFA)provisions regarding mortgage loan servicing. Specifically, this proposalimplements Dodd Frank Act sections addressing:

Periodic billing statements for residential mortgage loans;

Interest rate adjustment notices for adjustable-rate mortgages(ARMs); and

Prompt crediting of mortgage payments and response to requestsfor payoff amounts.

Periodic billing statementsThe CFPB proposed rule would require servicers of closed-end residentialmortgage loans, excluding reverse mortgages, to send a periodic statementfor each billing cycle.5These statements must meet the timing, form, andcontent requirements provided for in the rule. In particular, statements will

be required to explicitly breakdown principal, interest, fees, escrow, and duedates. The CFPB proposed rules leverage requirements included in DoddFrank and provide more detail including sample forms. 6The CFPB has alsoincluded an exception for small servicers that service 1,000 or fewermortgage loans and that only service mortgage loans that the servicer hasoriginated or hold in their loan portfolio. The rules also would exempt fixed

rate loans where the servicer provides the borrower with coupon books, solong as the coupon book contains certain information specified in the ruleand certain other information is made available to the consumer.

While periodic billing statements are already required, the key changeproposed by the CFPB relates to the grouping of the periodic statementcontents.7Based on the CFPBs own outreach and the results of analysisconducted by an outside firm, the CFPB believes the proposed statements

will be easier for most borrowers to understand. For example, the amountdue would be grouped with information around payment due date and latefees, while the explanation of the amount due would require a breakdownshowing the allocation to principal, interest, and escrow, as well as the totalsum of any fees or charges imposed, and any amount of past due payment.

42012 Truth in Lending Act (Regulation Z) Mortgage Servicing Proposal:

http://files.consumerfinance.gov/f/201208_cfpb_tila_proposed_rules.pdf52012 Truth in Lending Act (Regulation Z) Mortgage Servicing Proposal:Section 1.C: Summary (1.

Periodic billing statements) available at

http://files.consumerfinance.gov/f/201208_cfpb_tila_proposed_rules.pdf6Sample forms are included in Appendix H-28 as referenced in Section 1026.41 Periodic Statements forResidential Mortgage Loans (41 (C), Sample forms) of CFPB proposal available at

http://files.consumerfinance.gov/f/201208_cfpb_tila_proposed_rules.pdf7Referred in Section 1026.41 Periodic Statements for Residential Mortgage Loans of CFPB proposalavailable at http://files.consumerfinance.gov/f/201208_cfpb_tila_proposed_rules.pdf


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The proposed periodic statement is also designed to provide additionalinformation to borrowers in several scenarios: partial payments, payment-option loans, and delinquency.

Potential impact to servicers:

For some servicers, these new requirements will have minimal impact giventhe similarities between requirements under the NMS and/or their currentpractices. However, for others, the proposed periodic statements mayrequire some servicers or their vendors to:

Develop new forms or to reformat existing forms and systems tocover additional content requirements (such as payments received,

breakdown of payments, and results of late or delinquentpayments);

Collate or develop the additional information required to provideborrower scenarios around partial payments, payment-option loansand delinquency within the statement;

Create/update policies and procedures to include the required fieldsin the periodic statements; and

Train current and new staff on updated processes and/orrequirements as necessary.

Adjustable-rate mortgage interest-rateadjustment noticesThe CFPB proposed rule would require servicers to provide a noticeregarding the initial interest rate reset or adjustment of a hybrid adjustablerate mortgage at the end of the introductory period either (a) between 210and 240 days prior to such reset, or (b) at establishment of the mortgage ifthe first reset occurs during the first six months of the mortgage.8The CFPBstates9that the objective of this new notification is to provide borrowersenough time in advance of the initial rate change to consider their options.In light of this initial notice, servicers would no longer be required toprovide an annual notice if a rate adjustment would not result in an increasein the monthly payment.

