Summary of CFPB Mortgage Servicing Rules Proposals


Following years of discussion about the wisdom of “national servicing standards” and piecemeal efforts to impose rules of conduct through enforcement actions against individual servicers, the Consumer Financial Protection Bureau (“CFPB”) has released proposed servicing rules (the “Proposed Rules” or “Rules”) to govern virtually all servicers. The Proposed Rules were issued on August 10 and published in Federal Register on September 17.

There are a total of nine new categories of proposed requirements. Three arise out of provisions added by the Dodd-Frank Act to the Truth in Lending Act (“TILA”), and, therefore, are proposed to reside in TILA’s implementing regulation, Regulation Z, 12 C.F.R. Part 1026 (“Reg. Z”). The remaining six arise from Dodd-Frank amendments to the Real Estate Settlement Procedures Act (“RESPA”); those six are proposed to reside in RESPA’s implementing regulation, Regulation X, 12 C.F.R. Part 1024 (“Reg. X”).[1]

I. Comment Period, Date for Finalizing Rules, and Effective Date

Comment Period. Comments are due by October 9, 2012 (60 days after release), except for comments on the Paperwork Reduction Act analyses, which are due by November 16, 2012.

Likely Date for Issuance of Final Rules: The Bureau appears to intend to finalize all of the Proposed Rules by January 21, 2013. That is the date by which five of the Rules must be finalized under Dodd-Frank because they are mandated specifically by that statute. Those five are the Rules regarding (1) Adjustable Rate Mortgage (“ARM”) Adjustment Notices; (2) Periodic Billing Statements; (3) Prompt Payment Crediting and Payoff Statements; (4) Forced-placed Insurance; and (5) Error Resolution and Information Requests.

Because the Bureau is proposing the final four Rules under more general rule-making authority, the Bureau does not face a deadline for finalizing them.[2] Those four are the Rules regarding (6) Information Management Policies and Procedures; (7) Early Intervention with Delinquent Borrowers; (8) Continuity of Contact with Delinquent Borrowers; and (9) Loss Mitigation Procedures.

Effective Date of Final Rules: The Bureau is specifically requesting comment on the date(s) when each requirement in the final Rules should become effective.[3] For the five Rules specifically mandated by Dodd-Frank, the effective date can be any day during the 12-month period following the date they are finalized. For the other four Rules, the implementation effective date is left to the discretion of the Bureau.[4]

In requesting comment on effective dates, the Bureau has stated that it “generally believes that the final rules should be made effective as soon as possible,” but “understands that various elements of the final rules would require servicers to adopt or revise existing software to generate compliant disclosures, retrain staff, assess and revise policies and procedures, and/or take other implementation measures.”[5] The Bureau therefore seeks detailed comment on:

  • the nature and length of implementation process for each individual servicing Rule in light of interactions between the Rules;
  • the impacts on both consumers and servicers of a staggered implementation sequence as compared to imposing a single date by which all Rules must be implemented;
  • for companies that also may need to implement other new requirements under other parts of the Dodd-Frank Act, whether there will be overlap with implementing the various proposed origination rules and, if so, whether the general cumulative burden on entities that are subject to both sets of rules will complicate implementation; and
  • any particular implementation challenges faced by small servicers.[6]

II. Background

A. Views Expressed by the Bureau in the Proposing Releases
In assessing the Proposed Rules, it may be informative to consider views expressed by the Bureau about the servicing industry in the Supplementary Information accompanying the Rules. In those pages, the Bureau made clear its views that new rules were needed in large part because the mortgage servicing industry had failed consumers when delinquencies increased several years ago and remained in need of reform. Quoting from the federal banking agencies’ April 2011 Interagency Review of the foreclosure practices of 14 major depository institution servicers, the Bureau expressed agreement that those companies had “‘emphasize[d] speed and cost efficiency over quality and accuracy’ in their foreclosure processes.”[7] In its own words, the Bureau asserted that:

[s]ome servicers have made it very difficult for delinquent borrowers to explore and take advantage of potential alternatives to foreclosure. For example, servicers have frequently neglected to reach out or respond to such borrowers to discuss alternatives to foreclosure, lost or misplaced the documents of borrowers who have sought modifications or other relief, failed to keep track of borrower communications, and forced borrowers who have invested substantial time communicating with an employee of the servicer to repeat the process with a different employee.[8]

Although it acknowledged that “[s]ome servicers provide high levels of customer service,”[9] the Bureau also leveled broad criticisms at the industry as a whole:

Several aspects of the mortgage servicing business make it uniquely challenging for consumer protection purposes.… [I]ndustry compensation practices and the structure of the mortgage servicing industry create wide variations in servicers’ incentives to provide effective customer service to borrowers. Also, because borrowers cannot choose their own servicers, it is particularly difficult for them to protect themselves from shoddy service or harmful practices.[10]

The “compensation practices” referred to above, according to the Bureau, “have tended to make pure mortgage servicing (where the servicer has no role in origination) a high-volume, low-margin business in which servicers have little incentive to invest in customer service.”[11] Servicers’ business models, accordingly, cause them to:

act primarily as payment collectors and processors, and provide minimal customer service to ensure profitability. Servicers also have an incentive to look for opportunities to impose fees on borrowers to enhance revenues and are generally not subject to market discipline because consumers have no opportunity to switch providers. Additionally, servicers may have financial incentives to foreclose rather than engage in loss mitigation.[12]

The Bureau also singled out for specific criticism the allegedly skewed incentives of servicers of investor-owned first-lien loans who retain ownership of the second-lien loan on the property:

The Bureau further understands from mortgage investors that there is a pervasive belief that servicers are making discretionary decisions based on the best interests of the servicer rather than to achieve results that will benefit owners or assignees of mortgages loans. When servicers hold a second lien that is behind a first lien owned by a different owner or assignee, one study has found a lower likelihood of liquidation and modification, and a higher likelihood of inaction by a servicer. Specifically, “liquidation and modification of securitized first mortgages are 60% [to] 70% less likely respectively and no action is 13% more likely when the servicer of that securitized first mortgage holds on its portfolio the second lien attached to the first mortgage.” These failures to take actions that may benefit both consumers and owners or assignees of first lien mortgage loans harm consumers.[13]

B. The Rules as National Servicing Standards

As the Bureau explained in releases accompanying the Proposed Rules, it “and other Federal agencies have also engaged since spring 2011 in informal discussions about the potential development of national mortgage servicing standards through regulations and guidance.”[14] In that regard, the Bureau highlighted with approval the standards of conduct imposed on the five largest servicers in their February 2012 settlement with 49 Attorneys General and numerous federal agencies (the “National Servicing Settlement”). In the Bureau’s view, the Proposed Rules “represent another important step towards establishing uniform minimum national standards” because they would “apply to all mortgage servicers, whether depository institutions or non-depository institutions, and to all segments of the mortgage market, regardless of the ownership of the loan.”[15] The Bureau observed that several of the Proposed Rules cover areas also governed by the National Servicing Settlement, and signaled that it “continues to consider whether to incorporate other [National Servicing Settlement] standards into rules or guidance, either alone or in conjunction with other Federal regulatory agencies.”[16]

III. The Three Proposed TILA Rules

With one exception, all of the proposed TILA Rules apply not only to the “servicer”[17] of the loan but also to the “creditor”[18] (if it still owns the loan) and to any “assignee”[19] (if it purchased and still owns the loan). This means that while only one such party need comply, each may be held liable if none comply. The one exception is the Rule regarding Prompt Payment Crediting, which applies to “servicers” only.

A. ARM Adjustment Disclosures

The ARM adjustment disclosure requirements would be found at an amended § 1026.20(c) and a new § 1026.20(d).[20]

1. The Disclosures

Currently under Reg. Z, consumers must be provided with notice of an interest rate adjustment for ARMs at least 25, but no more than 120, calendar days before a payment at a new level is due. The proposed TILA Rules would require earlier and more fulsome notices of ARM payment changes, as described in detail below. In view of the proposed requirements, the Bureau also would eliminate a current requirement to provide consumers with an adjustment notice at least once each year during which an interest rate adjustment is implemented without resulting in a corresponding payment change.

