Do you suffer from Dodd-Frank Syndrome, which is defined as “the disease that strikes mortgage compliance officers overwhelmed by the flood of rules passed in 2010?” Well, there’s no need to call the doctor – QuestSoft, a mortgage compliance software provider based in Laguna Hills, Calif., addresses this unique syndrome in its annual Christmas comedy video.
According to the company, the video highlights a team of holiday carolers presenting a parody of a PBS telethon raising funds for the Compliance Officer’s Relief Fund. In five minutes, the “Compliance Carolers” manage to squeeze all of the major rules into a handful of revised Christmas carols. Or, according to Questsoft, “Think ‘Carol of the Bells’ built on a litany of abbreviations.”
This year’s video is available to view online. QuestSoft is also offering a complimentary special combo DVD/CD pack that contains all of the songs from this year’s and last year’s Christmas videos combined into a single set.
The Mortgage Bankers Association of the Carolinas, Inc. (MBAC) represents companies that participate in the mortgage lending industry within North and South Carolina.
MBAC members include residential and commercial mortgage bankers, mortgage brokers, wholesale lenders, savings & loan associations, commercial banks, credit unions, government agencies, non-profit organizations, and companies that provide affiliated services to mortgage bankers.
The annual meeting was held in September and I had the privilege of speaking there on the CFPB.
In the newly posted newsletter I also contributed on the new RESPA TILA Integrated Rule (see page 27).
By: Penny A. Showalter
An edited version of this article was originally published in the October 2012 issue of Servicing Management (Page 8-9)
The First Commandment of Loan Servicing
If there were Ten Commandments for the Loan Servicing business, Commandment #1 would be
Thou shalt contain costs while controlling delinquency, or thou shalt go broke
and sooner rather than later
Commandments #2-10 would be “See Commandment #1.”
This principle does not require a divinely inspired epiphany; eighth grade arithmetic, in fact, is sufficient.
Depending on the type of loan and the advancing requirements, servicers charge 25 to 50 basis points (bps) for each loan serviced. The servicer takes its fee from each payment collected, so if a payment is delinquent, no fee is collected until the delinquency is cured. So in a cruel twist, the most expensive loans to service generate the least collected revenue.
The servicing fee is the primary funding source for the tasks required for servicing a loan: sending statements, following-up on lagging payments, managing loss mitigation (modifications, short sales, deed-in-lieu, etc.), processing foreclosures and subsequent REO acquisitions and sales of the properties.
Setting aside accrual accounting timing difference, the servicing fees collected minus the servicing costs paid equals the profit – before other business costs and taxes.
Now, the reason this is eighth grade arithmetic rather than third grade arithmetic is that solving this equation sometimes involves an understanding of negative numbers. National Mortgage News reports, for example, that it costs servicers 75 bps (.75 percent) or more to service a high-touch loan (e.g., a defaulted loan). Subtracting costs of 75 bps from the collected servicing fee gives a profit on delinquent loan of -75 bps aka a loss of 75 bps.
“The positive profit on current loans must be sufficient to cover the full cost of servicing the delinquent loans”, says Michael Trickey, Managing Director of consulting firm Berkshire Advisors, LLC. So the concept is supremely valid: turning a profit in the loan servicing business is dependent on keeping the costs of providing those services to a minimum.
Of course, simply bidding low on purchasing of servicing rights is not the solution. This route has led to methodologies such as robo-signing, sewer service and pushing for the “rocket-docket” in Florida. These tactics have caused problems that in turn have led to the servicing shops now facing costly new regulatory compliance requirements from CFPB, rendering containment of costs more difficult than ever before.
On January 4, 2012, the Federal Reserve sent a White Paper on “The U.S. Housing Market: Current Conditions and Policy Considerations” to the Committee on Financial Services. That paper noted that:
Other data show, for instance, that less than half of lenders are currently offering mortgages to borrowers with a FICO score above 620 and a down payment of 10 percent – even though these loans are within GSE parameters. This hesitancy on the part of lenders is due in part to concerns about the high cost of servicing in the event of loan delinquency and fear that the GSEs could force the lender to repurchase the loan if the borrower defaults in the future.
