Fifth Circuit: Mortgage Servicing Rules Apply to Servicers Only

In a case of first impression, the Fifth Circuit has held that the CFPB’s Mortgage Servicing Rules only apply to servicers and do not impute liability to the lender.  In Christiana Trust v. Riddle, the consumer alleged that the prior and current servicers of her mortgage violated the Mortgage Servicing Rules by failing to evaluate her loss mitigation application as required by 12 C.F.R. 1024.41(c)(1).  Riddle contended that the original lender, Bank of America, was vicariously liable for its servicer’s violation.  The Fifth Circuit affirmed the dismissal of the claims against Bank of America in part because it held that “Bank of America, as a matter of law, is not vicariously liable for the alleged RESPA violations of its servicers.”  Christiana Trust v. Riddle, 2018 U.S. App. LEXIS 36217, *7 (5^th Cir. Dec. 21, 2018).

In reaching its conclusion, the Fifth Circuit looked at the express language of both the Mortgage Servicing Rules and the source statute, RESPA.  The Court noted that the regulation only imposes duties on servicers.  See 12 C.F.R. 1024.41(c)(1) (if a servicer receives a complete loss mitigation application… a servicer shall…”) (emphasis added).  Likewise, a servicer’s obligation to comply with the Mortgage Servicing Rules derives from RESPA which provides that only “a servicer of a federally related mortgage shall not… fail to comply with another obligation found by the Bureau of Consumer Financial Protection, by regulation, to be appropriate to carry out the consumer protection purposes of this chapter.”  12 U.S.C. §2605(k)(1)(E) (emphasis added).  The Court was further persuaded by the fact that 12 U.S.C. §2605 imposes liability on “whoever fails to comply with this section” rather than a more broad class of interested parties.  The Court concluded that “[b]ecause only ‘servicers’ can ‘fail to comply’ with 12 U.S.C. §2605(k)(1)(E), only servicers can be “liable to the borrower’ for those failures.”  Id. at *8.

The opinion is a good news for lenders as there is now some precedent that lenders cannot be held vicariously liable for their servicers’ violations of the Mortgage Servicing Rules.  At least in the Fifth Circuit, lenders are provided with some insulation from liability.

Cordray Provides Mortgage Industry with Insight on Examination Priorities

In his prepared remarks to the Mortgage Bankers Association, CFPB Director Richard Cordray offered some insight into his office’s examination priorities with respect to the mortgage industry.    Here are the key takeaways:

• TRID:  In his remarks, Cordray characterized the CFPB’s early examinations of TRID compliance to be “diagnostic and corrective, not punitive.”  According to Cordray, examiners are focused on the institution’s compliance management system and efforts to comply.  Cordray also indicated that examiners are engaged in transaction testing.
• Mortgage Servicing: Cordray confirmed that the complaint portal is being used as a partial basis for examinations as it provides a better understanding of trends.  Cordray also indicated that mortgage servicing remains a focal point of examinations and that examiners will continue to focus on the effectiveness of institutional information technology systems.
• Redlining:  Again, Cordray indicated that this is a “priority issue” in the Bureau’s supervisory work without much elaboration.

Timing is Everything: 11th Circuit Finds Loss Mitigation Application Untimely

The Eleventh Circuit recently issued an opinion emphasizing the importance of timing under the Mortgage Servicing Rules.  In Lage v. Ocwen Loan Servicing, the court considered whether the mortgage servicer had an obligation to evaluate a loss mitigation application when, at the time the completed application was submitted, a foreclosure sale was scheduled to occur in two days.  Lage v. Ocwen Loan Servicing, 2016 U.S. App. LEXIS 18264 (11^th Cir. Oct. 7, 2016).  The consumers contended that the application was timely because the servicer ultimately postponed the sale and the actual sale occurred more than 37 days after the application was submitted. 

The facts of this case are important in that they highlight the complexity of the loss mitigation process.  The foreclosure sale in this matter was originally scheduled to occur January 29, 2014.  On January 8, 2014, the borrowers submitted a loss mitigation application to the servicer which included detailed information about their income and expenses as well as copies of their recent pay stubs, tax returns and other financial information.  On January 9, 2014, the servicer acknowledged receipt and advised that they would notify the borrowers if they needed additional information.  Over the course of the next two weeks, the parties communicated back and forth regarding the loss mitigation application and ultimately, the servicer requested an additional pay stub and indicated that upon receipt, it would evaluate the application.  The pay stub was submitted January 27, 2014 and the borrowers contended that their application was complete January 27, 2014.  The next day, the foreclosure sale was postponed until March 14.  Ultimately, the servicer then requested two more pay stubs and requested additional information, as well.  According to the mortgage servicer, the loss mitigation application was complete on March 7, 2014.  The mortgage servicer denied the application on March 9, 2014 as untimely because the foreclosure sale was scheduled to occur within seven days.  