Initial Adjustment Notices

The Bureau is proposing to increase substantially the minimum time for providing advance notice to consumers of an initial interest rate adjustment, from the current 25 calendar days to 210 (but no more than 240) days before the first payment at the adjusted level is due. If the first payment at the adjusted level is due within 210 days of consummation, then the initial notice must be provided at consummation.

The proposal includes model and sample initial notices (Forms H-4(D)(3) and (4)). The contents and format of the notices are prescribed in Proposed § 1026.20(d)(2)(i)-(xi), § 1026.20(d)(3) and in the model and sample forms. The contents overlap with and expand on those currently required for ARM adjustment notices.

Estimates. If the new interest rate (or the new payment calculated from the new interest rate) is not known as of the date of the initial notice, then an estimate, labeled as such, can be provided.

Adjustment Notices

The Bureau is proposing to change the minimum time for providing advance notice of all adjustments from 25 to 60 calendar days before payment at a new level is due (including payments that change due to the conversion of an ARM to a fixed-rate transaction). The maximum time for advance notice would remain the same, 120 days.

With one exception, it appears that the 60-120 day notice would be required even where, in cases of an initial adjustment, the borrower already received an initial adjustment notice at the 210-240 day mark. The exception would be where the borrower received the initial adjustment notice at consummation (which the borrower would in all cases where the first payment arising from an initial adjustment is due within 210 days of consummation) and the notice disclosed the actual, not estimated, new interest rate. Thus, if only an estimated rate appeared in the initial adjustment notice at consummation, the borrower would need to receive a 60-120 day notice, too. That second notice, in cases where the first payment at the adjusted level is due within the first 60 days of consummation, would have to be provided “as soon as practicable but not less than 25 days before” the payment is due.

Format and Content. The proposed TILA Rules include model and sample adjustment notice forms (Forms H-4(D)(1) and (2)). The contents and format of the notices are prescribed in Proposed § 1026.20(c)(2)(i)-(vii), § 1026.20(c)(3) and in the model and sample forms. The contents overlap with and expand on those currently required for adjustment notices, but would not be as extensive as those required for the proposed initial adjustment notices.

Grandfather provision. The 25-day minimum notice period would still apply to existing ARMs (i.e., originated before July 21, 2013) with look-back periods of less than 45 days.

2. Entity and Product Coverage

Entity Scope: The current requirements apply only to “creditors.” The proposed TILA Rules, as noted above, would apply to “creditors, assignees and servicers.”

Product Scope: The current and proposed requirements apply to closed-end loans secured by the consumer’s principal dwelling where the APR may increase after consummation.[21] The current TILA rules except from coverage all loans with terms of one year or less, whereas the Proposed Rules would except construction loans with such terms.

B. Periodic Billing Statements

Requirements for periodic billing statements would be found at a new § 1026.41.

1. The Disclosures

This proposal implements the Dodd-Frank requirement that the Bureau “develop and prescribe a standard form for” periodic statements.[22] It would require that consumers receive a prescribed periodic statement for each billing cycle. For billing cycles shorter than 31 days (e.g., bi-weekly cycles), a periodic statement covering the entire month may be used.

Timing. The statement would have to be delivered or placed in the mail “within a reasonably prompt time after the payment due date or the end of any grace period provided for the previous billing cycle.” (According to the proposed commentary, this means that statements generally must be delivered or mailed within 4 days of the close of the grace period of the previous cycle.) The first periodic statement must be sent no later than 10 days before the first payment is due.

Electronic Delivery. Statements may be provided electronically with borrower’s “affirmative consent.”

Format and Content. The proposed TILA Rules include three sample disclosure forms (Forms H-28(A)(B) and (C)). The contents and format of the disclosures are prescribed in Proposed § 1026.41(c) and (d), and in the sample forms. Note that borrowers more than 45 days delinquent receive additional information.

