Alston & Bird Consumer Finance Blog

Mortgage Servicing

Connecticut and Maryland Adopt Model Mortgage Servicer Prudential Standards

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A&B Abstract:

On May 24, 2022, Connecticut enacted legislation that, among other things, adds financial condition and corporate governance requirements for certain licensed mortgage servicers (the “CT Standards”). In similar fashion, the Maryland Commissioner of Financial Regulation (the “Commissioner”) issued a notice of final action on March 25, 2022 adopting similar standards by regulation (the “MD Standards”).  In both instances, the CT and MD Standards are intended to implement the Model State Regulatory Prudential Standards for Nonbank Mortgage Servicers (the “Model Standards”) drafted and released by the Conference of State Bank Supervisors (“CSBS”) last July.

The CSBS Model Standards

As mentioned in our prior blog post, the CSBS initially proposed standards for mortgage servicers in 2020. In July 2021, after substantial revision to the proposed standards, the CSBS adopted the Model Standards to provide states with uniform financial condition and corporate governance requirements for nonbank mortgage servicer regulation while preserving local accountability to consumers and to “provide a roadmap to uniform and consistent supervision of nonbank mortgage servicers nationwide.”

The Model Standards cover two major categories that comprise prudential standards: financial condition and corporate governance. The financial condition component consists of capital and liquidity requirements. Corporate governance components include separate categories for establishment of a board of directors (or “similar body”); internal audit; external audit; and risk management.

The Model Standards apply to nonbank mortgage servicers with portfolios of 2,000 or more 1 – 4-unit residential mortgage loans serviced or subserviced for others and operating in two or more states as of the most recent calendar year end, reported in the Nationwide Multistate Licensing System (“NMLS”) Mortgage Call Report. For purposes of determining coverage under the Model Standards, “residential mortgage loans serviced” excludes whole loans owned and loans being “interim” serviced prior to sale. Additionally, the financial condition requirements in the Model Standards do not apply to servicers solely owning and/or conducting reverse mortgage servicing or the reverse mortgage portfolio administered by forward mortgage servicers that may otherwise be covered under the standards. The capital and liquidity requirements also have limited application to entities that only perform subservicing for others. Moreover, the whole loan portion of portfolios are not included in the calculation of the capital and liquidity requirements.

While CSBS drafted the Model Standards, they are implemented only through individual state legislation or other rulemaking.

Connecticut’s and Maryland’s Implementation of the Model Standards

The CT and MD Standards both track the Model Standards in many respects, including the following:

  • Covered servicers are required to satisfy the Federal Housing Finance Agency’s (“FHFA”) Eligibility Requirements for Enterprise Single-Family Seller/Servicers for minimum capital ratio, net worth and liquidity, whether or not the mortgage servicer is approved for servicing by the government sponsored enterprises (i.e., Fannie Mae and/or Freddie Mac) (the “GSEs”), as well maintain policies and procedures implementing such requirements; these requirements do not apply to servicers solely owning and/or conducting reverse mortgage loan servicing, or the reverse mortgage loan portfolio administered by covered institution that may otherwise be covered under the standards, and do not include the whole loan portion of servicers’ portfolios.
  • With respect to corporate governance, covered servicers are required to establish and maintain a board of directors responsible for oversight of the servicer; however, for covered servicers that are not approved to service loans by one of the GSEs, or Ginnie Mae, or where a federal agency has granted approval for a board alternative, a covered servicer may establish a similar body constituted to exercise oversight and fulfill the board of directors’ responsibilities.
  • A covered mortgage servicer’s board of directors, or approved board alternative, must (1) establish a written corporate governance framework, including appropriate internal controls designed to monitor corporate governance and assess compliance with the corporate governance framework, (2) monitor and ensure institutional compliance with certain established rules, and (3) establish internal audit requirements that are appropriate for the size, complexity and risk profile of the servicer, with appropriate independence to provide a reliable evaluation of the servicer’s internal control structure, risk management and governance.
  • Covered mortgage servicers must receive an annual external audit, which must include audited financial statements and audit reports, conducted by an independent accountant, and which must include: (1) annual financial statements, (2) internal control assessments, (3) computation of tangible net worth, (4) validation of MSR valuation and reserve methodology, (5) verification of adequate fidelity and errors and omissions insurance, and (6) testing of controls related to risk management activities, including compliance and stress testing, as applicable.
  • Covered mortgage servicers must establish a risk management program under the oversight of the board of directors, or the approved board alternative, that addresses the following risks: credit, liquidity, operational, market, compliance, legal, and reputation.
  • Covered mortgage servicers must conduct an annual risk assessment, concluding with a formal report to the board of directors, which must include evidence of risk management activities throughout the year including findings of issues and the response to address those findings.