The consumers filed suit contending the servicer violated the Mortgage Servicing Rules by failing to evaluate the merits of their loss mitigation application within 30 days as required by 12 CFR 1024.41(c).  The district court ruled in favor of the servicer holding that the servicer was not obligated to evaluate the application because the regulation was not in effect when the consumers submitted their application on January 8, 2014 (the regulations took effect on January 10, 2014).

On appeal, the Eleventh Circuit did not address the issue of whether the servicer was obligated to comply with the Mortgage Servicing Rules because even assuming the rules applied, the borrowers’ application was untimely.   The duty to evaluate a loss mitigation application is triggered only “when the borrower submits a “complete loss mitigation application more than 37 days before a foreclosure sale.”  12 CR 1024.41(c)(1).  The court concluded that the Mortgage Servicing Rules require that, in determining the timeliness of the application, the parties should look to the date the foreclosure sale was scheduled when the borrower submitted their completed application.  Specifically, 12 CFR 1024.21(b)(3) provides:

To the extent a determination of whether protections under this section apply to a borrower s made on the basis of the number of days between when a complete loss mitigation application is received and when a foreclosure sale occurs, such determine shall be made as of the date a complete loss mitigation application is received.

The court dismissed the consumers’ contention that the operative date was the date the foreclosure sale actually occurs.  To do so, according to the court, would render the last clause of (b)(3) meaningless.  The court also noted that its interpretation was consistent with the CFPB’s interpretation noting that the CFPB had expressly disavowed the consumers’ position.  “The Bureau recognized that allowing a servicer’s delay of a foreclosure sale to give a borrower greater rights may discourage servicers from rescheduling foreclosure sales and voluntarily considering untimely applications – actions which benefit borrowers…  Stated another way, the Bureau acknowledged that if a borrower’s late application could become timely – and trigger the servicer’s duty to evaluate the application under 1024.41 – as a result of the servicer voluntarily postponing a foreclosure sale then it may be to the servicer’s advantage to proceed with the scheduled foreclosure instead of evaluating the borrower for loss mitigation options.”  Lage  at *17-18. 

Accepting the consumers’ contention that their loss mitigation application was complete on January 27^th, the application’s timeliness was assessed based upon the January 29^th foreclosure sale and, therefore, the application was untimely.

To Be or Not to Be: The Definition of a Mortgage Servicer Comes Under Scrutiny

For purposes of RESPA, is there a difference to be had between “servicing” a loan and being a “servicer”?  The question was recently addressed by a district court from Florida. Buyea v. Select Portfolio Servicing, No. 9:16-cv-80347, 2016 U.S. Dist. LEXIS 140571 (S.D. Fla. Oct. 11, 2016). In Buyea, the consumer submitted a request for information (“RFI”) requesting the identity, address and telephone number of the current owner or assignee of the mortgage.  At the time the request was submitted, the mortgage has been in default for more than a year. The consumer filed suit alleging that the defendant violated RESPA by failing to timely and sufficiently respond to the RFI. The defendant moved to dismiss asserting that it was not a “servicer” at the time the RFI was received and that, to the extent it was a servicer, its response was timely and sufficient as a matter of law.

In support of its argument, the defendant relied upon the definitions of “servicer” and “servicing” provided in 12 U.S.C § 2605. Under RESPA, the “servicer” is the person responsible for servicing the loan. 12 U.S.C. § 2605(i)(2).  Meanwhile, “servicing” is defined as “receiving any scheduled periodic payments from a borrower pursuant to the terms of any loan… and making the payments of principal and interest and such other payments with respect to the amounts received from the borrower as may be required pursuant to the terms of the loan.”  12 U.S.C. § 2605(i)(3) (emphasis supplied). The defendant contended that, at the time the RFI was received, the consumer was 409 days delinquent in his mortgage payments and because the defendant was not receiving mortgage payments, it was not a “servicer” and had no obligation to respond to the RFI.

While the court agreed that the defendant was no longer servicing the consumer’s loan, it concluded that it remained a servicer and was obligated to respond to the RFI.  In reaching its conclusion, the court looked at what it considered to be a key distinction between the definitions of “servicer” and “servicing”: the term “servicer” means the person responsible for servicing the loan.  Therefore, “[w]hether or not Defendant was actively servicing the loan, Defendant remained responsible for servicing the loan at the time it received Plaintiff’s RFI.” Buyea at *10.

