Servicers got what they asked for when the Consumer Financial Protection Bureau limited the specificity of certain requirements in its final servicing rule. Now they may regret it.
The more than 900-page regulation, released earlier this month, favors consumer advocates' views of the bureau's role as a consumer protection agency, while also taking industry feedback into consideration in requiring servicers to take many additional steps to try to prevent foreclosures.
"On the one hand, the industry would like flexibility on how they have to do things. But on the other hand, the lack of specificity in terms of what would be considered compliant or noncompliant — or in conflict with other rules or statutes — means you often find companies caught between a rock and a hard place," said Quyen Truong, a partner at Stroock & Stroock & Lavan in Washington and a former assistant director and deputy general counsel of the CFPB.
For example, the rule contains new requirements related to borrowers in bankruptcy and force-placed insurance. In addition, it recognizes the rights of successors in interest, such as relatives who inherit property after the original borrower passes, giving them the same rights as original borrowers to foreclosure and other consumer mortgage protections once their status as successors has been established.
But while the rule requires servicers to have ways to establish the status of successors, legal experts' initial take on the rule is that it stops short of mandating a particular process. This is significant because some consumer and mortgage groups have had different views on how this should and can be done, with the industry citing concerns about conflicts with privacy law, among other things.
CFPB officials "have a general policy and procedure requirement, but they decline to provide specific procedures," said Jonathan Kolodziej, an attorney who represents banks, nonbanks and other financial service providers in regulatory compliance, enforcement and litigation matters for the law firm Bradley.
Both the industry and consumer groups give the rule mixed reviews, reflecting compromises that were largely expected and that language in the lengthy rule suggests the CFPB deliberated with knowledge of consumers' and servicers' concerns.
"We are encouraged by the steps taken by the CFPB but we are confirmed in our opinion that more needs to be done," said Kevin Stein, associate director of the California Reinvestment Coalition, a group that has found in its surveys of state housing counselors that foreclosures on widows of either traditional or reverse mortgage borrowers are a common consumer concern.
"It's going to be a significant burden and it's going to take a lot of time and a lot of resources, but there are silver linings throughout," Kolodziej said.
The final rule requires servicers to review distressed borrowers who request relief multiple times, instead of just once, as long as those consumers had paid on time in the interim.
Servicers will have to consider whether there will be any reduction in the size of the payments due to new foreclosure protection requirements and whether borrowers will ultimately redefault — as well as budgeting and paying for required operational changes.
"All of the amendments are intended to give the borrower more opportunity for loss mitigation, and that could result in additional review and accommodation costs on the servicer or lender as well," Truong said.
"Of course, you'd weigh that against the potential benefit of getting the recovery of additional payments," she added.
Operational costs tend to rise ahead of major rule implementations. Some of the changes have a 12-month implementation timeline, while others have an 18-month implementation. The last major servicing rule implementation boosted operational expenditures to a post-crisis high in 2013 as servicers worked to have the changes made in time for an early 2014 deadline, according to data from the Mortgage Bankers Association.
"I think the cost of compliance goes up substantially, just in terms of process," Truong said.
In terms of privacy concerns in successors in interest cases, the rule provides limited guidance on how it should be handled.
CFPB officials "don't believe that there are privacy concerns in a lot of scenarios, but they do they do believe there may be some," Kolodziej said.
In response to this, the CFPB rule suggests that servicers can respond to a consumer's request for mortgage information in line with a successor inquiry by omitting some information that would have raised privacy concerns, he said.
Consumer groups indicated that they were at least partially appeased by the way the CFPB addressed the privacy concern servicers have raised in conjunction with the rights of successors in interest.
"I think the CFPB responded correctly to that," said John Rao, an attorney at the National Consumer Law Center. "We always think more could be done, but I think it would be hard for some of the current practices to continue under the new regs. The successor can now ask what is required to confirm a successor, and a servicer is obligated to describe" it.
"It's a huge step forward," said Atare Agbamu, president and CEO of the consultancy ThinkReverse and an advocate for widows' rights to foreclosure protection when they inherit property from reverse mortgage borrowers. "There are probably going to be gripes from the industry, but consumers will feel better about their mortgages and that's good for the industry."
Although the rule is "final," there still could be changes to it.
"That's not to say that the industry couldn't still register concerns and advocate for additional clarification or modification of the rule that they believe could be beneficial," Truong said.
If there is clarification, it is most likely to occur after implementation, when servicers and the CFPB get to see how the required measures work in practice, she said.
The new rules come as the servicing industry prepares for the end of the government's Making Home Affordable program, which facilitated many de facto standards for loss mitigation. Separate from the new servicing rules, the bureau also released "guiding principles" for sustainable foreclosure relief earlier this month.