Mortgage Loans

A&B ABstract:

The Winter 2020 Supervisory Highlights identifies the CFPB’s findings from recent examinations, noting violations that resulted in compliance management system weakness.

CFPB Issues New Edition of Supervisory Highlights:

The Winter 2020 edition of the Consumer Financial Protection Bureau (“CFPB”) Supervisory Highlights details recent examination findings relating to debt collection, mortgage servicing, and student loan servicing, among other topics.

Debt Collection

 With respect to debt collection, the CFPB focused on:

• Failure to disclose in communications subsequent to the initial written communication that the communication is from a debt collector, in violation of Section 807(11) of the FDCPA; and
• Failure to send a written validation notice within five days after the initial communication with the consumer, in violation of Section 809(a) of the FDCPA.

As a result of these deficiencies, the CFPB reported that servicers revised their policies and procedures, and monitoring and training programs.

Mortgage Servicing and Loss Mitigation

With a focus on compliance with the loss mitigation provisions of Regulation X, the CFPB’s first finding was that servicers failed to notify borrowers in writing of the servicer’s determination that the loss mitigation application is complete or incomplete within five business days of receiving a loss mitigation application.  Second, the CFPB found that servicers failed to provide borrowers with a written notice of available loss mitigation options within 30 days of receiving the complete loss mitigation application.

Finally, the CFPB cited servicers’ failure to comply with Regulation X’s requirements, including providing a written notice to borrowers, for offering a short term loss mitigation option to a borrower based on an evaluation of an incomplete loss mitigation application. In this instance, the servicers granted short-term forbearance if the borrower in a disaster area experienced home damage or loss of income from the disaster. The borrowers received such accommodation after speaking with the servicer over the phone and responding to certain questions.

In response to that finding, the CFPB reminded servicers that an application for loss mitigation can be oral or written.   Because the servicer’s efforts to respond to a natural disaster were the partial cause of violations, the CFPB only required the servicer to develop plans to ensure staffing capacity in response to any future disaster-related increases in loss mitigation applications. The CFPB also reminded servicers of its September 2018 Statement on Supervisory Practices Regarding Financial Institutions and Consumers Affected by a Major Disaster or Emergency, which provides flexibility for servicers to assist borrowers during a major disaster or emergency but does not lift the Regulation X requirements.

Payday Lending

With a focus on Regulation Z, Regulation B, and unfair acts or practices, the CFPB found that lenders engaged in unfair acts or practices when they: (1) processed borrowers’ payments, but did not apply such payments to borrowers’ loan balances in lenders’ systems; (2) lacked systems to detect unapplied payments; and (3) incorrectly treated borrowers accounts as delinquent. The CFPB found that the injury was not reasonable avoidable by the borrowers because lenders conveyed incorrect information to them about their accounts and failed to follow up on borrower’s complaints. Furthermore, because the cost to lenders to implement appropriate accounting controls to reconcile payments would have been reasonable, countervailing benefits did not outweigh the injury.

Additionally, the CFPB found that a payday lender engaged in unfair acts or practices by assessing consumers a fee as a condition of paying or settling a delinquent loan when the underlying loan contract required the lender to pay that particular fee. The lender mischaracterized the fee as a court cost (which would have been paid by the borrower) or did not disclose it. According to the CFPB, a lack of monitoring and/or auditing of the lender’s collection practices caused the error. In response to this finding, the lender refunded the fee to affected consumers and made changes to its compliance management system.

Other Payday Lending Observations

Further, the CFPB found that payday lenders:

• Violated Regulation Z by relying on employees to manually calculate APRs when the lender’s loan origination system was unavailable. The CFPB found that errors made in calculating the term of the loan, which resulted in misstated APRs, were caused by weaknesses in employee training.
• Violated Regulation Z by charging a loan renewal fee to consumers who were refinancing delinquent loans and omitted such fee from the finance charge, resulting in inaccurate disclosure of the APR and finance charge. The CFPB found that a lack of detailed policies and procedures and training contributed to the Regulation Z violations. In response, the lender refunded the fee to the consumer explaining the reason for the refund and strengthened its policy and procedures and training program.
• Violated record retention requirements of Regulation Z by failing to maintain evidence of compliance for two years. The CFPB found that the violation resulted in part from a lack of training and detailed policies and procedures on record retention.
• Violated Regulation B by providing consumers with an adverse action notice that incorrectly stated the principal reason for taking an adverse action as a result of a coding error. In response, the lenders sent corrected adverse action notices to consumers and made changes to the system that generate the notices.

Student Loan Servicing

With a focus on unfair practices, the CFPB found that servicers engaged in an unfair act or practice caused by a data mapping errors during the transfer of private loans between servicing systems that resulted in inaccurate calculations of monthly payment amounts. As a result, borrowers may have made payments based on the inaccurate amounts, incurred late fees on such inaccurate amounts, or had inaccurate amounts debited from their account. In response to the examination findings, the CFPB required servicers to remediate affected consumers and implement new processes to eliminate data mapping errors.

 Takeaways

Highlighting debt collection, mortgage servicing, payday lending and student loan servicing, the Supervisory Observations in the Winter 2020 Supervisory Highlights showcase the importance of adequate policies and procedures, training, monitoring and auditing and system controls to avoid consumer harm and violation of consumer financial laws.  Although they cut across multiple industries, the CFPB’s findings highlight common themes – such as entities’ liability for violations that result from system errors or the assessment of unauthorized fees, and the need for careful monitoring in connection with servicing transfers.