2. Entity and Product Coverage

Entity Scope: The proposed TILA Rules, as noted above, would apply to “creditors, assignees and servicers.” There would be an exemption, however, for a “small servicer,” defined to mean a servicer that (i) together with affiliates, services fewer than 1,000 loans in a calendar year; and (ii) only services mortgage loans that it (or its affiliate) either originated or now owns. Note that in the case of a master-servicer / sub-servicer arrangement, the sub-servicer cannot claim the exemption for loans that are master serviced by an entity that does not qualify as a small servicer.

Product Scope: This requirement would apply to all closed-end loans secured by a dwelling, except (i) reverse mortgages (as defined by § 1026.33(a)), (ii) timeshare plans (as defined in the bankruptcy code, 11 U.S.C. § 101(53(D)), and (iii) subject to some qualifications, fixed-rate loans where the consumer uses a coupon book.

C. Prompt Payment Crediting and Payoff Statements

The prompt payment crediting and payoff statement requirements would appear at an amended § 1026.36(c), where very similar requirements now reside.

1. The Requirements

Prompt Payment Crediting: There would be no changes to the current TILA rules, except to clarify the handling of partial payments. For partial payments, the proposal would require that if the servicer retains the partial payment in a suspense or unapplied funds account (rather than credits or returns it), then the servicer would have to (1) disclose on the proposed periodic statement the total amount retained in such suspense or unapplied funds account and (2) when sufficient funds accumulate to cover a full payment, promptly credit the retained funds to the oldest outstanding payment. Note that a payment would be deemed “full” rather than “partial” — and therefore would have to be promptly credited in all cases — if it fails only to include amounts required to cover late fees or other fees that have been assessed.

Prompt Provision of Payoff Statements. The current TILA rules require pay-off statements to be provided “within a reasonable time after receiving” a request, including an oral request. The proposed TILA Rules would state that “reasonable time” may never mean more than 7 business days. It also would require that the request be in writing.

2. Entity and Product Coverage

Entity Scope: The current requirements for both prompt crediting and prompt provision of payoff statements apply only to “servicers.” The proposal regarding prompt payments would continue to apply only to servicers. The proposal regarding prompt provision of payoff statements would apply to “creditors, assignees and servicers.”

Product Scope: All of the current and new requirements apply to both open- and closed-end loans secured by a consumer’s principal dwelling. The proposal regarding prompt payoff statements also would apply in cases where the dwelling securing the loan is not the consumer’s “principal” dwelling.

IV. The Six Proposed RESPA Rules

Entities Covered: Unlike the proposed TILA Rules, which generally would apply to any “creditor, assignee or servicer” on the pertinent loan, the proposed RESPA Rules apply to the “servicer” only. Reg. X’s definition of “servicer” would remain unchanged, except in technical respects relating to the status of the National Credit Union Administration.

Products Covered: The proposed RESPA Rules would cover “mortgage loans,” a new term defined to mean a:

  • “federally related mortgage loan” (as currently defined, subject to immaterial proposed amendments),
  • subject to RESPA’s standard exemptions in § 1024.5(b), such as the exemptions for loans on vacant land and for business-purpose loans (these exemptions, too, would not be materially amended by the proposed RESPA rules)[23], and
  • excluding open-end lines of credit (home equity plans).

This new term, “mortgage loan” would replace the current term “mortgage servicing loan” throughout RESPA’s servicing provisions, including provisions not otherwise proposed to be amended. The principal effect of this change, if it is adopted, would be that RESPA’s servicing provisions would cover subordinate-lien closed-end mortgage loans, because the current rules — using the “mortgage servicing loan” concept — cover only first-lien closed-end mortgage loans. While this provision would clearly cover more loans, it would also avoid most state law notice requirements. Regulation X’s preemption provision (at proposed § 1024.33(d)) would, under the proposal, now apply to preempt those state law requirements that imposed borrower notice requirements on transfers of subordinate lien loans. The proposed RESPA Rules make clear, however, that state law provisions, such as those requiring additional notices to insurance companies or taxing authorities, are not preempted by section 6 of RESPA or this section, and that this additional information may be added to a notice provided under this section, if permitted under state law.

A. Force-Placed Insurance

The force-placed insurance requirements would appear within a new paragraph (5) of subsection § 1024.17(k) and in new § 1024.37.