8Referred under Section 1V - Discussion of Major Proposed Revisions (Timing of current and proposed

ARM regulations) of CFPB proposal available athttp://files.consumerfinance.gov/f/201208_cfpb_tila_proposed_rules.pdf9Succinct statement of the objectives of the proposed rule (VIII Regulatory Flexibility Act) of CFPB

proposal available at http://files.consumerfinance.gov/f/201208_cfpb_tila_proposed_rules.pdf


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In addition, the CFPB is proposing to change the minimum timing of whenthe notice of subsequent interest rate changes is required. Under currentrules, servicers must provide consumers with notice of subsequent interestrate change at least 25 days before a payment at a new level is due. This

would be extended to at least 60 days before the new payment is due. 10

The CFPB is also proposing new interest-rate adjustment disclosure forms.11These changes include an explanation of how the new rate and payment

would be determined, when the adjustment would take effect, a good-faithestimate of the amount of the new mortgage payment, and dates of futureinterest-rate adjustments.

Potential impact to servicers:The proposed initial reset ARM disclosure may require some servicers ortheir vendors to:

Develop new forms or to reformat existing forms to cover additionalcontent requirements (such as an explanation of how the new rateand payment would be determined, including how the index may beadjusted, such as by the addition of a margin);

Acquire new or updated software to populate information requiredin the initial interest rate change notification, since the notificationis required more than six months prior to first reset of interest rates;

Create/update policies and procedures to address the change in

timeframe as well as reset notifications where applicable; and

Train current and new staff on updated processes and requirements,as necessary.

Prompt payment crediting and payoffpaymentsThe CFPB is proposing a rule12that would require servicers to process andpost payments received from borrowers in a timely manner. The proposedrules also would clarify servicersobligations when they receive a partialpayment. Specifically, once there are sufficient funds in the account to covera full contractual payment, the servicer must apply those funds to the oldestoutstanding payment due, which would benefit the borrower by reducing

the period of delinquency by one billing cycle.

10Referred under Section 1V - Discussion of Major Proposed Revisions (Timing of current and proposed

ARM regulations) of CFPB proposal available at

http://files.consumerfinance.gov/f/201208_cfpb_tila_proposed_rules.pdf

11 1026.20(c)(2) of CFPB proposed rules available at

http://files.consumerfinance.gov/f/201208_cfpb_tila_proposed_rules.pdf12Summary of CFPB proposed rules under Overview (I) available athttp://files.consumerfinance.gov/f/201208_cfpb_tila_proposed_rules.pdf


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In addition, if a servicer holds a partial payment in a suspense or unappliedfunds account, the servicer must disclose on the periodic statement theamount of funds held in such account. This is not a new requirement tosome servicers as it is also required under the NMS servicing standards.However, under the CFPB proposed rules, the servicer must also disclose

when such funds will be applied to the outstanding payments due on theaccount, which is not required under the NMS standards.

The proposed rules12also require servicers to send an accurate payoffbalance to a customer no later than seven business days after receipt of awritten request from the borrower for such information.

Potential impact to servicers:Most existing servicing requirements such as those stated in NMS and TILArequire servicers to credit a payment to the consumers loan account as ofdate of receipt, except when a delay in crediting does not result in anycharge to the consumers or in the reporting of negative information to aconsumer reporting agency. The proposed new requirement12restates theexisting regulation with the only change that the existing regulation appliesto each of the payments. The new process to handle partial payments(anything less than a thorough contractual payment) may impose a cost onservicers who have different crediting practices. In order to meet the newrequirement servicers may need to:

Develop or update software to handle payment hierarchies and rules

around payment application; Update policies and procedures to address: the timeliness of

suspense payments and payments not posted at receipt due tovarious reasons (such as ineligible borrower name and/or loannumber or bankruptcy), address the tighter processing required forpayments received through each of the sources including Lockbox,

ACH, branches, as well as addressing the affect of this CFPBproposed rule on payments in suspense, unidentified payments, andpartial payments holds;

Analyze payment volumes and capacity models to determine whenadditional staff or OT is required throughout the month to allow foradherence to required timelines; and

Train current and new staff on updated processes and requirements,as necessary.


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CFPB proposal with RESPA

amendments

The CFPB is proposing to amend Regulation X, which enables the RealEstate Settlement Procedures Act of 1974 (RESPA). The proposedamendments13enable the Dodd-Frank Wall Street Reform and ConsumerProtection Act (Dodd-Frank Act) provisions regarding mortgage loanservicing. Specifically, this proposal requests comment regarding proposedadditions to Regulation X to address six servicer obligations:

Limitations on obtaining force-placed hazard insurance;

Notices of error or information requests from a borrower;

Establishing reasonable policies and procedures for maintainingand managing information and documents relating to borrowermortgage loan accounts;

Early intervention efforts with delinquent borrowers; Continuity of contact with delinquent borrowers; and

Enabling procedures to enable complete loss mitigation applicationsare reasonably evaluated before proceeding with a scheduledforeclosure sale.