Notwithstanding the foregoing, the CT Standards appear to deviate from the Model Standards in a few notable ways. First, with respect to coverage, the CT Standards differ from the Model Standards, in that the CT Standards can apply to a servicer who only services Connecticut residential mortgage loans, whereas the Model Standards do not apply unless the servicer operates “in two or more states as of the most recent calendar year end, reported in the [NMLS] Mortgage Call Report.” Additionally, the capital and liquidity requirements under the Model Standards have limited application to entities that only perform subservicing for others, including limiting the definition of “servicing liquidity or liquidity” to entities who own servicing rights. The comments to the Model Standards explain that “[f]inancial condition requirements for subservicers are limited under the FHFA eligibility requirements due to the lack of owned servicing. For example, net worth add-on and liquidity requirements apply only to UPB of servicing owned, thereby limiting the financial requirements for subservicers, and servicers who own MSRs and also subservice for others. However, the base capital and operating liquidity requirements … apply to subservicers.” On the other hand, the capital and liquidity requirements under the CT Standards explicitly do not apply to an entity that solely “performs subservicing for others with no responsibility to advance moneys not yet received in connection with such subservicing activities.”

The MD Standards, on the other hand, largely adopt the Model Standards. However, with respect to internal audit requirements, the MD Standards contain additional guidance, specifying that “[u]nless impracticable given the size of the licensee, internal audit functions shall be performed by employees of the licensee who report to the licensee’s owners or board of directors and who are not otherwise supervised by the persons who directly manage the activities being reviewed.” That said, it is worth noting that in an accompanying notice to servicers and lenders, the Maryland Commissioner of Financial Regulation clarified that the purpose of the MD Standards is “aligning Maryland regulations with nationwide model standards and creating uniform standards regarding safety and soundness, financial responsibility, and corporate governance for certain mortgage service providers.”

Takeaway

Connecticut and Maryland are the first two states to adopt implementing laws or regulations following the CSBS’s adoption of the Model Standards. Connecticut-licensed mortgage servicers subject to the CT Standards must comply by October 1, 2022, the section’s effective date. The MD Standards took effect on June 27, 2022. Servicers subject to the CT and/or MD Standards should review the standards and ensure their business satisfies the applicable requirements. As with any model law, the Model Standards require states to adopt implementing laws or regulations. Accordingly, we expect to see additional states begin to adopt similar measures.

Maryland Regulator Puts Lenders and Servicers on Notice Regarding the Assessment of So-Called “Convenience Fees”

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A&B Abstract:

On May 12, 2022, the Maryland Office of the Commissioner of Financial Regulation (the “OCFR”) issued an Industry Advisory (the “Advisory”) “put[ting] [the] industry on notice” of the recent decision issued by the 4th Circuit Court of Appeals in Ashly Alexander, et. al. v. Carrington Mortgage Services, LLC.  The Advisory directs lenders and servicers to review their practices in charging consumer borrowers loan payment fees (referred to herein as “convenience fees”) both to ensure on-going compliance with the law and to determine whether any improper fees have previously been assessed so that they can undertake appropriate reimbursements to affected borrowers.