Advancement of Funds

Most significantly, this proposal would provide that where a borrower on a loan with an escrow account fails to pay an amount sufficient to fund hazard insurance premiums, the servicer of the loan must advance funds to that escrow account to keep the hazard insurance current, even on delinquent accounts.[24] (A servicer currently is required to advance funds to make hazard insurance and other escrow payments as necessary, but only if the borrower’s contribution to the escrow account is less than 30 days overdue.) An exception would apply where the servicer has a reasonable basis to believe that the borrower’s hazard insurance has been cancelled or not renewed for reasons unrelated to nonpayment of premium charges.

Obtaining, Renewing and Replacing Force-Placed Insurance

The foregoing new rule on advancing obviously would reduce the number of occasions where a servicer would need to force-place hazard insurance. On those occasions, however, the servicer would be required, prior to obtaining the hazard insurance, to have a “reasonable basis to believe” that the borrower has failed to comply with his or her contractual obligation to maintain hazard insurance.[25] In addition, before charging a borrower for force-placed insurance, the servicer must:

  • deliver or place in the mail to the borrower a written notice at least 45 days before the premium or any fee is assessed. The proposal includes a model notice (Form MS-3(A)). The contents and format of the disclosures are prescribed in Proposed § 1024.37(c)(2), (3) and in the model notice; and
  • also deliver or place in the mail, 30 or more days later, a reminder notice. The prescribed content of the reminder notice would differ depending on whether, since sending the initial notice, the servicer had received (i) no insurance information or (ii) some insurance information but no verification that the borrower has had hazard insurance in place continuously. The proposed RESPA Rules include a model for each type of reminder notice (Forms MS-3(B) and MS-3(C)). The contents and format of the reminder notices are prescribed in Proposed § 1024.37(d)(2), (3) and in the model forms;[26] and
  • §not have received verification that the borrower has had hazard insurance in place continuously, taking account of any grace period.

Similarly, before charging a borrower for renewing or replacing force-placed insurance, the servicer must:

  • deliver or place in the mail to the borrower a written renewal notice at least 45 days before the premium or any fee is assessed. The proposed RESPA Rules include a model renewal notice (Form MS-3(D)). The contents and format of the renewal notice are prescribed in Proposed § 1024.37(e)(2), (3) and in the model form. This notice also would have to be delivered or placed in the mail before the first anniversary of the servicer’s obtaining force-placed insurance. Subsequently, the servicer would not be required to send the renewal notice more than once every 12 months; and
  • §not have received verification that the borrower has obtained hazard insurance.[27]

Cancelling Force-Placed Insurance

Within 15 days of receiving verification that the borrower has hazard insurance in place, a servicer must: (1) cancel the force-placed insurance; and (2) for any period during which the borrower’s hazard insurance was in place, refund to the borrower all premium charges and related fees paid by the borrower for such period and remove from the borrower’s account any assessed charges and related fees for such period.

Charges Must Be “Bona Fide and Reasonable”

Finally, all charges for forced-placed insurance must be “bona fide and reasonable,” meaning “a charge for a service actually performed that bears a reasonable relationship to the servicer’s cost of providing that service.” There are exceptions to this rule for charges subject to State regulation as the business of insurance and charges authorized by the Flood Disaster Protection Act of 1973.

B. Error Resolution and Information Requests

Reg. X currently includes a “qualified written request” mechanism through which a borrower can require a servicer to investigate potential errors and respond to information requests. Under the proposed rules, which would appear in new § 1024.35 and § 1024.36, a borrower’s requests may be oral, although the servicer may establish a telephone number and address that borrowers would have to use to trigger the servicer’s obligation.

The proposed rule also would shorten the response deadlines imposed on servicers:

  • the time to acknowledge receipt of a borrower request or notice of error would be shortened from 20 days to 5 days, excluding public holidays and weekends; and
  • the time to respond to a request or notice of error would be shortened from 60 days to 30 days, excluding public holidays and weekends (with an extension to 45 days in most cases if, before the end of the 30 day period, the servicer notifies the borrower of the extension and the reasons for the extension).

