Beginning in January 2014, the Consumer Financial Protection Bureau, or CFPB, issued new rules to protect mortgage borrowers. The rules deal primarily with what is known as the “servicing” side of the mortgage process. That’s everything that happens after a mortgage closes, from setting up escrows and crediting payments to foreclosures.
There are nine rules in all. Their purpose is to “provide homeowners and consumers shopping for a home mortgage with new rights and greater protection from harmful practices.” Let’s see what each one is about.
1. Periodic Billing Statements
Mortgage lenders must provide periodic statements to borrowers for each billing cycle. These should reflect information on payments currently due and previously made, fees imposed, transaction activity, application of past payments, contact information for the servicer and housing counselors , and, where applicable, information regarding delinquencies.
The periodic statement does not apply to fixed-rate mortgages, as long as the the servicer provides a coupon book. Also, the coupon book must contain certain information as specified in the rule and that information must be made available to the consumer.
2. Interest Rate Adjustment Notices for ARMS
If a loan is an adjustable rate mortgage (ARM), it contains provisions for periodic changes in the interest rate. If you have such a loan, the lender must provide you with written notice of a rate change between 210 and 240 days before the initial change is set to take place. They are then required to provide notice of subsequent rate and payment changes, between 60 and 120 days in advance of the change. The notice must include an estimate of both the new rate and the new payment.
3. Payment Crediting and Payoff Statements
Lenders must credit loan payments from borrowers as of the day of receipt. However, if a payment is received for less than the full amount, the payment may be held in a suspense account. When the amount in the suspense account covers a periodic payment, the servicer must apply the funds to the consumer’s account.
The lender is also required to deliver an accurate payoff balance to a consumer when requested. They have no later than seven business days from receipt of a borrower’s written request to provide that information.
4. Force-place Insurance
In the past, lenders engaged in a practice known as force-place insurance. That was a practice in which the lender would get a homeowner’s insurance policy on the property securing the mortgage, if it believed that the borrowers had allowed their policy to lapse. This sometimes resulted in high-priced policies, which were then charged to the borrower.
Under the new rules, lenders are prohibited from charging a borrower for force-place insurance unless the lender has cause to believe the borrower has failed to maintain insurance. They must also provide the borrowers with required notices.
The lender must provide the borrower with written notice of the force-place policy at least 45 days before charging the borrower for the coverage. They must also provide a second notice at least 30 days after the first, and at least 15 days before charging the borrower for the coverage.
If the borrower provides proof that a homeowner’s insurance policy exists, the lender must cancel the force-place policy. They must also refund any premiums paid on the policy during overlapping periods of coverage. In addition, the cost of the force-place policy must be reasonable for the amount of coverage in force.
If there is an escrow account attached to the loan which includes the payment of homeowner’s insurance premiums, the lender is prohibited from obtaining force-place insurance. If the servicer can continue the borrower’s homeowner insurance, even if they need to advance funds to the borrower’s escrow account to do so, they must go that route.
5. Error Resolution and Information Requests
Lenders are now required to respond to written requests for information, as well as complaints of errors. The lender must comply with error resolution procedures for mistakes that are spelled out in the new rules. This includes any errors that are the result of the servicing of the loan.
Lenders are required to acknowledge receipt of the borrower’s written notification within five days of receipt. Lenders then have 30 to 45 days to respond to the borrower’s request. Within that time, they must either correct the error claimed by the borrower, or conduct an investigation to determine that no error exists. If the latter occurs, they must then inform the borrower in writing.
If information requested by the borrower is not available, the lender must notify the borrower in writing. This notice must include an explanation as to why the information is not available.
6. General Servicing Policies, Procedures and Requirements
Lenders are required to establish policies and procedures that are designed to comply with the new rules. That means they must spell out how they will accomplish the following:
- Accessing and providing accurate and timely information to borrowers, investors, and courts
- Properly evaluating loss mitigation applications in accordance with the eligibility rules established by investors
- Facilitating oversight of, and compliance by, lenders
- Facilitating transfer of information during servicing transfers
- Informing borrowers of the availability of written error resolution and information request procedures
Each lender must also maintain certain documents and information for each mortgage loan. This must be done in a way that enables them to compile it into a servicing file within five days.
7. Early Intervention With Delinquent Borrowers
Lenders are required to intervene in the event that a borrower may be heading for default. The lender must make “good faith efforts” to establish live contact with borrowers by the 36th day of their delinquency. They are required to promptly inform borrowers that loss mitigation options may be available. The lender must also provide the borrower written notice with information about loss mitigation options by the 45th day of a borrower’s delinquency.
8. Continuity of Contact with Delinquent Borrowers
Lenders are now required to make early contact with borrowers who are at risk of default. That contact must also be on a continuing basis. Once again, the lender must be fully prepared to assist the delinquent borrower with loss mitigation options where they are available.
The lender must make reasonable efforts to ensure that personnel are assigned to a delinquent borrower by the time written notice of early intervention is required. This can be no later than 45 days after a borrower’s delinquency.
In addition, the assigned personnel must be accessible to the borrowers by phone to assist with loss mitigation options. This includes advising the borrower on the status of a loss mitigation application, as well as expected timelines. Those personnel are also expected to have access to all of the information surrounding the borrower’s situation. This information can be shared with other personnel who are responsible for evaluating the loss mitigation options available to the borrowers.
9. Loss Mitigation Procedures
This rule gets to the heart of the attempt by the CFPB to provide the borrowers with more options and protections in the event of foreclosure. The borrowers must be given every opportunity to avoid foreclosure through loss mitigation.
The lender must follow specific loss mitigation procedures. For example, the lender is required to acknowledge the receipt of a loss mitigation application in writing, within five days of receipt. They must also inform the borrower whether or not the application is complete. The borrower must be apprised of any missing information.
If the completed loss mitigation application is received more than 37 days before a foreclosure sale, the lender is required to evaluate mitigation options within 30 days. This must include options that will enable the borrowers to retain their home. It must also include non-retention options, such as a short sale.
The lender is required to provide the borrowers with written notification of the decision in regard to loss mitigation. This includes the reasons for denying the application. The borrower must also be able to appeal the denial, under the provision that the complete loss mitigation application is received at least 90 days before the scheduled foreclosure sale.
This rule also prevents what is known as dual tracking. That’s a practice in which the lender is simultaneously evaluating a borrower for loan modifications or other mitigation options, at the same time that it is preparing to foreclose on the borrower’s property. The rule prohibits the lender from making the first notice or from filing requirements for the foreclosure process until the mortgage account is more than 120 days past due.
But even if a borrower is more than 120 days late, the lender may not begin foreclosure proceedings if the borrower has submitted a completed loss mitigation application before the foreclosure process has begun. This rule applies unless any of the following takes place:
- The lender notifies the borrower that they are not eligible for any loss mitigation option. Also, all appeals have been exhausted
- A borrower rejects all loss mitigation offers
- A borrower fails to comply with the terms of a loss mitigation option, such as a trial modification
However, if the borrowers submits a completed loss mitigation application after the foreclosure process has begun, but more than 37 days before a foreclosure sale, the lender may not move for a foreclosure judgment or order of sale, or conduct a foreclosure sale, until one of the three conditions above has been met.
In general, the CFPB Mortgage Protection Rules are designed to improve the working relationship between borrowers and their mortgage lenders. And it is ultimately hoped that the rules will make the foreclosure process both less likely and less painful.
Updated October 10, 2016 and originally published September 28, 2016.