The Fed goes on to say that concerns about the high cost of mortgage servicing stem from:
- the realization of how expensive it is to resolve a nonperforming loan,
- uncertainty about what it will cost to comply with new mortgage servicing-related regulations and
- the potential change in the way Mortgage Servicing Rights (MSRs) are treated for capital requirements under Basel III (new international banking regulations).
The servicing fee must cover a variety of costs, many of which vary widely in sporadic and unpredictable ways. Servicing costs vary based on size and efficiency of the servicer and on level of delinquency. Also based on whether the loans are in securities and what the advance requirements are.
On a performing loan, servicing costs are low—especially for large servicers with highly efficient, automated systems. For these loans, the servicing fee significantly exceeds the servicing costs incurred.
For nonperforming loans, however, the direct costs associated with collections, loss mitigation, foreclosure, and the maintenance and disposition of REO properties are unpredictable and can quickly become substantial, substantially exceeding the servicing fee. Add on top of that the interest costs of advancing principal and interest to investors and taxes and insurance to counties and vendors, and the earnings drag becomes even worse.
The Consumer Finance Protection Bureau (CFPB) has proposed a policy change that would dramatically change the current regulations of the Real Estate Settlements Procedures Act (RESPA) and Truth in Lending Act (TILA). On August 9, 2012 CFPB Director Cordray announced the impending release of proposed national servicing standards to protect consumers, especially those experiencing difficulty making their monthly mortgage payments.
“The major failures in this industry demonstrate that all servicers need to meet basic standards of good customer service,” CFPB Director Richard Cordray said in a call with reporters. The proposal, he said, reflected “two basic, common-sense standards — no surprises and no runarounds.”
The core of the proposal comprises nine major points affecting the implementation of Dodd-Frank Act provisions, ranging from providing options for avoiding force-placed insurance to reviewing a loan modification within 30 days of receiving it.
Small servicers, already operating on razor-thin margins, would be subject to many of the same requirements as the industry giants (Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial) that struck the $25 billion mortgage settlement early this year with regulators.
“As these incremental mandated costs continue to add up, it will impact costs to borrowers” says Michael Trickey. “Servicers can only absorb so much before fees will have to be increased somehow.”
The nine major points of the proposal are as follows:
- Periodic billing statements (TILA proposal): Servicers would be required to provide clear billing statements including information on the loan, amount due, and application of past payments.
- Adjustable-rate mortgage interest-rate adjustment notices (TILA proposal): Servicers would be required to provide consumers with a new notice 6 to 7 months before the first rate adjustment, as well as earlier and improved notices before rate adjustments causing an increase in a consumer’s mortgage payments.
- Prompt payment crediting and payoff payments (TILA proposal): Payments must be applied as of the day they are received, and the handling of partial payments is clarified.
- Force-placed insurance (RESPA proposal): Servicers can only charge borrowers for buying insurance on the property when they have a reasonable basis to believe that the borrowers have let their own insurance lapse and have given borrowers two notices estimating the cost of the “force-placed insurance.”
- Error resolution and information requests (RESPA proposal): Mistakes happen, but they need to get fixed. Servicers must address borrower concerns about possible errors within certain timeframes and provide the information they request.
- Information management policies and procedures (RESPA proposal): Servicers must have reasonable policies to ensure that when borrowers provide documents and information the servicers can find and use them.
- Early intervention with delinquent borrowers (RESPA proposal): Servicers must work with delinquent borrowers with early intervention and information about options available.
- Continuity of contact with delinquent borrowers (RESPA proposal): Servicers will insure delinquent borrowers will be able to contact the right people to get information and take steps to avoid foreclosure.
- Loss mitigation procedures (RESPA proposal): Servicers would be required to appropriately review borrower applications for loan modifications or other options to avoid foreclosure.