The servicer also would be required to provide, at no charge, copies of documents and information relied upon in responding to requests or notices of errors within 15 days of receiving a borrower request for such documents (again, excluding public holidays and weekends).

A servicer would not be obligated to respond to a request or notice of error if it “reasonably determines” that the request or notice of error is

  • duplicative of one previously made or asserted;
  • “overbroad,” meaning that the servicer cannot reasonably determine what the alleged error is, or the borrower requests an “unreasonable volume” of documents or information; or
  • “unduly burdensome,” meaning that a diligent servicer could not respond in the allotted time or would incur unreasonable costs in doing so;
  • “untimely,” meaning that the request or notice is delivered more than one year after (i) servicing for the loan was transferred; or (ii) the loan was paid in full; or
  • in the case of requests for information, the requested information is confidential, proprietary, general corporate information, or not “directly related” to the borrower’s loan account.

If a servicer determines based on the above criteria that it is not required to respond to a request or notice, it must notify the borrower in writing not less than five days (again excluding public holidays and weekends) of its determination and the basis for it.

C. Information Management Policies and Procedures

This proposal, which would appear in new § 1024.38, would require servicers to have policies and procedures for maintaining and managing information and documents related to borrower accounts. The proposal sets forth certain “objectives” and “standard requirements” for the policies and procedures in proposed § 1024.38(b) and (c), such as providing borrowers with accurate information required by other rules, providing investors with accurate information and documentation, and making and records accessible to servicing personnel assigned to assist the borrower.

Even though the proposal would require the servicer’s policies and procedures to be “reasonably designed” to achieve the “objectives” and ensure compliance with the “standard requirements,” it also provides a safe harbor. Under the safe harbor, a servicer would satisfy this rule’s requirements if it does not engage in a pattern or practice of (i) failing to achieve any of the “objectives” or (ii) failing to ensure compliance with any of the “standard requirements.” The proposed commentary notes that in designing the required policies and procedures, servicers “have flexibility to do so in light of the size, nature, and scope of the servicer’s operations,” including “the servicer’s history of consumer complaints.”

D. Early Intervention with Delinquent Borrowers

This early intervention with delinquent borrowers proposal, which would appear in new § 1024.39, would impose the following requirements:

  • Oral notice: By the 30th day after the missed payment’s due date (even if the borrower still is afforded a grace period), the servicer would have to make “good faith efforts” to notify the delinquent borrower orally regarding the delinquency and the potential availability, if any, of loss mitigation options. If the servicer attempts to notify the borrower by telephone, then “good faith efforts” means three telephone attempts on three separate days.
  • Written notice: By the 40th day after the missed payment’s due date, the servicer would have to provide the borrower with a prescribed written notice. (The servicer would not have to provide the written notice more than once in any 180-day period.) The specified content of the notice would include a brief description of any loss mitigation options that may be available, and contact information for counseling organizations. The proposed RESPA Rules include model clauses for the notice (Clauses MS-4(A), (B), (C), (D) and (E)). The full contents of the written notice are prescribed in Proposed § 1024.39(b)(2), and in the model clauses.

E. Continuity of Contact with Delinquent Borrowers

This proposal, which would appear in new § 1024.40, corresponds to the idea of a “single point of contact” for delinquent borrowers. It would require that, within five days of making the first “good faith effort” described above to contact a delinquent borrower, the servicer assign “personnel” — meaning either a single person or a team — to respond to the borrower’s inquiries and, as applicable, assist the borrower with loss mitigation options.

Assigned personnel would need to be available by telephone. If a borrower does not receive a live response on a telephone call, the borrower would have to be able to record his contact information and receive a response within a “reasonable time,” which the Bureau proposes to mean three business days. The servicer would also need to have policies and procedures “reasonably designed to ensure” that assigned personnel can:

  • provide the borrower with accurate information about prescribed matters, including loss mitigation options; and
  • access borrower records, including all documents submitted by borrower

For a complete prescription of information and records that assigned personnel must provide or make available to the borrower, see Proposed § 1024.39(b)(1).