CFPB Continues to Focus on Mortgage Servicing

The CFPB has issued a special edition of its Supervisory Highlights making clear it remains dissatisfied with the advances the mortgage industry has made in the wake of the regulatory upheaval.  Many of the concerns expressed by the CFPB relate to information technology failures.  As noted in the Supervisory Highlights, “[t]he magnitude and persistence of compliance challenges since 2014, particularly in the areas of loss mitigation and servicing transfers, show that while the servicing market has made investments in compliance, those investments have not been sufficient across the marketplace.”  Supervisory Highlights Mortgage Servicing Special Edition, p. 3.  Notably, the CFPB attributes many of the failings to technology failures. 

The CFPB Approach to Examinations.  The CFPB readily admits that it uses a prioritization approach to determining which mortgage servicers to examine.  Its approach takes into account:

o   The size and market presence of the servicer – a relatively large servicer with a dominant market presence will take precedence over a comparatively smaller servicers;

o   Field and market intelligence including compliance management system strengths, existence of regulatory actions from prior examinations, servicing transfer activity, and the number, severity and trends of consumer complaints.

Lessons to Be Learned from the Supervisory Highlights. Those involved in the mortgage industry should place close attention to this edition of the Supervisory Highlights and make adjustments in their policies, practices and procedures accordingly.  Here are the key takeaways:

·       Mortgage Servicers need to carefully review their systems, processes and contents of their Acknowledgement Notices.  Specifically:

o   Some servicers are not sending out the loss mitigation acknowledgment notices  after receipt of a loss mitigation application from a consumer;

o   Some servicers are not providing the acknowledgements in a timely fashion;

o   Other servicers’ notices were deemed deceptive because they:

§  Failed to state the additional documents necessary to complete the loss mitigation application;

§  Requested documents inapplicable to the borrower’s circumstances;

§  Requested documents the borrowers had already submitted;

§  Failed to include a reasonable deadline to complete the application;

§  Gave a deadline to complete the application and then denied the application prior to the deadline running; and

§  “Failed to include a statement that borrowers should consider contacting servicers of any other mortgage loans secured by the same property to discuss available loss mitigation options.”

·       Mortgage Servicers Need to Carefully Review the Contents of Their Consumer Communications to Insure Their Accuracy.  A number of issues were identified where consumer communications did not accurately reflect the mortgage servicer’s actions. Mortgage servicers should carefully to review their communications and loss mitigation procedures to insure they are consistent. For instance,

o   One or more servicers sent communications which represented the servicer would defer charges to the maturity date of the loan and the servicer then assessed charges after the consumer signed and returned permanent modifications;

o   One or more servicers sent loss mitigation offers with response deadlines that had passed as a result of delays in the servicer mailing the correspondence;

o   One or more servicers provided modification agreements that did not match the terms approved by underwriting software;

o   One or more servicers provided communications which were not accurate concerning conversion of trial modifications to permanent modifications; and

o     “Examiners found one or more servicers required borrowers to sign waivers agreeing that they would have no “defenses, setoffs, or counterclaims to the indebtedness of borrowers pursuant to the Loan Document” in order to enter mortgage repayment and loan modification plans.”  As noted by the CFPB, this violated Regulation Z.

·       Mortgage Servicers Need to Review their Denial Notices to Insure They Accurately Reflect the Specific Reason(s) for Denial of Loss Mitigation.  Here, the CFPB noted:

o   One or more servicer failed to accurately state the reason(s) for denial; and

o   One or more servicer failed to communicate the borrower’s right to appeal denial of loss mitigation.

·       Mortgage Servicers Need to Review Their Policies and Procedures and Insure They are reasonably Designed to Comply with Regulation X.  Specifically, the CFPB noted that one or more servicers violated Regulation X because their policies and procedures were not reasonably designed to achieve the following:

o   Provide the borrower with accurate and timely information in response to the borrower’s request for information;

o   Identify and facilitate communication with a deceased borrower’s successor in interest;

o   Identify accurately and with specificity all loss mitigation options for which a borrower may be eligible;

o   Promptly identify and provide access to all materials submitted by a borrower in support of its loss mitigation application to the appropriate mortgage servicer personnel;

o   Properly evaluate loss mitigation applications for all options available to the borrower based upon the loan owner’s requirements;

o   Insuring accurate and current information regarding the servicer’s evaluation of the loss mitigation application and the status of foreclosure is available to all appropriate service personnel, including foreclosure attorneys and similar vendors;

o   Accurately identify necessary documents or information that may not have been transferred by a predecessor servicer.

