The Consumer Financial Protection Bureau issues bulletins for many purposes, one of which is to notify the industries that it regulates about upcoming changes in regulations. This practice allows regulated industries to (hopefully) prepare for the changes in advance so that they can be in compliance as soon as new rules take effect.
On February 11, the CFPB issued a bulletin to notify mortgage servicers what is coming up in the world of servicing regulations. In addition to the new servicing regulations that go live on January 10, 2014, the CFPB will also be paying close attention to the transfer of servicing rights.
When you obtain a mortgage loan, your lender may or may not be the entity that services your loan. Loan servicers collect mortgage payments, assess fees and penalties, and generally handle the day-to-day work of managing a portfolio of loans. In some cases, servicers may own the loans that they service. In others, they may be a subsidiary of the owner of the loan. There are also companies that exist solely to service loans -- they do not issue loans, but focus their efforts solely on servicing existing loans.
Because there is a market for mortgage loans and the servicing rights to loans, there are several ways in which a mortgage loan may change hands. The CFPB seems to be primarily concerned with three scenarios:
- Original lender sells loan to new investor, new investor selects a new servicer.
- Entire loan portfolios may be transferred from one entity to another.
- Loan servicers may sell servicing rights as an asset to another servicer.
There are other ways in which servicers may change, but these are the three main scenarios.
When a loan is transferred from one servicer to another, there is a risk that there will be an interruption in servicing or some other problem that arises. Payments may be mis-applied during the transition, the previous servicer may provide inaccurate information, one servicer's computer software may not work well with data from another servicer's software, etc. The CFPB has determined that the high volume of consumer complaints surrounding mortgage servicing indicates that these problems are not isolated.
The CFPB will be focusing on several stages in the servicing transfer process:
- Is the servicer transferring the data ensuring that it is accurate and compatible with the recipient's systems?
- Is the recipient auditing the data to ensure that it is accurate and functions within its own system?
- Is the recipient able to examine account-level information (dates payments are made/applied, dates that fees are assessed, etc.)?
- Is other information related to the account transferring over (loan modifications in-progress, prior loss mitigation documentation)?
It will be interesting to see how this progresses over time. The CFPB has been very active as a regulator and has already issued a vast amount of new rules in a very short period of time. If the CFPB's past moves are any indicator, then we can expect that this round of regulation will require notice and transparency on the part of servicers.
You can read the CFPB bulletin here. H/T to the CFPB Monitor for spotting the bulletin.