As with the requirement for policies and procedures regarding information management described above, the requirement here for policies and procedures has a safe harbor. Under the safe harbor, a servicer would satisfy this rule’s requirements if the servicer’s personnel do not engage in a pattern or practice of failing to provide the prescribed information or failing to access the prescribed records.

Assigned personnel must remain assigned and available to the borrower until:

  1. the borrower refinances the mortgage loan;
  2. the borrower pays off the mortgage loan;
  3. a reasonable time — approximately three months — has passed since (i) the borrower has brought the mortgage loan current by paying all amounts owed in arrears; or (ii) the borrower and the servicer have entered into a permanent loss mitigation agreement in which the borrower keeps the property securing the mortgage loan;
  4. title to the borrower’s property has been transferred to a new owner through, for example, a deed-in-lieu of foreclosure or a sale of the borrower’s property; or
  5. a reasonable time has passed since servicing for the borrower’s mortgage loan was transferred to transferee servicer.

The Proposal also provides that a servicer would not violate these continuity of contact requirements if the servicer’s failure to comply is caused by conditions beyond its control.

F. Loss Mitigation Procedures

Scope Note: This proposal, which would appear in new § 1024.41, would apply only to servicers that make loss mitigation options available to borrowers in the ordinary course of business.

Responses to Loss Mitigation Applications

For servicers to which it applies, this rule would require that 30 days after receiving a “timely, complete loss mitigation application,” the servicer will notify the borrower of its determination as to whether it will offer a loss mitigation option. The deadline for submitting a “timely” application may be set by the servicer, but cannot be “earlier than 90 days before a scheduled foreclosure sale.” A “complete loss mitigation application” means an application for which a servicer has received all the information the servicer regularly obtains and considers in evaluating loss mitigation applications.

If a servicer receives an incomplete loss mitigation application, it must in all cases exercise “reasonable diligence” in obtaining the missing information. In cases where the incomplete application is received more than five days (excluding public holidays and weekends) before the servicer’s deadline, the servicer would have to notify the borrower either orally or in writing within five days (again, excluding public holidays and weekends) about the missing information and the deadline.

Denials and Appeals of Denials

A servicer that denies a borrower’s loss mitigation application for any trial or permanent loan modification program offered by the servicer shall state in its notice of denial (i) the specific reasons for its determination for each such modification program; and (ii) that the borrower may appeal, and describe both the deadline set by the servicer for the appeal (which must be at least 14 days after providing the notice of denial) and any requirements for making the appeal.

Appeals would have to be reviewed by different personnel than those responsible for evaluating the application. Within 30 days of a borrower making an appeal, the servicer would have to provide a notice to the borrower stating the servicer’s determination. That determination would not be subject to any further appeal, and the servicer would not be obligated to consider any second loss mitigation application.

Under this system of rules, a servicer would not be permitted to conduct a foreclosure sale until one of the following has occurred:

(i) the servicer has provided the borrower a denial notice and either the appeal process is not applicable, the borrower has not requested an appeal, or the time for appeal has expired;

(ii) the servicer has denied a timely appeal;

(iii) the borrower has rejected the servicer’s offer of a loss mitigation option; or

(iv) the borrower has failed to perform under a loss mitigation agreement.


A servicer may require that a borrower accept or reject an offer of a loss mitigation option by a deadline established by the servicer that is no earlier than 14 days after the servicer communicates its decision. A borrower that does not satisfy the servicer’s requirements for accepting a loss mitigation option, but submits the first payment that would be owed pursuant to any such loss mitigation option within the deadline established by the servicer, would be deemed to have accepted the offer of a loss mitigation option. A servicer would also have to permit a borrower to accept or reject a loss mitigation option concurrently with making an appeal.

Other Liens

Any servicer that receives a loss mitigation application also would be required (i) within five days, to determine if any other servicers service mortgage loans that have senior or subordinate liens encumbering the relevant property; and (ii) to provide any other servicers so identified with a copy of the loss mitigation application. Moreover, any servicer that receives such a copy would, if it offers loss mitigation options in the ordinary course of business, need to comply with all the requirements above as if such loss mitigation application was provided by a borrower.