Force-placed insurance (FPI)The CFPB proposed rule would prohibit a servicer from obtaining FPI unlessthere is a reasonable basis to believe the borrower has failed to comply withthe loan contracts requirements to maintain property insurance. 14TheCFPB proposed rule sets forth a mandatory process servicers must follow

before imposing any charge on a borrower for force-placed insurance and a

mandatory process for terminating force-placed insurance upon receiptfrom the borrower of evidence confirming borrower-purchased hazardinsurance coverage.

For example, the mandatory process requires that, before charging aborrower for force-placed insurance, a servicer must send, via first-classmail, up to two notices to the borrower. If the servicer has not received fromthe borrower any demonstration of insurance coverage 30 days aftersending the first notice, the servicer must mail a second notice to the

borrower. The servicer would not be permitted to charge the borrower forFPI until 15 days after the servicer has sent the second notice.


These requirements may be new for servicers that are not under the scope ofNMS; however, servicing standards prescribed under NMS rules for set-upand terminating force-placed insurance appear to be consistent with thoseunder the proposal.

13Summary of 2012 Real Estate Settlement Procedures Act (Regulation X) Mortgage Servicing Proposalavailable at http://files.consumerfinance.gov/f/201208_cfpb_respa_proposed_rules.pdf14Section 1024.37 Force-Placed Insurance of 2012 Real Estate Settlement Procedures Act (Regulation

X) Mortgage Servicing Proposal available athttp://files.consumerfinance.gov/f/201208_cfpb_respa_proposed_rules.pdf


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To comply with the new requirements, servicers will need to establish andmaintain accurate billing practices, ensure cancellations are processedtimely and refunds are provided when applicable. In addition, servicersshould analyze and revise their current force-placed insurance statementforms to:

Update the current statement to include the additional contentrequirements which is depicted in sample forms provided by theCFPB;

Update the monitoring of borrower interaction to adhere totimeframe requirements, if currently not compliant;

Create/update policies and procedures to address the new

requirements, including, but not limited to the time frames and thecontent of notifications to the borrower; and

Track and analyze each of the charges to confirm they are beingreasonable and bona fide, and train staff on new requirements,including but not limited to periodic reporting of insurance renewaldates for both escrowed and non-escrowed loans, exceptionreporting of loans without notifications and a forced place insurancecharge, and analysis of the forced place contact to evaluate thereasonableness of the fee.

Error resolution and informationrequestsThe CFPB proposal includes a set of requirements for investigating andcorrecting errors and for responding to borrower inquiries. This approach

would incorporate, but not be limited to, RESPAs use of the qualifiedwritten request to address servicingissues, as defined by RESPA.Specifically, servicers would be required to correct errors relating toallocation of payments, final balances for purposes of paying off the loan,avoiding foreclosures, or other standard servicers duties.15Servicers would

be required to acknowledge the request or complaint within five days andwould have to correct or respond to the borrower with the results of theinvestigation generally within 30 to 45 days.

15Section 1024.35 Error Resolution Procedures and 1024.36 Requests for Information of 2012 Real

Estate Settlement Procedures Act (Regulation X) Mortgage Servicing Proposal available at

http://files.consumerfinance.gov/f/201208_cfpb_respa_proposed_rules.pdf


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Currently, servicers are required to respond to qualified written requests.Qualified written requests must be in writing and must relate to theservicing of the mortgage loan. Through these proposed rules, the CFPBappears to make the restrictions and circumlocutions inherent in thelanguage of the written request provisions obsolete. Any valid qualified

written request is a valid notice of error or information request and even aninvalid qualified written request may still be a valid notice of error orinformation request.