·       Servicers Need to Focus on Accurate Transfers of Accounts.  In this respect, the CFPB noted that one or more servicer incompatibilities between servicer platforms have led to transferees failing to identify and honor in-place loss mitigations.

The Bottom Line.   A number of the concerns raised by the CFPB are the result of system malfunctions and technology deficiencies.  As noted by the CFPB, “improvements and investments in servicing technology, staff training, and monitoring can be essential to achieving an adequate compliance position. However, such improvements have not been uniform across market participants.  Supervision continued to observe compliance risks, particularly in the areas of loss mitigation and servicing transfers.”  Mortgage servicers are encouraged to review their compliance management systems to insure their servicing platforms are accurately servicing their practices and should pay careful note to the concerns raised in the Supervisory Highlights as these are often the precursor to regulatory enforcement actions.

CFPB Issues Annual Report on Consumer Complaints: What the Mortgage Industry Should Know

Since it opened its doors in 2011, the CFPB has accepted consumer complaints on a variety of consumer products. Beginning with credit card complaints in 2011, the CFPB has expanded its complaint portal to accept complaints on debt collection, credit reporting, mortgage, bank accounts and services, student loans, pay day loans, prepaid cards and other products. On April 1, the CFPB issued an Annual Report synthesizing consumer complaints in 2015 and the CFPB’s response. Here are the important takeaways for the mortgage industry:

 

The Good News? The good news for the mortgage industry is that consumer complaints showed a slight decrease in 2015 when compared to 2014. In 2014, mortgage complaints comprised 20% of all complaints received by the CFPB (51,200 in total). In 2015, that percentage decreased to 19% (or 50,800). The slight decrease allowed credit reporting to jump into second place for the most complaints in 2015.  

 

The Bad News? Nine percent of the consumer mortgage complaints handled by the CFPB were referred to other regulatory agencies for further investigation.

 

Problems When Unable to Pay. As suggested in prior posts, the leading complaint category for mortgage involves problems that arise when the consumer is unable to pay. This category encompasses loan modification, collection and foreclosure issues and it shouldn’t come as a surprise to anyone that 43% of all mortgage complaints in 2015 were placed in this category. The mortgage industry should pay close attention to these issues and review their Compliance Management Systems to insure compliance with RESPA and Regulation X as litigation continues to increase in line with the concerns expressed by consumers below.

• Loan Modification Concerns. Particularly, the Report notes that consumers complain about delays and ambiguity in the review of their modification applications. Complaints include:
•  Failure to be included for all available loss mitigation options;
•  Incorrectly being denied a modification;
• Terms of the approved modification were unfavorable; and
• Frequent changes in the single point of contact during review of the loan modification application.
• Foreclosure Concerns. With respect to foreclosure, three primary areas of concern were identified:
• Issues with short sales- particularly, the credit reporting of short sales as foreclosures and second lien holders failing to accommodate short sales;
• Confusion about the fees assessed during foreclosure and particularly, the barrier these fees present to reinstatement; and
• Concerns with mortgage servicers commencing foreclosure while modification applications remain under review.
•  Servicing Concerns. Complaints with regard to servicing tend to focus on issues arising during the transfer of the account from one servicer to another.

Making Payments. The second most prevalent mortgage complaint (37% of all mortgage complaints) involves the posting of payments and the management of escrow accounts. Consumers typically complain about the misapplication of payments and the refusal of servicers to accept partial payments. Consumers’ complaint indicate some issues with servicers disbursing tax payments from escrow in a timely manner.

CFPB Clarifies Liability Standard for TRID

 Since TRID was introduced, a debate has raged on as to whether the Truth in Lending Act’s (TILA) liability rules or RESPA’s would govern TRID violations. The debate has key ramifications: under TILA, there is a private right of action. Under RESPA, there is not. In a letter to the Mortgage Bankers Association, the CFPB has provided some answers to the debate while attempting to provide some assurances to the mortgage industry. The results are a mixed bag.

The letter comes in response to concerns raised by the Mortgage Bankers Association as to secondary market rejection of mortgages which may contain technical TRID violations. As to the secondary market, the CFPB assured that the Federal Housing Finance Agency, government sponsored entities, and the Federal Housing Administration will not conduct routine post purchase loan file reviews for technical compliance and do not intend to exercise contractual remedies, including repurchase, for noncompliance with TRID’s disclosure rules where the lender is making good faith efforts to comply. The CFPB also reiterated that initial examinations by regulators for compliance with TRID will focus on “whether companies have made good faith efforts come into compliance with the rule.” Examinations with be “corrective and diagnostic, rather than punitive.”