In addition, mortgage servicing companies would be required to provide clear monthly billing statements, warn borrowers before interest rate hikes and actively help them avoid foreclosure. The rules also require companies to credit people’s payments promptly, quickly correct errors and keep better internal records.
The CFPB plans to finalize the rules by January 2013.
Consider the costs involved if a property does end up in a foreclosure proceeding. The servicer is required to provide all of the documentation of the default to the law firm preparing the foreclosure documents. This would of course include all of the payment records and accounting, but may also require that the servicer copy all of the communications between the borrower and the account reps and collectors that worked the loan.
Depending upon the state, the foreclosure process may require from one to ten months’ time if all goes well. Borrowers have been made very aware of the robo-signing issues and are using that knowledge to delay or in some cases derail the foreclosure process. The servicer is incurring costs to keep that loan on the books every day, and every action by the borrower has the potential to create a need for a reaction from the servicer to respond to a request for more data information. Everything, from a telephone call to an e-mail adds cost to the servicer. When you’re operating on 25 basis points, it does not take much to turn the potential profit into a hard loss.
Once the lender is successful in completing the foreclosure, the servicer’s duties are still not done. Many states have a redemption period, wherein the borrower can remedy the loan default.
Redemption is a period after your home has already been sold at a foreclosure sale when you can still reclaim your home. During that period the servicer pays the outstanding mortgage balance and all costs incurred during the foreclosure process.
Many states have some type of redemption period. The redemption period and availability is often determined by whether the foreclosure is judicial or non-judicial. And, timelines and procedures can vary greatly from state to state.
Given the soft real estate market, a foreclosed property is more than likely going to remain on the lender’s books for months. During that time, the REO property will need to be inspected, secured, and maintained. The lender may be paying the bills, but the servicer is still providing the accounting and reporting, and incurring the daily cost of having that loan on the books.
Cost increases, other than compliance expenses, will include increased capital requirements, increased cost of funds and recourse losses.
Sticking with the first commandment of servicing is becoming ever more challenging. As public policy grows ever more vigilant for consumer protections, costs will continue to be pushed upward. The associated costs are unstoppable, but must be controlled to the best of the servicer’s ability.
On October 9, 2012 MBA sent their comment letter to CFPB on the Proposed Servicing Rules. Several important points were made in the 97 page letter. Their recommendations focused on numerous areas, including small servicer exemption, error resolution and information requests, loss mitigation, and early intervention for troubled or delinquent borrowers, just to name a few.
- Suggest that the numerous provisions in the Proposed Rule are not required by the Dodd-Frank Act, TILA or RESPA. Nonetheless the CFPB rules should not grant borrowers a private right of action against servicers for failing to follow requirements that were not authorized by Congress in the Dodd-Frank Act and which are not within the scope of RESPA or TILA.
- The small servicer exemption should be expanded to include more servicers, varying corporate structures, and additional types of relief.
- They should take appropriate time to formulate the final rule and establish a reasonable implementation period because of the numerous regulations that are being formulated and must be implemented, suggesting at least two years from the date of publication to implement the final rules with small servicers given an additional six months.
- After a thorough review of the Proposed Rule, we believe it would be mutually beneficial for all parties involved if the CFPB held a day-long meeting about challenges relating to information and technology management. The focus would be on proposed forms production and data management, including the periodic statement, ARM disclosures, servicing file, and record retention requirements. A joint meeting with the mortgage industry stakeholders involved in the implementation process would allow the industry to work together to better help consumers
MBA supplied numerous comments specific to RESPA and others specific to TILA provisions.
Comment period for the proposed rule closed on October 9, 2012. 134 comments have been received and can be viewed at regulation.gov .
