On September 1, 2020, the Deputy Superintendent of the New York Department of Financial Services (“NYDFS”), issued guidance (the “Guidance”) to New York State regulated mortgage lenders and servicers (collectively referred to as “Servicers”) regarding fees paid to register mortgages in default. The Guidance reminds Servicers of the restrictions on fees and charges set forth under Part 419 of the Superintendent of Financial Services Regulations (“Part 419”) and directs Servicers to reverse and/or refund and credit registration fees impermissibly charged to New York borrowers and to create a log of all borrowers who were either charged, or paid any registration fee to a Servicer.
Part 419 Fee Restrictions
In December 2019, the NYDFS finalized amendments to Part 419, nearly 10 years after its initial adoption. Part 419, which sets forth business conduct requirements for mortgage loan servicers operating in the state, was amended to include expansive obligations that, in certain instances, exceed obligations under the Consumer Financial Protection Bureau’s mortgage servicing rules.
Under Section 419.5 of the amended regulations, servicers may only collect certain specified types of fees from a borrower, subject to certain conditions. Such fees include attorney’s fees, late and delinquency fees, and property valuation fees. In addition, a servicer may collect a fee if it is for a service that is actually rendered to the borrower, reasonably related to the cost of rendering that service, and is: (1) expressly authorized and clearly and conspicuously disclosed by the loan instruments and not prohibited by law; (2) expressly permitted by law and not prohibited by the loan instruments; or (3) not prohibited by law or the loan instruments and is for a specific service requested by the borrower that is assessed only after disclosure of the fee is provided and the borrower expressly consents to pay the fee in exchange for the service.
The Guidance indicates that the NYDFS has become aware that “certain counties, cities and other municipalities in New York State, by ordinance or otherwise, are requiring mortgage lenders and servicers…to register mortgages declared to be in default…with the county, city or other municipality in which the real property is situated” and that some Servicers have charged borrowers, or collected from their account, the fee for such registrations.
The Guidance reminds Servicers that Section 419.5 of Part 419 “only permits [a servicer] to collect certain specified types of fees from a [borrower], consisting of attorney’s fees, late and delinquency fees, property valuation fees, and fees for services actually rendered to a mortgagor when such fees are reasonably related to the cost of rendering the service to the borrower.” Because a “[r]egistration [f]ee is neither an attorney fee, late or delinquency fee, property valuation fee, or fee for a service rendered to a [borrower],” Servicers are prohibited from charging or collecting such a fee from a borrower under Part 419.
Servicers subject to the requirements of Part 419 who, at any time, collected any registration fees from a borrower, are directed to refund and credit the full amount of such registration fees to the account of the borrower. If the registration fee was charged to a borrower’s account, but was not collected, the Servicer must remove and reverse any and all registration fees charged to the borrower’s account.
Finally, Servicers are directed to create a log of all borrowers that were either charged, or paid any registration fee to the servicer “at any time.” The log must contain details of the full amounts of the registration fees, whether such fees were collected or charged, and the date(s) the full amounts of collected registration fees were refunded and credited to or, in instances where the fee was charged but not collected, removed and reversed from borrowers’ accounts. The Guidance indicates that the NYDFS plans to inspect the log during its next examination of Servicers.
The Guidance is a reminder to Servicers to ensure compliance with the fee restrictions under the amended Part 419 regulations. Servicers should review their portfolio of New York loans to ensure borrowers who paid, or were charged, a registration fee are provided appropriate remediation, as the NYDFS has already flagged this as an issue that will be scrutinized in upcoming servicing examinations.