Since the Great Recession, the regulation of residential mortgages and those who service them have been in sharp focus. Legislators and regulators continue to demonstrate an abiding mistrust in the servicing industry a full decade after the financial collapse—imposing and then tinkering with a regulatory scheme that is challenging for most people (and most lawyers, for that matter!) to fully comprehend.
In Washington alone, the regulations governing Washington’s Consumer Loan Act (CLA) have already been updated at least four times in the last six years. 2018 brings yet another set of regulatory changes from the Washington Department of Financial Institution (DFI). The purpose of these latest revisions is to clarify the rules for investors, owners, and servicers of residential mortgage loans. They also attempt, in some instances, to harmonize Washington law with federal regulations for mortgage loan servicers. The new rules take effect September 1, 2018. Below is a summary of some of the major changes.
Who Is Impacted?
The CLA applies to all persons “directly engaged in servicing,” unless an exemption applies. The new rules clarify that this includes master servicers and subservicers. Master servicers are eligible to seek a waiver from DFI if they have 25 or fewer loans. The rules do not offer any such waiver opportunity for subservicers.
The new rules also clarify that mere investors are generally not regulated by the CLA. For instance, investors holding securities backed by pooled residential mortgage loans are expressly exempt. Similarly, note buyers also are exempt if they purchase the financial interest in mortgage loans without also purchasing the corresponding servicing rights.
Banks and credit unions continue to remain generally exempt from the CLA under the new rules. RCW 31.04.025 provides that the CLA does not apply to “any person doing business under, and as permitted by, any law of this state or of the United States relating to banks, savings banks, trust companies, savings and loan or building and loan associations, or credit unions….” Longstanding DFI guidance makes clear that this language exempts financial institutions that are in some degree doing business under federal law, including by virtue of being insured by the FDIC or membership with the Federal Reserve. Nothing in the new rules changes this longstanding exemption.
In contrast, subsidiaries of exempt financial institutions are covered by the CLA. For instance, bank subsidiaries must comply with the CLA if they are carrying out any servicing activities that require a license under the CLA. In addition, since July 21, 2011 (which is also the effective date for much of Dodd-Frank, for banking history buffs!), DFI has taken the position that Washington’s CLA applies to the non-depository subsidiaries of national banks and federal thrifts.
Keep Your Records and Servicing Activities Close…ish!
Several of the DFI's new rules reflect the increasing globalization of the financial services industry. For instance, servicers previously were required to seek preapproval from DFI before they could maintain any records out of state. Recognizing the impracticality of this requirement, the new rules simply require the servicer to keep the location of the records updated in the NMLS system and to give DFI access to those records upon request. Any servicers using cloud-based storage systems must ensure that the servers “underlying the service” (presumably, those where the data is stored and processed) are located in the United States or its territories.
In an industry where volumes are high and efficiency is critical, many lenders and servicers have found it advantageous to offshore certain data processing functions. DFI’s new rules expressly authorize certain servicing-related activities taking place in locations outside of the United States, such as data entry, document review, records searches, and analyses/recommendations for action. Globalism apparently has its limits, though, especially when it comes to actual contact with consumers. Collection activities, receipt of payments, communications with consumers, and receipt of data to or from borrowers must all occur inside the United States or its territories.
Following in the CFPB’s Footsteps
Washington law will now require servicers to adopt and maintain a Compliance Management System (a “CMS”) to create an overall culture of compliance. This is something that is already required of entities subject to supervision and enforcement by the federal Consumer Financial Protection Bureau (the “CFPB”). Any CMS must contain, at a minimum, functionality for board and management oversight, as well as a compliance program that features policies and procedures, training, monitoring/audit, and consumer complaint response. Rather than providing its own further guidance on the subject, DFI then directs servicers to consult the CFPB’s Supervision and Examination Manual for greater detail on each of these required components. DFI further offers that entities can use the CMS procedures set out in the CFPB’s Examination Manual “to self-assess the effectiveness of its CMS.”
Of course, the CFPB’s guidance does not prescribe any particular set of CMS, since each institution’s circumstances and compliance risks will be different. But servicers looking to build an effective CMS should refer to the CFPB’s guidance and consider the factors outlined in it, since those are the same factors DFI will use in assessing any servicer’s required CMS.
Gimme Just a Little More Time…
Two revisions to the CLA rules actually extend the time within which servicers must take certain actions. It has long been labeled an “unfair or deceptive act or practice” to fail to reconvey title to collateral after a loan is repaid. Under the revised rules, the time for reconveyance has been extended to 60 business days (twice what was previously allowed), giving servicers a little more breathing room than was previously afforded. Servicers should take note, though, that language was deleted from the rules that previously excused strict compliance when conditions existed that would make compliance unreasonable. By implication then, there is no longer any excuse for failure to reconvey title within the new 60 business day-period.
Servicers are also given twice as much time (now, 30 business days) to respond to a borrower’s written request for information, unless a different time is required by the timelines set out in any specific loss mitigation program. Note, however, that the time for responding to follow-up requests for more information after a first exchange remains unchanged at 15 business days after receipt.
Modifying the Rules for Modifications
Servicers using a Home Affordable Modification Program (HAMP) or GSE modification programs were previously exempt from a set of additional requirements that have been imposed on other modification programs since April 2013. With the new rules, that exemption is removed and all modification programs are subject to the same set of requirements. For all modifications, servicers will now be required to take the following steps, among others:
- Maintain an electronic system to allow borrowers to check, at no cost, the status of their modification.
- Make a determination on a loan modification application within 30 calendar days.
- If denied, state the reasons for denial and allow the borrower to rebut within 30 days.
- For denials based on agreements with investors, identify the investor and a summary of the reason for denial.
- For denials based on net present value determinations, provide the inputs used to calculate the net present value.
- Give the borrower an opportunity to obtain a full appraisal to contest net present value.
- Have denials reviewed internally by an independent evaluation process within 30 days of the denial or mailing of notice of denial (whichever is earlier).
- Give the borrower 10 business days to correct any deficiencies in their application.
- Suspend foreclosure if a borrower accepts a loan modification verbally, in writing, or by making the first trial payment.
- Review and consider complete modification applications if received more than 37 days before scheduled foreclosure sale. If any offer to modify is made, delay the foreclosure to allow the borrower 14 days to accept or deny the offer.
- Expedite review of applications received between 15 and 37 days before scheduled foreclosure. If any offer to modify is made, delay the foreclosure to allow the borrower 14 days to accept or deny the offer.
- Give the borrower 30 days to appeal, with certain exceptions, and respond to appeals within 30 days.
- Describe to borrower any other loss mitigation options available.
- Reduce any modifications or forbearance agreements to writing.
- Maintain adequate staffing and systems to comply, and make public information about how to apply for modifications and/or short sales.
The Only Thing Constant is Change
These changes reflect the latest thinking of DFI on the regulation of the servicing industry, and an attempt to clarify the parties who are covered by the CLA, the records they are expected to keep, and the processes for loan modification they are expected to follow. It is unlikely that these are the last changes we will see. In fact, further proposed changes to the CLA’s implementing regulations are already under consideration, and may be enacted as soon as Fall 2018. Be sure to stay tuned for updates on those changes in the coming weeks!