The Federal Housing Finance Agency (FHFA) has released an updated strategic plan for FHFA for fiscal years 2013-2017 subtitled, “Preparing a Foundation for a More Efficient and Effective Housing Finance System.” The four strategic goals included in the new FHFA plan are:
- Safe and sound housing government-sponsored enterprises (GSEs)—Fannie Mae, Freddie Mac and Federal Home Loan Banks;
- Stability, liquidity, and access in housing finance;
- Preserve and conserve Enterprise (Fannie Mae and Freddie Mac) assets; and
- Prepare for the future of housing finance in the United State
FHFA requested comment from Congress, stakeholders, and the public on the new FHFA Strategic Plan: Fiscal Years 2013-2017 through a posting on their website over a 30-day period in May.
The Consumer Financial Protection Bureau (CFPB) today announced an enforcement action with orders requiring three American Express subsidiaries to refund an estimated $85 million to approximately 250,000 customers for illegal card practices.
In addition, the banks, their holding company, and its parent company are required to pay a total of $27.5 million in civil monetary penalties to the CFPB, the Office of the Comptroller of the Currency, the Federal Reserve Board, and the Federal Deposit Insurance Corporation.
This action is the result of a multi-part federal investigation which found that at every stage of the consumer experience, from marketing to enrollment to payment to debt collection, American Express violated consumer protection laws.
“Several American Express companies violated consumer protection laws and those laws were violated at all stages of the game – from the moment a consumer shopped for a card to the moment the consumer got a phone call about long overdue debt,” said CFPB Director Richard Cordray. “Today’s orders require the American Express companies to fully refund about $85 million to consumers and it requires them to make specific changes in their business practices. The American Express companies will identify the harmed customers, notify them, and make sure they get back their money.”
The Federal Deposit Insurance Corporation (FDIC) together with the Utah Department of Financial Institutions discovered the illegal activities during a routine examination of an American Express subsidiary, the American Express Centurion Bank. The FDIC transferred portions of the investigation to the CFPB when the Bureau opened its doors last year and together the agencies pursued the matter. The CFPB later concluded that many of the same violations that occurred at American Express Centurion Bank also took place at American Express Travel Related Services Company, Inc. and American Express Bank, FSB.
The investigations found that the violations occurred at various points in time between 2003 and spring 2012. They occurred at every stage of the consumer experience, from shopping for cards, to applying for cards, to paying charges, and to paying off debt. More specifically, American Express subsidiaries:
- Deceived consumers who signed up for the American Express “Blue Sky” credit card program: Consumers were sometimes led to believe they would receive $300 in addition to bonus points if they signed up for this American Express Centurion Bank program. But consumers who met the qualifications did not receive the $300. This violates federal laws prohibiting deceptive practices.
- Charged unlawful late fees: American Express Centurion Bank and American Express Bank, FSB billed late fees on certain cards based on a percentage of the debt in violation of the Credit CARD Act.
- Unlawfully discriminated against new account applicants on the basis of age: American Express Centurion Bank used a credit scoring system that treated charge card applicants differently on the basis of age. For a period of time, the bank did not fully implement the system for applicants over the age of 35. This violated the Equal Credit Opportunity Act because it requires credit scoring systems that take age into account to be properly designed and implemented.
- Failed to report consumer disputes to consumer reporting agencies: American Express Centurion Bank and American Express Bank, FSB failed to report the existence of certain customer disputes to credit bureaus, which is a violation of the Fair Credit Reporting Act.
- Misled consumers about debt collection: All three of the American Express subsidiaries deceived consumers into believing there were certain benefits to paying off old debt. Consumers were wrongly told that if they paid off the old debt, the payment would be reported to credit bureaus and could improve their credit scores. In fact, American Express was not reporting the payments and the debts were so old that even if they had tried to report them, many of the payments would not have appeared on these consumers’ credit reports or affected their credit scores. American Express also told some consumers that a portion of their debt would be waived or forgiven if they accepted certain settlement offers. But for customers who applied for a new American Express card, the company was not really forgiving or waiving the debt.
