REQUIRED READING: The servicing industry has cautiously eyed the evolution of the Consumer Financial Protection Bureau (CFPB) since the bureau's inception in 2010 with the passage of the Dodd-Frank Act. But with the release of its Mortgage Servicing Examination Procedures document in October, the CFPB provided a first glimpse into the guidelines that individual examiners will use to assess servicers' compliance with consumer protection laws.
By most accounts, there is ample reason for servicers to brace for major changes in areas as divergent as portfolio transfers and fair servicing. As the servicing industry is already well aware, issues pertaining to mortgages, default management and foreclosure processing have landed servicers squarely in the crosshairs of the agency.
The CFPB is a uniquely far-reaching regulatory body. Whereas servicers are well acquainted with the safety-and-soundness purview of prudential bank regulators, the CFPB requires servicers to view their policies and procedures from the perspective of a borrower, which may come as a culture shock for some shops.
‘Part of what they ask themselves when they're looking at their own processes – and I think it's done to some degree already – isn't just going to be whether or not you're strictly in compliance with what the regulation is,’ says George FitzGerald, a senior vice president at Lender Processing Services. ‘I think there's going to have to be some questions about the impact on the consumer end.’
The CFPB divides its servicing examination procedures into nine ‘modules,’ with each category devoted to a specific area of servicing (e.g., escrow and insurance, collections and foreclosures). The bureau, whose procedures became effective on the date they were published, says it will initially focus on the treatment of delinquent loans.
Although the CFPB's examiners will consider servicers' compliance with a host of long-standing statutes – the Fair Credit Reporting Act, Equal Credit Opportunity Act and Real Estate Settlement Procedures Act, to name a few – regulatory experts suggest the agency may also represent the culmination of years of consumer-minded enforcement actions taken against the industry.
Jonice Gray Tucker, an attorney with Buckley Sandler LLP, says the CFPB procedures cover many issues that prudential regulators would have otherwise looked at and layer on top of those de facto consumer-protection standards borne out of landmark Federal Trade Commission (FTC) actions in the past decade. Additionally, the CFPB procedures appear to consider process deficiencies such as those identified as part of 2010's robo-signing debacle.
‘Coming out of this, we are likely to see more uniformity in the way that servicers are regulated,’ she says. ‘In the past, some servicers were regulated by the prudential banking regulators, because of their integration with institutions subject to oversight by these regulators. Servicers not under the purview of the prudential regulators were essentially regulated by enforcement actions from the FTC.’
As things stand now, the servicing procedures only apply to entities that are tied to depository institutions with more than $10 billion in assets. If the controversial recess appointment of Richard Cordray as CFPB director on Jan. 4 is not challenged and overturned in court, the bureau can go forward with direct examination authority over non-depositories.
Collections, fair servicing
Regulatory and legal experts have pinpointed several specific areas of concern in the CFPB servicing procedures. For example, a Nov. 7 legal alert published by law firm K&L Gates singles out the CFPB's authority to examine financial institutions for unfair, deceptive or abusive acts or practices (collectively known as UDAAP). The K&L Gates attorneys explain that although the Federal Trade Commission Act defines ‘unfair’ and ‘deceptive’ practices, the concept of ‘abusive’ practices is considerably more amorphous.
‘The scope of the term 'abusive' is largely new and untested,’ the attorneys wrote.
Elsewhere in the procedures – the ‘collections’ module, specifically – the CFPB takes a decidedly stringent tact.
The CFPB document explains that the Fair Debt Collection Practices Act (FDCPA) only considers a mortgage servicer to be a ‘debt collector’ if the servicer is collecting debt on a loan that was in default at the time the servicer acquired the right to service the loan. However, experts say, a footnote attached to that passage takes the meaning of ‘default’ to the extreme.
‘FDCPA itself does not contain a definition of the term 'default,'’ the footnote states. ‘The standard mortgage note states that the debt is in default if the payment is even one day late.’