The proposed rule16provides a finite list of nine types of covered errors towhich the error resolution provisions would relate:

1. Failure to accept a payment that conforms to the servicers writtenrequirements for the borrower to follow in making payments;

2. Failure to apply an accepted payment to principal, interest, escrow,or other charges under the terms of the mortgage loan andapplicable law;

3. Failure to credit a payment to a borrowers mortgage loan accountas of the date of receipt;

4. Failure to pay taxes, insurance premiums, or other charges,including charges that the borrower and servicer have voluntarilyagreed that the servicer should collect and pay, in a timely manner,or to refund an escrow account balanced;

5. Imposition of a fee or charge that the servicer lacks a reasonablebasis to impose upon the borrower;

6. Failure to provide an accurate payoff balance amount upon aborrowers request;

7. Failure to provide accurate information to a borrower for lossmitigation options and foreclosure;

8. Failure to accurately and timely transfer information relating to theservicing of a borrowers mortgage loan account to a transfereeservicer; and,

9. Failure to suspend a scheduled foreclosure sale.

With this rule it appears that the CFPB is proposing broader, moreconsumer-friendly error resolution and information request procedures.These do not seem to overlap with existing requirements, such as existingRESPA provisions, or the direct dispute procedures under Fair Credit

Reporting Act where the dispute involves erroneously furnishing negativeinformation to a consumer reporting agency. The proposal appears toaddress that lack of overlap by suggesting that the CFPB expects servicers

would abide by the stricter standard in order to comply with each of therequirements.

16Section 1024.35 Error Resolution Procedures of 2012 Real Estate Settlement Procedures Act

(Regulation X) Mortgage Servicing Proposal available at



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Aside from the requirement to respond in writing to notices of error andinquiries, servicers not already in compliance with the provision would needto:

Train current and new staff on new processes;

Create/update policies and procedures;

Develop new or updated software and hardware in order to access

the information required to address notices of error and inquiries;and

Establish robust SLAs, enhanced MIS system and reporting tomonitor compliance with error resolution timeframes and borrower

information requests.

Some servicers that have high touchcustomer service model, or those thathave updated their processes per consent order guidelines, may already becompliant with many of the proposed provisions on error resolution andresponding to information requests.

Information management policies andproceduresThe CFPB proposed rules17would require a servicer to establish reasonablepolicies and procedures for maintaining and managing information anddocuments relating to: borrower communications, error resolution,

information requests, loss mitigation (including, without limitation, loanmodification actions), foreclosure, and other servicer operations. It statesthat the servicer may determine the specific methods by which it willprovide reasonable information management policies and procedures toachieve the required objectives. Servicers appear to have the flexibility todesign the operations that are reasonable in light of the size, nature, andscope of the servicers operations.

17Section 1024.38 Reasonable information management policies and procedures of 2012 Real Estate

Settlement Procedures Act (Regulation X) Mortgage Servicing Proposal available at



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Under the proposal, servicers policies and procedures must be reasonablydesigned to meet the following objectives:

1. Achieve objectives18for:a. Accessing and Providing Accurate Information

b. Evaluating Loss Mitigation Optionsc. Facilitating Oversight of, and Compliance by, Service Providersd. Facilitating Servicing Transfers

2. Comply with standard requirements19for:a. Provisions for record retention

b. Identification of a servicing file


Upon initial analysis, there does not appear to be any significant differencein the CFPB proposed rules around information management policies andprocedures and those that some servicers are already required to comply

with under other servicing requirements (such as NMS and OCC). Thenature of this proposed rule is more guidance based consistent with thoseconsent order requirements, and the CFPBs proposed requirement to retaindocuments for one year after servicing transfer is less stringent than therequirements under the consent orders. As a result, this requirement willlikely have little impact on servicers already subject to consent orders.

In contrast, for servicers that are not operating under consent orders, theproposed new requirements for information management will likely require

them to consider making a variety of changes, including:

Making each of the borrower documents and information availablein one centralized location to facilitate providing complete servicingfile to borrower upon request or to servicing personnel managinginquiries from delinquent borrowers;

Developing or improving automated systems to record or trackborrower communications;

Training current and new staff on the policies and proceduresaround accessing and providing accurate information, evaluatingloss mitigation options, facilitating service transfers and compliance

by service providers;

Monitoring staff adherence to the policies and procedures; and

Developing processes for retaining mortgage files until one yearafter a mortgage loan is paid in full or the servicing of a mortgageloan is transferred to a successor servicer, if not already in place.

The CFPB is still analyzing the scope of these provisions to determine whichservicers would and would not be included subject to them.