In accordance with the orders issued today, the American Express subsidiaries have agreed to correct their practices and refund consumers who were harmed by the illegal practices. Specifically, they have agreed to the following:
- End the illegal practices: American Express Centurion Bank will not deceive consumers with marketing for the Blue Sky credit card, or any other card, by falsely promising a rebate or points feature. The banking subsidiaries will not charge illegal late fees. They will properly report disputes to credit bureaus and will make sure that cardholders are told about their rights regarding such disputes. American Express Centurion Bank will not unlawfully discriminate based on age when it comes to credit decisions, and it will be required to certify that all qualified consumers who suffered unlawful age discrimination were given an opportunity to reapply for credit.
- Full repayment of an estimated $85 million to approximately 250,000 consumers:These American Express entities will be paying their customers full restitution, specifically:
- Consumers who were misled into paying old debt because they thought it would be reported to the credit bureaus will be reimbursed the money they paid plus interest.
- Consumers who were promised their debt would be forgiven and who were denied new credit cards because the debt was not really forgiven, will receive $100 and a pre-approved offer for a new card with terms the CFPB and the FDIC find acceptable. If the consumer already paid the waived or forgiven amount in order to get a new card, they will be refunded that amount plus interest.
- Blue Sky customers who were promised $300 for signing up will get their $300.
- Consumers who paid an illegal late fee will be reimbursed, with interest.
- Convenient repayment for consumers: These American Express companies are responsible for notifying the affected consumers. Consumers are not required to take any action to receive their credit or check. If the consumers are still American Express customers, they will see a credit in their account. If they no longer have a card account with American Express, they will receive a check in the mail. American Express expects that consumers who will be receiving payment will receive the payout by no later than March 15, 2013.
- Inform consumers of debt collection rights: These American Express subsidiaries will inform consumers when the debt they are seeking to collect will not be reported to a consumer reporting agency because it is too old. And they will not collect debt unless it has documentation evidencing the debt. Going forward, this will include, at a minimum, the complete terms and conditions of the account and a complete transactional history of the debt.
- Independent audit: These American Express subsidiaries will implement new procedures to ensure compliance with consumer financial protection laws. They will also use independent auditors to ensure compliance with the terms of today’s orders.
- Pay civil monetary penalty of $27.5 million: Several federal government agencies seeking action against these American Express companies have ordered monetary penalties. With jurisdiction over the three subsidiaries, the CFPB’s fine is $14.1 million; with jurisdiction solely over American Express Centurion Bank, the FDIC’s fine is $3.9 million; with jurisdiction over American Express Travel Related Services Company, Inc. and American Express Company, the parent company, the Board of Governors of the Federal Reserve System’s fine is $9 million; and with jurisdiction over American Express Bank, FSB, the Office of the Comptroller of the Currency’s fine is $500,000.
The Consumer Financial Protection Bureau (CFPB) released a study comparing credit scores sold to creditors and those sold to consumers. The study found that about one out of five consumers would likely receive a meaningfully different score than would a lender.
“This study highlights the complexities consumers face in the credit scoring market,” said CFPB Director Richard Cordray. “When consumers buy a credit score, they should be aware that a lender may be using a very different score in making a credit decision.”The Consumer Financial Protection Bureau (CFPB) released a study comparing credit scores sold to creditors and those sold to consumers. The study found that about one out of five consumers would likely receive a meaningfully different score than would a lender.
The study released today determined:
- One out of five consumers would likely receive a meaningfully different score than would a creditor: When consumers purchase their score from a credit bureau, the score they receive may be meaningfully different from the score that a lender would consult in making a decision. A meaningful difference means that the consumer would be likely to qualify for different credit offers – either better or worse – than they would expect to get based on the score they purchased.
- Score discrepancies may generate consumer harm: When discrepancies exist between the scores consumers purchase and the scores used for decision-making by lenders in the marketplace, consumers may take action that does not benefit them. For example, consumers who have reviewed their own score may expect a certain price from a lender may waste time and effort applying for loans they are not qualified for, or may accept offers that are worse than they could get.