More importantly, the letter provided some helpful clarification of the CFPB’s interpretation of TRID liability and suggests that TILA’s provisions will control:

Cure Provisions:

• TRID provides for curing of certain errors post-closing by issuing a correct Closing Disclosure. The letter reminds that “consistent with existing Truth in Lending Act (TILA) principles, liability for statutory and class action damages would be assessed with reference to the final closing disclosure issued, not to the loan estimate, meaning that a corrected closing disclosure could, in many cases, forestall any such private liability”; and
• TILA provides a safe harbor to lenders for correction of errors and that provisions applies to TRID. Under 15 U.S.C. 1640(b), lenders may cure violations provided the creditor notifies the borrower of the error and makes appropriate adjustments to the account before the creditor receives notice of the violation from the borrower.

Assignee Liability:

• For non high-cost mortgages, there is no general TILA liability unless the violation is apparent on the face of the disclosure documents and the assignment is voluntary.

Limitations on Liability:

• “TILA limits statutory damages for mortgage disclosures, in both individual and class actions to failure to provide a closed-set of disclosures”;
• “Formatting errors and the like are unlikely to give rise to private liability unless the formatting interferes with the clear and conspicuous disclosure of one of the TILA disclosures listed as giving rise to statutory and class actions damages in 15 U.S.C. 1640(a); and
• “The listed disclosures in 15 U.S.C. 1640(a) that give rise to statutory and class action damages do not include either the RESPA disclosures or the new Dodd-Frank Act disclosures, including the Total Cash to Close and Total Interest Percentage.”

Bona Fide Errors:

• TILA’s provisions for unintentional, bona fide errors applies to TRID.

While there has been significant debate as to whether RESPA or TILA would control the liability functions of TRID, Cordray’s letter suggests that the answer is TILA. While that is not entirely good news for the mortgage industry (as RESPA contains no private right action), the CFPB has at least provided some indication of their intentions and with a path in front of it, the mortgage industry can now better assess and manage risk.

Cordray Remarks Hint at Further Changes for the Mortgage Industry and Send Warning to Vendors

In his prepared remarks to the Mortgage Bankers Association this week, Richard Cordray suggested there are more changes to come for the mortgage industry and that regulators need to pay more attention to vendors involved in the mortgage industry.


In addressing the implementation of TRID, Cordray reiterated prior assurances that initial examinations regarding TRID will be focused on the good faith efforts lenders have made to come into compliance with the rule.  Cordray acknowledged that the implementation process "was not as smooth as we would have hoped" despite the agency having allowed almost two years for implementation.  Rather than acknowledging the unwieldy nature of wholesale changes to how lenders provide disclosures to borrowers, Cordray suggested that the issues were largely the fault of vendors who "performed poorly in getting their work done in a timely manner, and they unfairly put many of you on the spot with changes at the last minute or even past the due date."  Cordray suggested that financial regulators, including the CFPB, may need to devote greater attention to performance of vendors and how they are affecting the marketplace.  Under Dodd Frank, the CFPB has supervisory authority over service providers to supervised banks and nonbanks, as well as service providers to a substantial number of small insured depository institutions or small insured credit unions.  12 U.S.C. §§5514-5516.


Cordray also noted that more changes are likely in the mortgage The CFPB has been  examining the entire closing experience and evaluating electronic closings and how improvements in technology can be used to the advantage of both the consumer and the lender.  Based on the results of a CFPB pilot program for electronic closings, the CFPB is strongly encouraging the mortgage industry to embrace innovation and "e-closings."

Welcome TRID

Tomorrow is D Day for implementation of the TILA-RESPA Integrated Disclosure Rule (“TRID”).  As banks and others in the mortgage industry continue their final preparations to implement wholesale changes to their disclosures and closing practices as required by TRID, trade groups supporting the industry continue to request a formal hold harmless period following the Rule’s implementation.  While the CFPB and OCC politely have declined to adopt a formal hold harmless period, they have continued to offer some assurances to the industry that they will evaluate examinees based upon their “good faith efforts to comply with the Rule’s requirements in a timely manner.”   In a recent letter to the American Bankers Association and other interested trade groups, the CFPB and OCC reiterated that during initial examinations for compliance with TRID, examiners will “evaluate an institution’s compliance management system and overall efforts to come into compliance, recognizing the scope and scale of changes necessary for each supervised institution to achieve effective compliance.”  Specifically, the initial focus of examinations will take into account: “the institution’s implementation plan, including actions taken to update policies, procedures, and processes; its training of appropriate staff and, it handling of early technical problems or other implementation challenges.”  Meanwhile, formal efforts to extend an official hold harmless date continue in Congress and are expected to come to a vote by the House within the next week.