18Details on objectives are described in the 1024.38(b) section of CFPB proposed rules.19Details around Standard requirements are described in 1024.38(c) section of CFPB proposed rules.


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Early intervention with delinquentborrowersThe CFPB proposal includes rules20to spur engagement between servicersand borrowers in an attempt to increase borrowers ability to avoidforeclosure. Per the CFPB, early intervention may benefit borrowers byreducing avoidable interest costs and by limiting the impact on borrowerscredit reports.

The CFPB proposed rules20regarding early intervention with delinquentborrowers would require servicers to provide delinquent borrowers with twonotices. First, the servicer would be required to make good faith efforts (no

later than 30 days after the payment due date) to notify a borrower orallythat the borrowers payment is late and that loss mitigation options may beavailable, if applicable. This is consistent with the Regulation AB and USAPmonthly contact requirements.

Second, the servicer would be required to provide a written notice, no laterthan 40 days after the payment due date20, with information concerning theforeclosure process, housing counselors and the borrowers State housingfinance authority, and, if applicable, loss mitigation options available to the

borrower.This requirement would be consistent with the Federal HousingAuthority (FHA) required notifications for delinquent borrowers as well asstate required breach letters. However, services may still need to makeadjustments to meet the new timelines and incorporate the required

information. For example, GSE servicers servicing loans for borrowersdetermined to be at lower risk for foreclosure may have processes thatcurrently do not comply with proposed CFPB rules.


Some servicers have recently made significant changes as part of otherregulatory actions including Single Point of Contact (SPOC). However, theCFPBs proposed rules appear to raise the bar with additional requirementsand deadlines. Therefore, in order to meet the proposed new requirementsfor early intervention with delinquent borrowers, servicers may need to:

Update their written notices templates to incorporate the entirerequired content prescribed in CFPB proposed rules such as, astatement explaining that foreclosure is a legal process to end the

borrowers ownership of the property and an estimate, expressed ina number of days from the date of a missed payment, of when theservicer makes the referral to foreclosure etc.; and

20Section 1024.38 Reasonable information management policies and procedures of 2012 Real Estate

Settlement Procedures Act (Regulation X) Mortgage Servicing Proposal available athttp://files.consumerfinance.gov/f/201208_cfpb_respa_proposed_rules.pdf


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Develop or enhance tracking and exception reporting to monitortimely contact with borrower.

Servicers would also need to make sure that they are equipped to be able tocontact borrowers and to introduce SPOCs earlier in the default process asnoted in the section below.

Continuity of contact with delinquentborrowersThe CFPB proposals include rules requiring continuity of contact withdelinquent borrowers. 21Specifically, servicers must provide borrowers who

meet the requirements for the proposed oral notification under the CFPBs

proposed early invention provision with live phone access to the assignedpersonnel (SPOC). The proposal would require that servicers maintainreasonable policies and procedures designed to make sure that the assignedpersonnel perform an enumerated list of functions, such as having access tocertain information about the borrowers.21The proposal provides conditionsthat define the duration of continuity of contact. The proposal21alsoprovides exemptions, for example, that certain delays and failures thatdisrupt continuity of contact do not violate the rule.

As noted above, the continuity of contact with delinquent borrowersprocedures in this proposal may overlap with Regulation AB, USAP, andFHA requirements or other regulations, but the CFPB proposal appears to

set the expectation that servicers would abide by the more stringentstandard in order to comply with each of the requirements.


Some servicers may already be compliant with these requirements, butsimilar to early intervention, SPOCs may need to be introduced earlierduring the default process to increase the contact time with the borrower. Inaddition, the proposed new requirements may require servicers to:

Develop a staffing model use to identify the workforce required tomeet demand; and

Develop and provide effective training addressing numerous

delivery channels on multiple default mortgage topics andincorporating internal and external sources of expertise. Areascovered may include on-boarding, orientation, compliance,leadership, process changes, and system usage, among others.

21Section 1024.40 Continuity of Contact of 2012 Real Estate Settlement Procedures Act (Regulation X)

Mortgage Servicing Proposal available at



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Loss mitigation proceduresThe CFPB proposed rules22for loss mitigation procedures state thatservicers that offer loss mitigation options to borrowers would be requiredto roll out procedures and controls to complete loss mitigation to make sureapplications are reasonably evaluated before proceeding with a scheduledforeclosure sale.