The Carrington Decision

In Carrington, the 4th Circuit Court of Appeals held that the Maryland Consumer Debt Collection Act (“MCDCA”) incorporates §§ 804 through 812 of federal Fair Debt Collection Practices Act (“FDCPA”), including the FDCPA’s prohibition on “[t]he collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law,” under § 808(1). Because Maryland law does not expressly permit or authorize the assessment of convenience fees, the court held that such fees must be expressly authorized by the loan documents in order to be permitted under § 808(1).

The Carrington court further clarified that the FDCPA’s substantive provisions apply to any person who meets the broad definition of a “collector” under the MCDCA, even if such person would not be considered a “debt collector” under the FDCPA. Notably, the FCDPA contains important exclusions from the definition of “debt collector”, such as when a person is collecting a debt that was obtained prior to default, or if the person collecting the debt was the original creditor.  On the other hand, as amended effective October 1, 2018, the MCDCA defines a “collector” broadly to include all persons collecting or attempting to collect an alleged debt arising out of a consumer transaction and does not provide for similar exclusions.  We discussed the Carrington decision in greater detail in a prior blog post.

The Advisory

The Advisory reminds Maryland “collectors” of the Carrington court’s ruling, that collecting fees on any form of loan payment violates the MCDCA if the fees are not set forth in the loan documents. As a result, Maryland lenders and servicers are cautioned “that any fee charged, whether for convenience or to recoup actual costs incurred by lenders and servicers for loan payments made through credit cards, debit cards, the automated clearing house (ACH), [or other payment methods], must be specifically authorized by the applicable loan documents.” The Advisory makes clear that “[i]f such a fee is not provided for in the applicable loan documents, it would be deemed illegal.” Further, attempts to circumvent this fee restriction by directing consumers to a payment platform associated with the lender or servicer that collects a loan payment fee or requiring consumers to amend their loan documents for the purposes of inserting such fees could also violate Maryland law.”

The Advisory anticipates that some lenders or servicers may discontinue offering certain payment options as a result of the Carrington decision. However, the Commissioner expressly requests that such lenders or servicers promptly notify their customers of such change and encourages lenders and servicers “to work with consumers to minimize the impact any change in payment options could have, including where possible, continuing such payment options without fees, especially when consumers are attempting to pay their obligations in a timely manner.”

Lenders and servicers are directed to review their records to determine whether any improper fees have previously been assessed and, if so, make appropriate reimbursements to affected borrowers. The OCFR intends to monitor the impact that the Carrington decision has on lender and servicer fee practices and lenders and servicers can expect a follow-up on this topic from the OCFR in the coming months.

Takeaway

The implications of the Carrington decision are numerous. First, lenders and servicers must immediately cease the collection of convenience fees from Maryland borrowers, unless such fees are expressly authorized by the loan documents. Lenders and servicers choosing to discontinue certain payment services as a result of the Carrington decision, must also ensure that affected consumers are promptly notified of such change.  In addition, lenders and servicers who meet the definition of a “collector” under the MCDCA must ensure compliance with §§ 804 through 812 of the federal FDCPA, regardless of whether they meet the FDCPA’s definition of a “debt collector.” Finally, while the Carrington decision was focused on the permissibility of convenience fees, we note that the court also held that “[t]he FDCPA’s far-reaching language [under § 808(1)] straightforwardly applies to the collection of ‘any amount.’” Thus, the implications of the Carrington decision go beyond convenience fees to arguably any other fee that is not expressly authorized by the loan documents or permitted by law, and we understand that Maryland regulators have informally indicated as much.  Accordingly, lenders and servicers should carefully review all fees that are, or may be, assessed to Maryland borrowers to ensure such fees are either expressly authorized by the loan documents or permitted by law.

New York Amends Contact Requirements for Certain Delinquent Borrowers

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A&B ABstract: On February 24, Governor Kathy Hochul signed into law Assembly Bill 8771 (2022 N.Y. Laws 48), amending single point of contact requirements for certain delinquent borrowers.  What changes does the measure require for servicer protocols?

New York SPOC Requirements: As created effective January 2, 2022, Section 6-o of the New York Banking Law required a lender to provide a single point of contact (“SPOC”) to a borrower who: (a) is 60 or more days delinquent on a “home loan”; and (b) chooses to pursue a loan modification or other foreclosure prevention alternative.  The obligation arose in response to a written or electronic request from the borrower, and required the lender (or a servicer acting on the lender’s behalf) to provide the SPOC within 10 business days of such request.

