The September/October 2014 issue of MBA News published our following article:

In January of 2013, the Consumer Financial Protection Bureau (“CFPB”) issued new rules implementing various provisions of the Real Estate Settlement Procedures Act and the Truth in Lending Act regarding mortgage loan servicing (collectively, the “Rules”). These Rules went into effect on January 10, 2014, and impose significant requirements on consumer mortgage servicers to ensure that consumers are better protected in their dealings with their mortgage servicers.

The Rules are far-reaching and affect virtually every aspect of mortgage servicing. For example, the Rules impose, among other things, specific and detailed requirements for the provision of certain periodic billing statements[1] and certain interest-rate adjustment notices[2], as well as proper procedures for responding to information requests or error complaints[3]. The Rules also require early intervention and continuity of contact with delinquent borrowers[4], and delineate specific loss mitigation procedures to be followed when a loss mitigation application is submitted by a borrower[5], whether or not that application is complete and whether or not that application is submitted before or after the foreclosure process has been initiated, in addition to various other requirements.

Recognizing that smaller mortgage servicers are more likely than larger servicers to already implement consumer service policies and procedures in their business models, the CFPB created a “small servicer exemption” that exempts smaller servicers from certain provisions of the Rules, thereby reducing the burden imposed by the Rules on these smaller servicers[6]. This article will take a closer look at this exemption and discuss the important considerations to keep in mind when determining whether you qualify.

Qualification for the Exemption

You may qualify for the “small servicer exemption” if you and any affiliates together service 5,000 or fewer mortgage loans[7] per year, which you either originated or own[8]. If you service any mortgage loans which you do not own or did not originate, you do not qualify for the “small servicer exemption,” no matter how few mortgage loans you service. You are considered the originator of mortgage loans that you or your affiliates obtained as part of certain mergers or acquisitions for purposes of determining your “small servicer” eligibility[9].

 This does not mean that you lose your “small servicer” status by retaining a service organization, or some other subservicer[10], to service your mortgage loans. However, if your subservicer is an affiliate of yours, the number of mortgage loans serviced by your subservicer will need to be included in the total number of mortgage loans that determines your “small servicer” status qualification. Subservicers can also qualify for “small servicer” status.

Qualification for the “small servicer exemption” is not made on a one-time basis. Rather, this qualification is determined on an ongoing basis. Specifically, it is determined each calendar year and is based on the number of mortgage loans that you and your affiliates service as of January 1 through the remainder of that calendar year[11]. Should you cross the 5,000-loan threshold or take on a mortgage loan you do not own or did not originate, you have 6 months or until the next January 1 (whichever is later) to comply with any requirements you were previously exempt from as a “small servicer”[12]. Thus, a servicer must not only properly determine whether or not it initially qualifies for the exemption, but also must be sure to track its continued qualification.

The CFPB, along with other federal financial regulatory agencies, is supervising servicers to assure servicers comply with these requirements. Certain provisions, such as the loss mitigation provisions, can be enforced by individuals. Given the extent of the Rules, especially those from which “small servicers” can be exempted, a servicer’s failure to fully understand whether or not it qualifies for “small servicer” status could result in unfortunate and costly problems.

Extent of the Exemption

It is imperative to properly understand the impact of “small servicer” status on your mortgage servicing operations in order to ensure you comply with the Rules, which apply to you. However, even those servicers that do qualify as “small servicers” are not completely absolved from compliance with the Rules. The CFPB did not completely exempt “small servicers” from the Rules’ requirements and qualifying for the “small servicer exemption” only exempts you from following some, but not all, provisions of the Rules. In fact, there are numerous provisions of the Rules which impose requirements on all consumer mortgage servicers’ mortgage loan servicing, regardless of size, including the prompt crediting and payoff request provisions[13], the error resolution and information request provisions[14], the majority of the force-placed insurance provisions[15], certain portions of the loss mitigation provisions[16], and the interest rate adjustment notice provisions[17].

Conclusion

The Rules have brought consumer mortgage servicing to the forefront and lenders need to be aware of the extent of the Rules and the application of the Rules to their mortgage servicing operations in order to both effectively serve their customers, as well as avoid the costly effects of non-compliance and the adverse public relations that would accompany it.

[1] 12 C.F.R. § 1026.41

[2] 12 C.F.R. § 1026.20.

[3] 12 C.F.R. §§ 1024.35, 1024.36.

[4] 12 C.F.R.  §§ 1024.39, 1024.40.

[5] 12 C.F.R. § 1024.41.

[6] The CFPB has proposed and is currently seeking public comment on a potential alternate definition of “small servicer” that would apply to certain 501(c)(3) nonprofit organizations. This article focuses on the definition of “small servicer” currently in effect.

[7] “Mortgage loan” is defined in 12 C.F.R. § 1026.41(a)(1) as a closed-end consumer credit transaction secured by a dwelling. Further references to a mortgage loan in this article should be considered references to a mortgage loan with these specific features.

[8] 12 C.F.R. § 1026.41(e)(4).

[9] See Comment 41(e)(4)(iii)(1) in Supplement I to 12 C.F.R. Part 1026.

[10] “Subservicer” is defined in 12 C.F.R. § 1024.31 to mean a servicer that does not own the right to perform servicing, but that performs servicing on behalf of the master servicer. “Master servicer” is also defined therein to mean the owner of the right to perform servicing who either performs the servicing itself or does so through a subservicer.

[11] 12 C.F.R. § 1026.41(e)(4)(iii).

[12] CFPB 2013 Real Estate Settlement Procedures Act (Regulation X) and Truth in Lending Act (Regulation Z) Mortgage Servicing Final Rules Small Entity Compliance Guide, p. 17 (Jan. 8, 2014).

[13] 12 C.F.R. § 1026.36(c)(1), (3).

[14] 12 C.F.R. §§ 1024.35, 1024.36.

[15] 12 C.F.R. § 1024.37.

[16] 12 C.F.R. § 1024.41.

[17] 12 C.F.R. § 1026.20.