While various initiatives are starting to bring standardization to significantportions of the market, it has been challenging to establish a consistent setof national procedures and expectations regarding loss mitigation given theinvestor nuances and program rules that exist today.22The CFPB says that,

because so much loss mitigation activity is ongoing, and because the activityhas potentially significant impacts on both individual borrowers and thehealth of the larger housing market and economy, consistent uniformminimum regulations would be appropriate and useful to set borrower andservicer expectations and provide necessary consumer protections.

Loss mitigation procedures in this proposal may overlap with MHAguidelines, OCC and Fed consent orders, the NMS settlement, andregulations of other agencies, but the CFPB proposal appears to set theexpectation that servicers would abide by the more stringent standardacross each of the requirements.


The requirement that servicers evaluate borrowers for each of the lossmitigation programs for which the borrower may be eligible and therequirement that potential foreclosure activities are appropriately put onhold upon receiving a complete package may have a significant impact onthe current processes for servicers who are not already compliant under theNMS. For example, The 90-day timeline requirement between the time a

borrower submits a complete loss mitigation application and the time theservicer conducts a foreclosure sale, may delay foreclosures, including thosethat are, as a practical matter, inevitable. Also, any lengthening of time untilforeclosure sale will also increase the time during which servicers will havethe expense of providing borrowers with continuity of contact.

22Section 1024.41Loss Mitigation procedures of 2012 Real Estate Settlement Procedures Act

(Regulation X) Mortgage Servicing Proposal available athttp://files.consumerfinance.gov/f/201208_cfpb_respa_proposed_rules.pdf


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Operationally, the proposed new requirements may require servicers,particularly those that are not already subject to the NMS, to:

Employ additional staff in order to meet the proposed 30-daytimeline for evaluation when large numbers of borrowers submitapplications;

Allocate staff, develop and document policies and procedures, andconduct training necessary to support the required appeals process;and

Develop adequate system support and business triggers to be able tomanage foreclosure holds and releases throughout the entire process. Some

of this may already be in place as a result of existing standards such as theNMS standards.


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Conclusion

The Consumer Financial Protection Bureau has commenced its efforts todevelop a set of national servicing standards for each of the servicersthrough the proposed changes to the Truth in Lending Act (TILA) and theReal Estate Settlement Procedures Act (RESPA) described above. Based onour analysis of the proposal, it appears that the CFPB has targeted varioushot topic areas that have already undergone significant change for someservicers over the past 12 to 24 months, and has effectively extended thatchange to a broader range of market participants.

The result is a new set of stringent standard that exists in the context of avariety of other, somewhat overlapping requirements. Given the multipleregulating bodies that have developed these various standards and

requirements, it is important for servicers to align their compliance effortsand to increase the extent to which they can maintain operational processesthat meet compliance requirements and that also enable them to meet their

business objectives.

In light of these proposed new requirements, servicers may have to take athorough approach to adjust their current practices to be compliant to thenew guidance, including:

Conducting gap analyses across servicing processes;

Increasing focus on capacity analysis and planning;

Improving servicing policies, procedures, and controls (both toachieve compliance objectives as well as increasing efficiencies);

Planning to Upgrade IT systems to address new requirements; Enhancing staff skills through development of training programs

and capacity analysis;

Establishing and communicating timely and transparent ofservicing compliance attestation and testing;

Developing a robust complaint resolution process that includes afeedback loop; and

Enhancing compliance monitoring to prevent and/or detect controlbreakdowns and the implications on the control environment andrisk assessment.

Servicers have an opportunity to comment on the CFPBs proposed newservicing standards during a comment period that ends on October 9th,2012. Therefore, it is important for servicers to understand the potentialimpact of these changes on their current processes as soon as possible, inorder to provide specific feedback to CFPB on aspects of the proposals

believed to work well as well as those believed to be unworkable orinappropriate, recommending more workable alternative approachescompatible with the CFPBs consumer protection mission. Note that the lossmitigation proposals are proposed under the CFPBs general authority toimpose obligations on servicers and are not specifically required by Dodd-Frank and so may provide the industrys greatest opportunity to impact the


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substance of the final rules. The CFPB also has specifically requestedcomments on industry views as to what would constitute a reasonableimplementation period.

