As scrutiny of default servicing practices provided significant impetus for the recently announced global foreclosure settlement agreement (the “Agreement”), it is no surprise that the Agreement prescribes extensive standards to resolve issues with these practices. Based upon the Servicing Standards announced as part of the Agreement, one major area of focus will be the fees that mortgage loan servicers charge in connection with servicing loans.
Although the Servicing Standards include a broad range of fee prescriptions, with regard to default servicing fees the primary areas of focus include: (1) whether such fees are bona fide, reasonable in amount, and disclosed to the borrower appropriately and in detail; (2) whether any default-related fees collected are for reasonable and appropriate services actually rendered, and meet additional criteria; (3) whether fees charged for third-party default-related services (including those performed by an affiliate of the servicer) are at a reasonable market rate; (5) whether the servicer collects any unearned fees, or gives or accepts any referral fees, in connection with third-party default-related services; and (6) whether the servicer marks up any third-party default-related services.
Similar topics have been the recent focus of state regulators. For example, the New York Department of Financial Services adopted regulations addressing mortgage loan servicers’ business conduct, which among other topics include four sets of restrictions on fees that the Servicing Standards incorporated into the Agreement echo. (We use New York as an example because its regulation of mortgage loan servicers has been rumored as the basis for a national model for servicer conduct; parallels between the Servicing Standards and the New York rules support that view. The New York rules apply broadly to any servicer doing business in the state, rather than only to entities registered under New York law.)
First, the Servicing Standards require a servicer to “maintain and keep current a schedule of common non-state specific fees,” make that schedule “available on its website and to the borrower or borrower’s authorized representative upon request,” and to include within the schedule an identification of each fee (including a plain English explanation of the fees and a statement of the amount of the fee, of the maximum amount of the fee or how the fee is calculated or determined). Like the almost identical New York rules, this requirement in the Servicing Standards is not limited to default fees.
Second, the Servicing Standards permit a servicer to collect a default-related fee only if it is for reasonable and appropriate services actually rendered and the fee: (1) is expressly or generally authorized by the loan instruments, and is not prohibited by law or the Agreement; (2) is permitted by law, and is not prohibited by the loan instruments or the Agreement; or (3) is not prohibited by law or the loan instruments, and is a reasonable fee for a specific service required by the borrower that is collected only after clear and conspicuous disclosure of the fee to the borrower. The New York rules incorporate a similar three-prong analysis with regard to fees, which originated in a pair of Federal Trade Commission settlements with mortgage loan servicers – one filed in September 2008 with EMC/Bear Stearns, and one filed in June 2010 with Countrywide. By comparison to the New York rules and those settlements, the Servicing Standards relax some of the more problematic language by not requiring the fee to be “expressly” authorized by the loan documents and not requiring the borrower’s “express consent” to pay a fee in exchange for a service.
Third, both the Servicing Standards and the New York rules prohibit any attorney fees charged in connection with a foreclosure action from exceeding reasonable and customary fees for such work. Both also limit a borrower’s liability to fees for work actually performed in the event that a foreclosure action is terminated prior to a final judgment and sale for specified reasons (such as reinstatement of the loan). The Countrywide settlement included a similar prohibition, limiting any fee charged for a default-related service to the amount of a reasonable fee charged by a third party for work actually performed.
Fourth, with regard to late fees, both the Servicing Standards and the New York rules, in addition to recognizing the late fee restriction in TILA (under which a servicer may not collect a late fee when the only delinquency is attributable to late fees or delinquency charges assessed on an earlier payment, and the payment is otherwise a full payment for the applicable period and is paid on or before its due date or within any applicable grace period) prohibit a servicer from collecting a late fee: (1) based on an amount greater than the past due amount; (2) from the escrow account or any escrow surplus, except with the borrower’s approval; or (3) by deducting it from any regular payment. The Servicing Standards also include specific prohibitions related to collecting late fees for periods during which borrowers are in default and under consideration for loss mitigation, when a short sale offer is being evaluated, or when a borrower is in a Chapter 13 bankruptcy. The Servicing Standards do not set limits on the amount of a late fee (which the New York rules and applicable state laws frequently do), nor do they prohibit a servicer from assessing a late fee more than once with respect to a single delinquent installment (again, a frequent feature of state late fee restrictions).
The Servicing Standards go one step further than the New York rules by specifically regulating third-party fees. Property preservation, inspection and BPO fees are subject to a general prohibition against unnecessary or duplicative fees as well as the specific fee limits (which limitation was also a feature of the EMC/Bear Stearns settlement). Property inspection and BPO fees are subject to timing limits. With limited exceptions, BPO fees are limited to once per month and property inspection fees may be charged no more frequently than that allowed under GSE or HUD guidelines. Property preservation fees are generally prohibited when the borrower is under consideration for loss mitigation.
To date, several states have enacted statutes regulating the conduct of mortgage loan servicers, none so comprehensive as the New York rules. Expect the Servicing Standards and efforts such as the New York rules to provide a model for other states looking to regulate mortgage loan servicer conduct with regard to servicing fees.