So what does this mean as we head towards tomorrow’s implementation of TRID? Banks and other affected verticals should already have in place their TRID compliance management systems, completed training of their affected staff, and completed discussions about the transition to TRID with their vendors (including brokers and closing attorneys).  The challenge moving forward is to trouble shoot for issues with implementation and continually evaluate the effectiveness of the entity's TRID compliance management system and revise the same as needed.

CFPB’s Supervisory Highlights Reveal Struggles Complying with Regulation X and Loss Mitigation (Part 3)

The CFPB published its Supervisory Highlights last week, highlighting examinations across various financial products that were conducted between January and April of this year.  The Report highlights key findings made by the CFPB and provides insight into the current focus of the examiners.  The current edition of Highlights provides insights on consumer reporting, fair debt and student lending, but the centerpiece of the Report are the key findings regarding the mortgage industry.  Today’s post focuses on the mortgage findings, both for loan originators and servicers.  The overriding theme of the Highlights continues to be the need to have appropriate compliance management systems in place.

                Loan Origination

The CFPB indicates that this is the first round of examinations to take into account compliance with the Title XIV rules, which include the ability to repay, loan originator compensation, high-cost mortgages, homeownership counseling and escrows.  The Highlights indicate that supervised entities which originate mortgage loans are struggling with the implementation of the policies and procedures necessary to comply with the new regulations. More generally, the CFPB found entities did not provide adequate training in certain key areas, did not provide for sufficient monitoring and corrective action, and failed to have systems in place for robust compliance audits.  The key highlights:

• Not surprisingly, based upon the recent rash of consent orders, heavy scrutiny was applied to compliance with the Loan Originator Rule.  The CFPB noted that while written policies were in place, there were no written procedures instructing employees how to comply with the written policies.  The CFPB emphasized the need for written procedures that not only ensure compliance with the Loan Originator Rule, but also monitor compliance;
• Some supervised entities struggled with the disclosures required by the Regulation X and did not fully comply with the disclosure requirements by failing to provide the list of housing counseling agencies to consumers and in particular, failing  to provide the websites for each agency;
• Supervised institutions also struggled to comply with the good faith estimate requirements of Regulation X.  Particularly, the CFPB found entities:
  • Failed to timely provide the consumer with the good faith estimate within three business days of receipt of the completed application;
  • Failed to timely provide the consumer with revised good faith estimates within three business days of receiving information of changed circumstances; and
  • Failed to include all fees within the good faith estimate.
• Supervised entities failed to ensure that the HUD-1 settlement statements accurately reflect the actual settlement charges paid by the borrower;

Mortgage Servicing

The CFPB acknowledged that compliance with the CFPB mortgage servicing rules is a high priority.  It should come as no surprise, then, that the report details a number of issues in this regard.  The CFPB again made the general observation that entities needed procedures in place to audit for systemic controls.

• Particularly as to loss mitigation, the CFPB noted:
  • A number of issues with acknowledgement notices sent by servicers.  The Highlights make clear the expectation that servicers’ requests for additional documents should be on point and only request the specific additional documents actually required to complete a loss mitigation application;
  • Entities also need to protect against system failures and weaknesses to insure that loss mitigation acknowledgement notices are timely sent; and
  • Entities need to insure that systems and procedures are in place to insure that loans transferred while in loss mitigation are handled appropriately.

• Particularly as to foreclosure, the CFPB noted the expectation that servicers’ notices of intent to foreclose take into account any pending loss mitigation plans.

• The CFPB also noted that one or more servicer failed to automatically cancel private mortgage insurance as required by the Homeowners Protection Act. 

• Entities also struggled with the periodic statement requirements of Regulation Z. Particularly, the CFPB noted that:
• One or more servicers failed to send periodic statements either because of a sustained system error or because of an erroneous belief that the loans were exempt; and
• One or more servicers inaccurately listed fees and transactions in the transaction history.