This, according to Buckley Sandler attorney Jeffrey Naimon, represents a major departure from how the servicing industry has historically treated such payments.
‘If interpreted literally, that would mean that servicing transfers on a go-forward basis would have to occur on the first of the month,’ says Naimon. ‘Otherwise, if the transfer occurs on any day other than the first, you're going to have a lot of loans the bureau considers to be in default, thus making the servicer a debt collector for the purpose of the FDCPA.’
Another reason the industry views the CFPB with more than a tinge of trepidation is due to the strong emphasis that the agency's procedures place on fair servicing in the context of loss mitigation.
‘The CFPB will be taking traditional fair lending principles, typically applied in the origination context, and applying them to default servicing in order to ascertain whether borrowers who are members of protected classes have been subjected to discrimination in connection with loss mitigation and foreclosure.’ says Tucker. ‘That's a different tact than has traditionally been taken. Until recently, many servicers hadn't focused on these issues in this way.’
Federal agencies such as the FTC and the U.S. Department of Housing and Urban Development have loudly advocated for regulators to take a close look at whether minority borrowers who may have been victimized during the subprime lending boom are now being discriminated against while being assessed for loss mitigation options. Prudential bank regulators, meanwhile, have been less than uniform in terms of amending their examination procedures to account for fair servicing critiques. The Office of the Comptroller of the Currency stood alone when it amended its guidelines more than a year ago, Tucker explains.
What the CFPB's emphasis on fair lending means for servicers practically is the need to be able to compile and analyze data, including race data, that may be hard to come by.
‘Servicers typically do not have the race data, on a loan level, unless they are integrated with the financial institution that originated the loan,’ says Tucker. ‘In light of this limitation, servicers who are proactively looking at these issues may decide to conduct internal analyses at the census-tract level, looking at loss mitigation outcomes based on the percentage of minorities in a given census tract, for example.’
Other strategies are also available to servicers, says Ed Kramer, Wolters Kluwer Financial Services' executive vice president of regulatory programs. During the six years he served as New York's deputy superintendent of banks, Kramer encouraged banks in the state to develop fair lending guidelines that touch upon, among other servicing functions, collection and foreclosure practices.
To prepare for CFPB examinations, servicers should be able to segment loan modification and foreclosure activity by protected and nonprotected consumer classes, he says. Additionally, servicers should be able to demonstrate how modifications are distributed among populations of minority borrowers, as well as show the percentage of minority borrowers who have been denied modifications.
‘In fair lending, you don't have all the data you want to have, but you have the ability to get proxies to do monitoring testing,’ Kramer says.
In anticipation of the CFPB's July 2011 launch, several of Wolters Kluwer's servicing clients used the better part of the past year to better understand fair servicing principles, he says.
However, even when servicers are equipped to sort out loan modification and foreclosure data by borrower race, the application of front-end fair lending principles to default servicing is troubling to some. Although fair lending in an origination sense is pretty clear cut – a 5% interest rate is preferable to a 6% rate, and a loan approval is better than a loan denial – the same is not true in servicing. In loss mitigation, borrowers' individual situations vary wildly, and the perceived benefit of a given workout differs from one case to the next.
Furthermore, previous studies that have attempted to examine the matter have yielded surprising, perhaps even counterintuitive, results. For instance, a statistically significant December 2010 study by researchers at the San Francisco Federal Reserve and the University of Wisconsin-Madison concluded that African American, Hispanic and Asian American borrowers are marginally more likely than similarly situated white borrowers to receive a loan modification.
‘You can spend an infinite amount of time looking into it, but because of the varied factual scenarios faced by borrowers who are in trouble, you still won't know whether you discriminated unless you have a compliance officer sitting behind every loss mitigator at all times making sure they're not discriminating,’ says Buckley Sandler's Naimon. ‘It's an impossible task to understand whether this is going on.’
(John Clapp is a former editor of Servicing Management.)