[1] The Federal Register citations for the Proposed Rules are 2012 Truth in Lending Act (Regulation Z) Mortgage Servicing Proposal, 77 Fed. Reg. 57317 (proposed Aug. 10, 2012) (the “proposed TILA Rule”) and 2012 Real Estate Settlement Procedures Act (Regulation X) Mortgage Servicing Proposal, 77 Fed. Reg. 57199 (proposed Aug. 10, 2012) (the “proposed RESPA Rule”). In instances where the CFPB’s commentary to both Rules is substantively identical, this Alert will cite only to the proposed TILA Rule.

[2] For the four Rules not specifically mandated by statute, the Bureau is relying principally on its general authority under an amendment to RESPA made by the Dodd-Frank Act. That amendment requires servicers of federally related mortgage loans to “comply with any other obligation found by the [Bureau], by regulation, to be appropriate to carry out the consumer protection purposes of” RESPA. 12 U.S.C. § 2605(k)(1)(E) (2012).

[3] See Proposed TILA Rule, 77 Fed. Reg. at 57326.

[4] Id.

[5] Id.

[6] Proposed TILA Rule, 77 Fed. Reg. at 57326-57327.

[7] Federal Reserve System, Office of the Comptroller of the Currency, & Office of Thrift Supervision, Interagency Review of Foreclosure Policies and Practices 5 (2011), available at in Proposed TILA Rule, 77 Fed. Reg. at 57318.

[8] Proposed TILA Rule, 77 Fed. Reg. at 57323.

[9] Id. at 57322.

[10] Id. at 57321.

[11] Id.

[12] Id.

[13] Id. at 57322.

[14] Id. at 57323.

[15] Id.

[16] Id.

[17] Reg. Z does not define “servicer,” except in and only for the purposes of the current and proposed versions of 12 C.F.R. § 1026.36(c), where the current and proposed Rules regarding Prompt Payment Crediting and Payoff Statements may be found. There, the meaning is cross-referenced to Reg. X’s definition of “servicer.” Presumably, the Bureau has in mind the Reg. X definition in its other uses of “servicer.” There is no proposal to change that Reg. X definition, except in technical respects relating to the status of the National Credit Union Administration.

[18] Reg. Z currently defines “creditor,” and no amendment is proposed to that definition.

[19] Reg. Z does not define “assignee,” but generally uses the term to mean an entity that purchases a debt from a creditor (or from a previous assignee). See, e.g., 12 C.F.R. Part 1026, Cmt. 1026.2(a)(17)(i)-2.

[20] In this sentence and hereafter, this Alert uses the shortened citations “§ 1024.__” and “§ 1026.__” to mean “12 C.F.R. § 1024.__” and “12 C.F.R. § 1026__.”

[21] According to the proposed commentary, when an open-end account converts to a closed-end ARM, disclosures would not be required until the implementation of an interest rate adjustment post-conversion that results in a corresponding payment change.

[22] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 1420, 124 Stat. 1376, 1465 (2010).

[23] Note that the Bureau has proposed to remove RESPA’s existing exemption for loans on property of 25 acres or more in its separate proposal to merge TILA and RESPA origination disclosures.

[24] “Hazard insurance” would be defined to mean “insurance on the property securing a mortgage loan that protects the property against loss caused by fire, wind, flood, earthquake, theft, falling objects, freezing, and other similar hazards for which the owner or assignee of such loan requires insurance.”

[25] This requirement and those described below regarding force-placement would not apply to hazard insurance to protect against flood loss obtained by a servicer as required by the Flood Disaster Protection Act of 1973.

[26] The proposed rule also would provide that if a servicer receives hazard insurance information from a borrower after the reminder notice has been put into production, the servicer would not be required to update the notice so long as the notice was put into production within a reasonable time prior to the servicer delivering the notice to the borrower or placing the notice in the mail.

[27] A servicer that has renewed or replaced existing force-placed insurance during this 45-day notice period may charge the borrower for the renewal or replacement promptly after the servicer receives verification that any hazard insurance obtained by the borrower did not provide the borrower with insurance coverage for any period of time following the expiration of the existing force-placed insurance.