As amended by AB 8771 retroactive effect to its creation, the section: (a) applies the SPOC obligation to any borrower who is 30 or more days delinquent; and (b) no longer conditions the obligation on an affirmative request from the borrower.  The amended section also authorizes the Superintendent of Financial Services to establish rules and regulations relating to the SPOC requirement.

Impact of the Amendment: The amendment brings Section 6-o of the Banking Law closer to the language of New York’s Mortgage Loan Servicer Business Conduct Regulations (“Part 419” of the Superintendent of Financial Services Regulations).  Since its adoption in final form in December 2019, Rule 419.7 has required a servicer to “assign a single point of contact to any borrower who is at least 30 days delinquent or has requested a loss mitigation application (or earlier at a servicer’s option).”  (Emphasis added.)  As we have discussed, both requirements are in contrast to the CFPB’s Mortgage Servicing Rules, which requires assignment of a SPOC to borrowers who are 45 days delinquent.  However, there are a few notable distinctions.

First, Section 6-o does not define a “single point of contact,” leaving open whether only one individual may serve that role with respect to any particular borrower.  Part 419 provides the SPOC may be either “an individual or designated group of servicer personnel each of whom has the ability and authority to perform the responsibilities” of the SPOC as set forth in Rule 419.7(b).  Part 419 further clarifies, however, that if a servicer designates a group of personnel to fulfill the SPOC responsibilities, “the servicer shall ensure that each member of the group is knowledgeable about the borrower’s situation and current status in the loss mitigation process, including the content and outcome of any communication with the borrower.”

Second, Part 419 specifies the obligations of a servicer and a designated SPOC for a delinquent borrower.  Specifically, Part 419:

  • requires the SPOC to “attempt to initiate contact with the borrower promptly following the assignment of the single point of contact to the borrower;”
  • specifies the responsibilities of the SPOC with respect to the borrower’s participation in loan modification or loss mitigation activities;
  • requires coordination with other servicer personnel (in particular, to ensure that foreclosure proceedings are halted when required by Part 419); and
  • requires the SPOC to remain assigned and available to the borrower until either the borrower’s account becomes current or the servicer determines that the borrower has exhausted all loss mitigation options available from or through the servicer.

Section 6-o, by contrast, does not include such specifications.  However, by granting the Superintendent rulemaking authority, the amended section leaves open the possibility that such requirements may be established by rule.

Finally, the requirement under Rule 419.7 provides broad coverage, extending to any mortgage loan serviced by a servicer within the scope of Part 419 (i.e., all first- and subordinate-lien forward and reverse mortgage loans) where the borrower (a) is 30 days or more delinquent, or (b) has requested a loss mitigation application.  By contrast, the requirement under Section 6-o applies to a narrower subset of residential mortgage loans.  The obligation extends only to a “home loan,” defined under Section 6-l of the Banking law to be limited to forward mortgages secured by one- to four-family residential property that, at origination, do not exceed the Fannie Mae conforming loan limit (among other conditions).  Further, the obligation under Section 6-o requires both that the borrower meet the delinquency threshold (30 or more days) and have chosen to pursue a loan modification or other foreclosure prevention alternative.

Takeaways:  Given the distinctions between the obligations to which a lender is subject under Section 6-o (and which it may delegate to a servicer), and those to which a servicer is subject under Part 419, we recommend careful review and coordination of loss mitigation procedures to ensure the proper fulfillment of SPOC obligations for delinquent borrowers in New York.  Further given the retroactive effective date of the measure, the need for such review is urgent.

Fourth Circuit Rules That a Mortgage Servicer Can Be Liable for FDCPA Violations Even if Not Subject to the FDCPA

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A&B ABstract:

Putative class action plaintiffs recently prevailed on appeal in a case involving mortgage servicing fees charged to Maryland borrowers. In doing so, the opinion opens the door for FDCPA liability for all mortgage servicing activity and other collection activity in Maryland, even if such activity is otherwise exempt from FDCPA liability.