 

 

Lender May Be Held Vicariously Liable for Servicer’s Violation of RESPA

A federal court has denied a lender’s motion to dismiss, holding that a lender may be held vicariously liable for its servicer’s violation of RESPA.  Rouleau v. US Bank, NA, C.A. No. 14-cv-568-JL, Op. No. 2014 DNH 084 (D.N.H. Apr. 17, 2015).  The Rouleaus sought a mortgage modification from their lender.  Before the lender took action on the loan modification, the loan was sold to US Bank and Nationstar Mortgage began servicing the loan.   Shortly thereafter, Nationstar sent a letter to the Rouleaus indicating that if they were in the process of applying for or providing information related to a workout with the original lender, Nationstar anticipated receiving their information soon and encouraged the Rouleaus to contact Nationstar to make sure it had the information necessary.  The Rouleaus made several unsuccessful attempts to contact Nationstar to discuss the modification.  The Rouleaus heard nothing from either Nationstar or US Bank until receiving notice from US Bank of a foreclosure sale.  The Rouleaus filed suit seeking to enjoin the foreclosure and seeking monetary damages against the original lender, US Bank, and Nationstar.   The claims against US Bank include a claim that US Bank is vicariously liable for it servicer Nationstar’s violation of RESPA.  US Bank moved to dismiss the RESPA claim asserting that it is not a servicer as said term is defined in Reg X and therefore not liable.

RESPA regulates the conduct of servicers of federally regulated mortgage loans.  A “servicer” is the person responsible for receiving payments from the borrower.  Under Reg X, a servicer must promptly review a modification application it receives 45 days or more prior to a foreclosure sale and notify the borrower within 5 days of receipt whether the application is complete or incomplete and if incomplete, what information is necessary to complete it.  12 C.F.R. §1024.41(b)(2).  The regulations further require that the servicer evaluate the borrower for loss mitigation options within thirty days of receiving the completed application and notify the borrower what options, if any, are available.  12 C.F.R. §1024.41(c)(1). The servicer cannot initiate foreclosure while a loss mitigation application is pending.  12 C.F.R. §1024.41(f)(2), (g).  Moreover, a servicer to whom servicing is transferred while an application is pending must maintain policies and procedures which are “reasonably designed to ensure that the servicer can identify necessary documents or information that may not have been transferred by a transferor servicer and obtain such documents from the transferor servicer.” 12 C.F.R. §1024.38(b)(4)(ii).  RESPA further provides a private right of action for violations of Reg X.

In reviewing the claim, the court determined that RESPA created a “species of tort liability.”  As such, traditional vicarious liability rules applied, making principals vicariously liable for the acts of their agents or employees in the scope of their authority or employment. The court did not give deference to US Bank’s argument that it was not covered by the applicable regulations because it was not a servicer under RESPA’s definition of the term.  Instead, the court held that “RESPA does not limit liability to servicers, but provides that “[w]hoever” violates a statutory requirement may be held civilly liable.  Slip Op. at 17.  Absent any statutory, regulatory or judicial indication that RESPA does not incorporate traditional tort rules of vicarious liability, the court concluded that the lender could be held vicariously liable for RESPA violations of its servicer. 

Mortgage Servicer Settles with CFPB and FTC

The CFPB and FTC have announced a settlement with Green Tree Servicing LLC, a national mortgage servicing company, regarding its loan servicing and debt collection practices.  Under the proposed settlement, Green Tree will pay $63 million dollars of which $48 million will be paid to affected consumers and the remainder will be paid as a civil penalty.  Additionally, Green Tree will be subjected to significant and onerous remediation requirements.

According to the complaint, Green Tree engaged in deceptive practices which included requiring good faith or upfront payments in violation of HAMP and refusing to honor “in process” loan modifications between the consumer and prior loan servicer.  Additionally, the complaint alleges that Green Tree engaged in unlawful debt collection practices both under the FDCPA as well as the general prohibition on unfair and deceptive acts set forth in §5 of the FTC Act and §§1031 and 1036(a)(1)(B) of the CFPA.  The proscribed debt collection practices set forth in the Complaint include:

• Disclosing debts to third parties, including family members, employers, coworkers and neighbors;

• Calls as early as 5 AM and as late as 11 PM;

• The use of profane language;
• Calling consumers between 7-20 times a day on a daily basis;
• Leaving multiple voice mail messages each day;
• Threatening consumers with arrest and imprisonment;
• Pressuring consumers to use a payment method that includes a $12 convenience fee per transaction without offering other alternatives for payment; and
• Taking payment from consumer accounts with their consent.

The complaint further alleges inaccurate credit reporting and problems with the administration of consumer escrow accounts.  Significantly with respect to the debt collection activities, the complaint encompasses accounts covered by the FDCPA (those accounts in which Green Tree became the servicer when the account was already past due) and those covered by the FTC Act and the CFPA (accounts in which Green Tree became the servicer pre-default). The Complaint additionally asserts claims under the FCRA and RESPA.