The CFPB Proposals are designed to and will have a substantial impact onthe mortgage servicing industry. Based on the assistance we have providedto mortgage servicing companies in connection with consent orders and theNMS, we believe that firms are more successful in meeting these newrequirements when they can leverage in-house, company specific expertise

with support from external advisors with broad expertise in the servicingbusiness and risk processes across the industry. Essentially, firms achievethe most adequate results when they combine what they do well internally

with leading practices or methods that they can use to enhance those areaswhere challenges may be greatest.


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Appendix Comparison of CFPB proposed

rules vs. existing rules

The CFPB proposed rules, which provide certain Dodd-Frank Act provisions relating to mortgage servicing, aresplit into two notices issued under the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act(RESPA) and cover nine primary topics. We have noted in the tables below the key differences between theproposed rules in CFPB and other existing requirements (i.e., NMS, consent orders, MHA, etc.).

The CFPB proposal addresses amendments in the following three Truth in Lending Act (TILA) topics:

Topics CFBB proposed rulesCoreobjective

Key difference to existing rules (e.g., NMS,consent orders, Investor rules, MHA etc.)

Periodic statements forresidential mortgage loans

Amends the rule by providingspecific timing, form, andcontent requirements provided

for in the CFPB rule. The CFPBproposal contains sample formsthat servicers could use.

Grouping of ContentProposed rulesrequires grouping of the periodic statementcontents to make statements easier to

understand for the borrower. For example,the amount due would be grouped withinformation around payment due date andlate fees, while explanation of amount due

would require a breakdown of the amountdue showing allocation to principal, interestand escrow, as well as the total sum of anyfees or charges imposed, and any amount ofpast due payment.

Payment Handling The proposed rulesrequire additional information relatingseveral scenarios relating to partialpayments, payment option loans and

delinquency.Interest rate adjustmentnotices for adjustable-ratemortgages (ARMs)

Amends the current rulesrelated to the scope, timing,content, and format of currentdisclosures to borrowersoccasioned by the interest rateadjustments of their variable-rate transactions.

Timing of Notifications Under currentrules, servicers must provide borrowers

with notice of interest rate change at least25 days before a payment at a new level isdue; however, this is being amended underthe proposal to 60 days.

Disclosure Noticethe proposalincludes a new disclosure required for thefirst interest rate adjustment, which is to besent 210 to 240 days prior to firstadjustment (i.e., 7 to 8 months) to provide

borrowers enough time to consider their

options. Notification TemplateThere are some

changes in the proposed format of thenotifications, including an explanation ofhow the new rate and payment would bedetermined and when the adjustment willtake effect, a good-faith estimate of theamount of the new mortgage payment anddates of future interest-rate adjustments.


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Topics CFBB proposed rules

Coreobjective

Key difference to existing rules (e.g., NMS,consent orders, Investor rules, MHA etc.)

Prompt crediting ofmortgage payments andresponse to requests forpayoff amounts

Amends the rule by addingspecific guidelines on the wayto process and post partialpayments. Also, it requiresservicers to send an accuratepayoff balance to a consumerno later than seven businessdays after receipt of a writtenrequest from the borrower forsuch information.

Partial Payments The key changerelates to rules for clarifying servicersobligations when they receive a partialpayment. Specifically, once there aresufficient funds in the account to cover acontractual payment, the servicer mustapply those funds to the oldest outstandingpayment due, which would benefit the

borrower because it would advance the dateof delinquency by one billing cycle. This wasnot explicitly required previously, although

is consistent with how servicers processedpayments.

Disclosure In addition, if a servicerholds a partial payment in a suspense orunapplied funds account, the servicer mustdisclose on the periodic statement theamount of funds held in such account. Thisis not new as it is also required under theNMS servicing standards. However, underCFPB proposed rules, the servicer must alsodisclose when such funds will be applied tothe outstanding payments due on theaccount.

The CFPB proposal addresses amendments in the following six RESPA topics:

Topics Core objective Key difference to existing rules (e.g., NMS,consent orders, Investor rules, MHA etc.)

Force-placed insurance Amends the existing rule byrequiring servicers to send onenotice to the borrower at least 45days before charging for forced-place insurance coverage, and asecond notice would be required

no earlier than 30 days after thefirst notice. The CFPB proposalcontains model forms thatservicers could use. The CFPBproposed rule also providesspecific guidelines on how tohandle forced-placed insurance incase a borrower provides proof ofhaving their own insurance.