The Maryland Consumer Debt Collection Act

The case is a putative class action challenging certain fees charged by the borrowers’ mortgage servicer in the ordinary course of business. Among other claims, the plaintiffs alleged that the servicer violated the Maryland Consumer Debt Collection Act (MCDCA). Specifically, the MCDCA prohibits a “collector” from “engag[ing] in any conduct that violates §§ 804 through 812 of the federal Fair Debt Collection Practices Act.” The plaintiffs alleged that the attempt to collect certain mortgage servicing fees violated the FDCPA’s proscription for a “debt collector” to engage in “[t]he collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.”

The MCDCA applies to any “collector,” defined as any “person collecting or attempting to collect an alleged debt arising out of a consumer transaction.” The FDCPA, on the other hand, uses the term “debt collector” which is defined with several limitations and exceptions, including for debt that was not in default when obtained. Despite the narrower scope of the FDCPA, plaintiffs in the case argued that a servicer could engage in conduct that violated the FDCPA, and thereby be in violation of the MCDCA, even if the servicer was not a “debt collector” subject to the FDCPA.

The district court dismissed the case before considering class certification, determining that the servicer was not a “collector” under the MCDCA and, likewise, was not a “debt collector” under the FDCPA.

The Fourth Circuit’s Decision

On appeal, the Fourth Circuit reversed and remanded the case for further proceedings, finding that the servicer was a collector under the MCDCA. Critically, the court determined that the servicer could be held liable for engaging in conduct that violated the FDCPA, even if it was not actually subject to the FDCPA. The court reasoned that even though the FDCPA only applies to “debt collectors” and, even though the MCDCA, in turn, only prohibits conduct that violates the FDCPA, an entity could still be in violation of the MCDCA even if it was not engaging in debt collection under the FDCPA. The court concluded that “[t]he MCDCA’s broader definition controls here, as it is not displaced by the federal definition.” The court stated that the MCDCA only incorporated the FDCPA’s “substantive provisions” contained in §§ 804 through 812, thus the FDCPA’s applicable definitions and exemptions, contained in §§ 803, 818 were to be disregarded in determining if a violation of the FDCPA occurred for purposes of the Maryland law.

Takeaway

This decision subjects several otherwise exempt and excluded actors to potential liability for FDCPA violations via the MCDCA within Maryland. In addition to mortgage servicers, who are typically exempt from the FDCPA under normal circumstances, the FDCPA contains a number of other exemptions including for entities collecting their owns debts, process servers, and certain nonprofit organizations performing credit counseling. Under the reasoning of the Fourth Circuit’s decision, all of these actors could now potentially be held liable under the MCDCA for FDCPA violations within Maryland. Furthermore, all such actors arguably need to comply with the strictures of the FDCPA in communicating with consumers. This would include restrictions on the timing, frequency, and format of communications with consumers that do not apply to communications outside the scope of the FDCPA. On February 15, 2022, the court denied a Motion for Rehearing and Rehearing En Banc, thus finalizing the decision.

Following this decision, recent legislation introduced in the Maryland General Assembly may delay foreclosure proceedings in Maryland. On February 3, 2022 a delegate introduced HB 803, which would allow borrowers to file counterclaims in response to foreclosure proceedings, would make additional procedural requirements applicable to such actions, and would prevent a foreclosure from proceeding if a borrower files such a counterclaim. Under the Fourth Circuit’s decision, servicers could experience increased MCDCA challenges alleging violations of the FDCPA that would otherwise not apply, and, combined with the additional procedural requirements and delays contemplated by HB 803, foreclosure proceedings could face significant delays as a result.

While some state laws offer state remedies for a violation of federal law, we are unaware of any case that has interpreted such a law to expand the scope of liability under the incorporated federal law. While states can and have adopted consumer statutes that are more expansive than federal law, it remains to be seen if other courts will now interpret simple incorporation of federal law as something more expansive as well.