More than two years have passed since the Consumer Financial Protection Bureau (“CFPB”) implemented comprehensive amendments to the loan servicing provisions of Regulation X. Mortgage servicers have had to invest in technology and human capital to keep up with new regulatory requirements while saddled with expanded duties to respond to borrower inquires, disputes, and requests for information, in addition to new and extensive loss mitigation requirements. Outdated technology has put servicers at risk for increased enforcement and litigation issues. But, as the CFPB has noted, the problems are not “insurmountable.”
On June 22, 2016, the CFPB released a special edition of its Supervisory Highlights addressing what the CFPB viewed as certain of the technology failures and process breakdowns among mortgage servicers (the “Report”). See Supervisory Highlights Mortgage Servicing Special Edition, Issue 11, June 2016. Chief among the concerns raised by the CFPB is its view that certain mortgage servicers continue to use outdated and deficient servicing technology, which may pose a substantial risk of harm to consumers in the servicing market. The CFPB notes that “while the servicing market has made investments in compliance, those investments have not been sufficient across the marketplace.”
Among other issues, CFPB examiners observed that technology failures and process breakdowns caused problems specifically related to loss mitigation and servicing transfers. Some notable servicing issues identified in the Report include:
- Failure to Send Compliant and/or Accurate Loss Mitigation Acknowledgement Notices Due to Technological Breakdowns or Malfunctions
- CFPB examiners found multiple violations relating to loss mitigation acknowledgement notices. The CFPB found that certain servicers failed to send timely acknowledgement notices and that the notices regularly contained deceptive and/or inaccurate statements regarding the loss mitigation review process. Further, examiners found that one or more servicers failed to send any loss mitigation acknowledgement notices “due to a repeated loss mitigation processing platform malfunction over a significant period of time.”
- Inaccurate Loss Mitigation Denial Notices Due to Technological Failures with the Servicers’ Platforms
- The CFPB discovered that one or more servicers sent loss mitigation denial notices that failed to state the correct reasons for denying a trial or permanent loan modification option due to technological failures with the servicers’ platforms. For example, a denial notice stated that the borrower “did not provide the requested additional information needed to complete the workout review.” The servicers’ platform, however, indicated the application was complete, and the denial was actually related to the borrower’s income.
- Failure to Identify and Honor In-place Loss Mitigation Agreements Due to Incompatible Servicer Platforms upon a Servicing Transfer
- Incompatibilities between servicer platforms led, in part, to some transferee servicers failing to identify and honor in-place modification agreements upon loan transfer. Additionally, the CFPB found that some borrowers, who completed a trial modification with the new servicer, encountered substantial delays before receiving permanent loan modifications. Delays led to additional interest accrued on the unpaid principal balance while waiting on the permanent modification.
The CFPB also found that servicing violations were exacerbated by the lack of proper training, testing, and auditing of their computer systems and software platforms and those of their service providers.
The Report did note, however, that “[n]one of [the servicing] problems is insurmountable … with the proper focus on making necessary improvements, especially in the information technology systems necessary for effective implementation.” Indeed, while not detailed until the Report’s conclusion section, the CFPB acknowledged the overall efforts by certain servicers to improve compliance with the CFPB’s servicing rules with improved technology. Areas of improvement include:
- Proper staffing of compliance management programs;
- Enhancement and monitoring of servicing platforms, staff training, coding accuracy, auditing, and greater flexibility in operations;
- Implementation of focused compliance audits with management involvement and target dates for resolving identified issues;
- Use of analytic tools to search, review, and track consumer complaint records with content indicating potential regulatory violations; and
- Creation of complaint governance committees to oversee all customer complaints to ensure responsiveness, including remediation.
To be sure, the issues identified in the Report will continue to be a focus of the CFPB in current and future examinations and possibly enforcement actions. We will continue to monitor this issue for new developments.