Residential: Incomplete documentation and programming errors lead to supervisory scrutiny of mortgage servicers

In the latter half of 2018, Consumer Financial Protection Bureau (CFPB) examiners uncovered unfair and deceptive practices, misleading statements and regulatory violations among mortgage servicers. The recently released Supervisory Highlights report attributed the problems primarily to servicing platform issues and incomplete communication with borrowers.

“We continue to see mortgage servicing as an area of concern in these supervisory reports,” said Tom Cronin, Managing Director at The Collingwood Group. “CFPB examiners are clearly keeping a close eye on this sector, with particular attention to reverse mortgage servicing, loss mitigation and borrower communication.”

CFPB examiners flagged a handful of problem areas, including overcharging consumers, misrepresenting private mortgage insurance (PMI) cancellation, violating Regulation X and giving misleading statements related to successors-in-interest on reverse mortgages.

The report found that unauthorized late fees affected thousands of consumers. In some cases, late fees on Federal Housing Administration (FHA) loans were assessed as 4% of overdue principal, interest, taxes and insurance, but FHA permits servicers to collect late fees only on 4% of overdue principal and interest. Similarly, some servicers exceeded state restrictions on late fees. West Virginia, for example, allows servicers to collect 5% on overdue principal and interest, not exceeding $15. Examiners found, however, that for a “large number of loans” servicers charged fees in excess of $15.

The report found, “Programming errors in the servicing platform and lapses in service provider oversight caused the overcharges.” Cronin said, “This is one of the first times we’ve seen violations in the mortgage servicing space caused by issues with servicing platforms. This underscores the continued importance of vendor management and technology oversight.” Servicers were required to conduct internal reviews and update policies and procedures. The CFPB also required servicers to remediate affected borrowers.

“Lapses and issues with borrower communication are a recurring theme in servicer supervision,” said Cronin.

CFPB examiners said servicers acted deceptively by misrepresenting the conditions for removing PMI. In some cases, borrowers requested PMI cancellation after reaching 80% loan-to-value (LTV), but were declined inappropriately. The report explains, “Although the borrowers did not satisfy other criteria necessary to trigger borrower-initiated cancellation rights under the Homeowners Protection Act (HPA) … the servicer(s) did not provide these as reasons to borrowers for denying the requests.”

Violations of Regulation X’s requirement for servicers to conduct “reasonable diligence” to complete a borrower’s loss mitigation application were attributed to failures to notify borrowers and communicate documentation requirements.

“Successors-in-interest remains a hot topic, and the CFPB cautioned servicers that oversights in this area risk becoming a deceptive practice if not addressed,” said Cronin.

Following the death of a Home Equity Conversion Mortgage (HECM) borrower, the Department of Housing and Urban Development (HUD) requires servicers to move to foreclosure within six months, with an extension available to allow successors to purchase the property. In some notices to successors-in-interest, servicers failed to communicate the complete list of documents required and applicable deadlines for submission. The servicers involved in this oversight said they plan to enhance communication with the relevant details.

“The Supervisory Highlights report continues to provide the industry a glimpse into the priorities of CFPB examiners,” said Cronin. “It also gives mortgage lenders and servicers a chance to address misrepresentations and oversights before they become full-blown legal violations.”

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