The Proposed Consent Order, in which Green Tree admits no wrongdoing, requires both monetary payments as well as remediation.  The Consent Order:

• Requires payment of $18 million dollars for the alleged misrepresentations relating to the alleged misrepresentations concerning payment methods requiring a convenience fee;

• Requires payment of $30 million dollars for the alleged misconduct involving short sales and in-process loan modifications;

• Requires payment of $15 million dollars in civil penalties to the CFPB;

• Prohibits the conduct complained of;

• Requires the establishment and use of a “comprehensive data integrity program reasonably designed to ensure the accuracy, integrity, and completeness of the data and other information about the accounts that” Green Tree services, collect or sells;

• Requires ongoing testing and correction of errors;

• Requires the submission and approval by the CFPB of a data integrity program;

• For eight years, requires a biennial assessment and report by a third party professional assessing the data integrity program which will be subject to review by the FTC;

• Requires the establishment of a “home preservation plan”, effective for five years, designed to “identify and review” identified consumers for "loss mitigation options, provide for the solicitation and fast-track evaluation of loss mitigation applications and stop pending foreclosure sales for such consumers to the extent necessary to permit the consumers to be solicited and considered for loss mitigation”;

• For 5 years requires quarterly disclosures to consumers with past due debts serviced by the Defendant which include customer service information, as well as directions as to how to contact the FTC and CFPB concerning the manner in which the account is being collected;

• Requires the provision to all employees, who are required to acknowledge their receipt in writing, of a lengthy and detailed notice of their responsibilities under the FDCPA;

• For five years, requires the delivery to all officers, directors, managers and members a copy of this Order, the FDCPA, the FCRA and RESPA;

• For five years, requires that a copy of the Order must also be provided to all employees, along with a copy of the aforementioned statutes relevant to their job responsibilities;

• Requires the delivery of certain compliance notices to the FTC for 15 years; 

• For fifteen years, subjects Green Tree to stringent record keeping (with a five year retention period) which includes a record of all complaints received from consumers, recordings to the extent allowed by state law of 90% of all telephone calls (limited to a two year retention period), copies of all training materials, accounting records, personnel records;  and

• Provides that the monetary obligations are nondischargeable in bankruptcy.

Key takeaways:

• The investigation is consistent with the targets identified by the CFPB:  markets where the consumer has no choice in his provider and businesses with large market share;

• In its attack on the pre default accounts Green Tree was servicing, the complaint is consistent with the CFPB’s position that it can regulate debt collection even regarding actors not covered by the FDCPA. It is important to note that the complaint did not limit itself to the authority of the FDCPA for accounts that Green Tree was servicing post default but also asserted authority to regulate violations with respect to accounts which were assigned to Green Tree pre-default and for which Green Tree was not a debt collector under the FDCPA; and

• While the debt collection activities complained of are egregious, the primary focus of the Consent Order appears to be directed towards the convenience fee issue and the loan modification and short sale issues.

FDCPA and RESPA: District Court Dismisses Claims Against Banks

A United States District Court has dismissed both FDCPA and RESPA claims brought against a bank and its servicer.  In Fleming v. U.S. Bank, C.A. No. 14-3446 (D. Minn. Feb. 6, 2015), the consumers sent the servicer a Qualified Written Request which the servicer timely responded to.  The Flemings eventually defaulted on the mortgage and the bank commenced foreclosure proceedings.  The Flemings filed suit asserting violations of both the FDCPA and RESPA.

Regarding the FDCPA claim, the plaintiffs argued that defendants violated the FDCPA by attempting to foreclose on the property and engaging in conduct that was unfair and deceptive in its efforts to foreclose.  The defendants argued that they were exempt from the FDCPA because foreclosure activities undertaken by mortgagors and mortgage servicing companies are not debt collection under the FDCPA. While noting a split in the circuits (the Fourth and Sixth Circuit have held that foreclosure is debt collection), the court concurred with the defendants, holding that foreclosure activities do not constitute debt collection under the FDCPA.

The court also dismissed the RESPA claim.  Under RESPA, servicers are required to provide a written response to a Qualified Written Request within 30 days of receipt.  The court determined that the QWR served by the Flemings was not proper and even assuming for the sake of argument that the QWR was proper, the servicer had adequately responded to the same.  Moreover, the court determined that the plaintiffs failed to properly plead the RESPA claim because they failed to allege that they suffered some actual damage as a result of the alleged violation.  The court noted that “[A] RESPA plaintiff must plead and prove, as an element of the claim, that he or she suffered some actual damage as a result of the alleged RESPA violation.  In the case of the Flemings, they only sought damages “if any be proven”, thus failing to properly allege harm.