- Consumers unlikely to know about score discrepancies: There is no way for consumers to know how the score they receive will compare to the score a creditor uses in making a lending decision. As such, consumers cannot exclusively rely on the credit score they receive to understand how lenders will view their creditworthiness.
The Bureau recommends that consumers consider the following in evaluating the credit score they receive:
- Shop around for credit. Consumers benefit by shopping for credit. Regardless of the scores different lenders use, they may offer different loan terms because they operate different risk models or face different competitive pressures. Consumers should not rule out of seeking lower priced credit because of assumptions they make about their credit score. While some consumers are reluctant to shop for credit out of fear that they will harm their credit score, that negative impact may be overblown. Inquiries generally do not result in a large reduction in a consumer credit score.
- Check the credit report for accuracy and dispute errors. Credit scores are calculated based on information in a consumer’s credit file. Inaccurate information may be the difference between a consumer being approved or denied a loan. Before shopping for major credit items, the Bureau recommends that consumers review their credit files for inaccuracies. Each of the nationwide credit bureaus is required by law to provide credit reports for free to consumers who request them once every 12 months.
The Bureau will begin supervising consumer reporting agencies as of September 30, 2012. The CFPB’s supervisory authority will cover an estimated 30 companies that account for about 94 percent of the market’s annual receipts. The Bureau’s examiners will be looking to verify that consumer reporting companies are complying with federal consumer financial law, including that the companies are using and providing accurate information, handling consumer disputes, making disclosures available, and preventing fraud and identity theft.
On September 24th, 2012 the Federal Deposit Insurance Corporation (FDIC) and the Consumer Financial Protection Bureau (CFPB) announced a joint public enforcement action with an order requiring Discover Bank to refund approximately $200 million to more than 3.5 million consumers and pay a $14 million civil money penalty. This action results from an investigation started by the FDIC which the CFPB joined last year. The joint investigation concerned deceptive telemarketing and sales tactics used by Discover to mislead consumers into paying for various credit card “add-on products” – payment protection, credit score tracking, identity theft protection, and wallet protection.
The agencies jointly determined that Discover engaged in deceptive telemarketing tactics to sell the company’s credit card add-on products. Payment Protection was marketed as a product that allows consumers to put their payments on hold for up to two years in the event of unemployment, hospitalization, or other qualifying life events.
Under the order, Discover has agreed to:
• Stop deceptive marketing: Discover is required to institute certain changes to its telemarketing of these products that are designed to ensure that these unlawful acts do not occur again. Discover has also agreed to submit a compliance plan to the CFPB and the FDIC for approval, and to take specific corrective actions related to the products.
• Pay restitution to consumers who purchased the products: Discover will pay approximately $200 million in restitution to more than 3.5 million consumers who were charged for one or more of the products between December 1, 2007 and August 31, 2011. All consumers affected by Discover’s deceptive practices regarding these products, except those who affirmatively made use of Payment Protection, will receive restitution with amounts varying depending on when they purchased, and how long they held, the add-on products. All consumers will receive at least 90 days’ worth of fees paid (minus any refunds they have already received), with approximately 2 million consumers receiving full restitution of all of the fees they paid.
• Provide refunds or credits without any further action by consumers: Consumers are not required to take any action to receive their credit or check. If an affected consumer is still a Discover customer, he or she will receive a credit to his or her account. If an affected consumer is no longer a Discover credit card holder, the consumer will receive a check in the mail or have any outstanding balance reduced by the amount of the refund.
• Submit to an independent audit: Compliance with the restitution terms of the order will be assured through the work of an independent auditor, who will report to the CFPB and FDIC on Discover’s compliance with the joint CFPB-FDIC Consent Order.
• Pay a $14 million penalty: The CFPB and the FDIC imposed civil money penalties of $14 million. Discover will pay $7 million of that penalty to the U.S. Treasury and $7 million to the CFPB’s Civil Penalty Fund.