Set-up & Termination of ForcedPlaced Insurance Theserequirements may be new for servicersnot under the scope of NMS; however,for servicers in compliance with servicingstandards prescribed under NMS, rules

for set-up and terminating force-placedinsurance seem to be consistent.


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Error resolution andinformation requests

Amends the existing rule byrequiring servicers to meet certainprocedural requirements forresponding to informationrequests or complaints of errors.The proposal defines specific typesof claims which constitute an errorsuch as a claim regardingmisapplied payments.

Error Resolution process The keydifference noted relates to the responsetime for specific types of claims andprescribes clearer rules for expectederror resolution.

Information management

policies and procedures

Amends the existing rule by

requiring servicers to establishreasonable policies andprocedures regarding informationmanagement. The rule specifies

what should be included in thepolicies and procedures. Examplesof such include: documentretention, servicing filerequirements, and prompt accessto documents and information.

No Key Differences Upon initial

analysis, there does not appear to be anysignificant difference in the CFPBproposed rules for informationmanagement policies and procedures.The nature of this CFPB proposed rule ismore guidance-based consistent withprevious consent order requirements.

Document Retention In addition, itis noted that CFPBs proposedrequirement to retain documents for one

year after servicing transfer is lessstringent than existing rules.

Early intervention with

delinquent borrowers

Amends the rule by requiring

servicers to make good faithefforts, both verbally and in

writing, to notify delinquentborrowers of loss mitigationoptions. It also provides stricttimeframes of when the servicermust contact the borrower.

Early Intervention Process Privatelenders and investors, Fannie Mae andFreddie Mac, and Federal agencies,already have early intervention servicingstandards in place for delinquent

borrowers. Hence, the CFPB proposedrules of two written notification and goodfaith efforts to contact borrowers maynot be a new requirement to mostservicers, and given the flexibility in theCFPB proposed rules, may not requirechanges to existing practices.

However, exceptions have been noted,for example GSE servicers servicing

loans for borrowers determined to be atlower risk for foreclosure may haveprocesses that currently do not comply

with CFPB proposed rules.


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Continuity of contact withdelinquent borrowers

Amends the rule by requiringservicers to assign dedicatedcontact personnel for a borrowerno later than five days afterproviding the early interventionnotice.

No Minimum Uniform NationalStandard This topic was included inCFPB proposed rules because there arecurrently no minimum uniform nationalstandards that apply across the mortgageservicing industry. However, theserequirements are consistent with existingrules (such as GSE, MHA, NMS, etc.) andminimal differences have been noted.

Loss mitigation procedures Amends the rule by requiring

servicers that offer loss mitigationoptions to borrowers to provideprocedures to enable completeloss mitigation applications arereasonably evaluated beforeproceeding with a scheduledforeclosure sale. This process iscommonly known as dual-track.

No Minimum Uniform National

Standard

Similar rules related to lossmitigation procedures already exist (suchas NMS, HAMP, FHFA, etc.); however, it

was noted by CFPB that there iscurrently no set of consistent nationalprocedures and expectations regardingloss mitigation procedures. Hence, this

was included in CFPB proposed rules.

Appeal of Denial Decision However, exceptions have been noted;for example, the CFPB proposed rules seta minimum standard of 14 days within

which to appeal a denial decision, whilst

NMS requires at least 30 days.

The CFPB has stated that it is planning to finalize these rules by January 2013. The length of time permitted forimplementation is one area that the CFPB is requesting comments on, as it believes that while the final rulesshould be made effective immediately, some of these standards may require more substantial changes and hencemore time to roll out. Dodd-Frank permits the CFPB to provide for an implementation period of up to 12 months,

but it will want to be sure that it has a strong factual basis for whatever implementation period or periods it adoptsin the final iteration.


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For more information

PwC Consumer Finance contacts

Martin [email protected] 790 8751

Roberto [email protected] 367 2386

Annie LiaoSenior [email protected] 256 1825

Maureen MagrannSenior [email protected] 420 8746

PwC Regulatory contacts

Jeff [email protected] 918 1379

David [email protected] 918 1364

Anthony RickoManaging [email protected] 692 1701


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www.pwc.com/consumerfinancewww.pwcregulatory.com

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