PWC CFPB National Servicing Standards Proposal

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com/consumerfinance
www.pwcregulatory.com

CFPB National
Servicing Standards
Proposal
An analysis of the Consumer
Financial Protection Bureaus
proposed changes to the
Truth in Lending Act (TILA)
and the Real Estate Settlement
Procedures Act (RESPA)

A joint point of view by
PwCs Consumer Finance
Group and Financial
Services Regulatory Group
September 2012

CFPB National Servicing Standards Proposal

Contents

Overview of the proposal ................................................................ 1
CFPB proposal with TILA amendment .......................................... 6
CFPB proposal with RESPA amendments ................................... 10
Conclusion ..................................................................................... 19
Appendix ....................................................................................... 21
Contacts ......................................................................................... 25

CFPB National Servicing Standards Proposal 1

Overview of the proposal

Following the financial crisis, there has been a heightened focus on
increasing the standards against which mortgage servicers are held
accountable. Various standards intended to increase consumer protection
have been rolled out by different regulatory bodies such as the Office of the
Comptroller of the Currency (OCC), and the Board of Governors of the
Federal Reserve System (Fed) through the issuance of the April 2011
Consent Orders to fourteen large mortgage servicers. More recently, the
National Mortgage Settlement (NMS) signed by the top five mortgage
servicers and 49 state attorneys general and numerous federal agencies and
the California Homeowners Bill of Rights have begun the ground work for
what many regulators and politicians have been calling fora set of national
standards for mortgage servicers.
On August 9, 2012, the Consumer Financial Protection Bureau (CFPB)
followed suit and released its proposed national servicing standards for
comment. The proposed standards are divided into two separate proposals,
one proposing amendments to Regulation X under the Real Estate
Settlement Procedures Act (RESPA) and the other proposing amendments
to Regulation Z under the Truth in Lending Act (TILA). The proposals cover
the following nine aspects of mortgage servicing:
1. Periodic billing statements;
2. Adjustable-rate mortgage interest-rate adjustment notices;
3. Prompt payment crediting and payoff payments;
4. Force-placed insurance;
5. Error resolution and information requests;
6. Information management policies and procedures;
7. Early intervention with delinquent borrowers;
8. Continuity of contact with delinquent borrowers; and
9. Loss mitigation procedures.
According to the CFPB press release
1
that announced these proposals
would offer consumers basic protections and put the service back into
mortgage servicing ... to prevent mortgage servicers from giving their
customers unwelcome surprises and run-arounds.
Servicers and the public will have 60 days, until October 9, 2012, to analyze
and provide comments on the proposed rules. The CFPB has stated that it
intends to issue final rules by January 2013 and that the final rules will
specify an implementation period.
The CFPB rules as proposed would generally apply to each mortgage
servicer and would effectively extend many of the requirements contained in
the April 2011 Consent Orders and the NMS to each industry participant.

1
CFPB Press Release, August 10: Consumer Financial Protection Bureau Proposes Rules to Protect
Mortgage Borrowers (http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-
bureau-proposes-rules-to-protect-mortgage-borrowers/)


The proposed rules do contain certain limited exceptions for smaller
servicers, defined as those that service 1,000 or fewer mortgage loans and
service only loans they originated or own. The proposed rules generally
apply to closed-end mortgage loans with certain exceptions.
What can you do now?
While the rules are currently in the proposal stage, there are several actions
that servicers can take now to facilitate the process of adapting to these new
requirements, to better position themselves for future CFPB scrutiny, and to
influence the substance of the final rules.
Develop an extensive approach
These proposals are significant, complex, and intertwined. Based on our
experience helping servicers adapt to the consent orders and the NMS, we
recommend that servicers start by developing an extensive approach to
adjust their current practices to be compliant to the new guidance,
including, for example:
Conducting gap analyses across servicing processes;
Increasing focus on capacity analysis and planning;
Improving servicing policies, procedures, and controls (both to
achieve compliance objectives as well as increasing efficiencies);
Planning on upgrade of IT systems to address new requirements
(e.g., as necessary to provide statement and notice form changes;
and to support requirements regarding error corrections,
information requests, and continuity of contact with delinquent
borrowers and other loss mitigation requirements);
Enhancing staff skills through development of training programs
and capacity analysis;
Establishing and communicating timely and transparent servicing
compliance attestation and testing;
Developing a robust complaint resolution process that includes a
feedback loop; and
Enhancing compliance monitoring to prevent and/or detect control
breakdowns and the implications on the control environment and
risk assessment.
Focus early on high-impact areas
Servicers also should focus early on the aspects of the proposals that are
likely to require the greatest magnitude of change in the servicing systems
and processes, which may include one or both of the areas described below.


Error correction and information requests
One requirement likely to require substantial changes across industry
participants is the requirement related to error correction and responding to
information requests. The CFPB has proposed an extensive set of
requirements for investigating and correcting errors and for responding to
borrower inquiries. This approach would incorporate, but not be limited to,
RESPAs use of the qualified written request to address servicing issues, as
defined by RESPA. While it may be tempting to view this as a narrow
procedural requirement, compliance with the error correction and
information request requirements will take time to implement and likely
require substantial servicing systems improvements. For example, servicing
systems will need to be able to support and track responses to information
requests, and to provide for auditable means of correcting errors. Moreover,
to reduce the risk of non-compliance to acceptable levels and to reduce the
operational burden of managing the error correction processes, companies
also should identify and address the root causes of errors that could have a
negative impact on consumers.
In addition, compliance with this requirement likely will include a large and
ongoing staffing component. That component will need to be supported, for
example, by recruiting, training, policies and procedures, and alignment of
compensation and/or performance management with compliance with the
requirement.
Loss mitigation requirements
A set of requirements likely to require substantial attention, particularly by
non-consent order/non-NMS industry participants, is the set of loss
mitigation proposals, i.e., early intervention with delinquent borrowers;
continuity of contact with delinquent borrowers; and loss mitigation
procedures. As with the error correction requirement above, meeting these
procedural requirements may require both servicing systems and staffing
changes. For example, servicers will have to develop approaches to
providing contact continuity, and then will have to address fully the
associated staffing issues including recruiting, training, policies and
procedures, and alignment of compensation and/or performance
management with compliance with the requirement. Servicing systems will
then need to be upgraded to provide the information the entire contact
personnel need to maintain continuity, including timely access to each of the
prior communications, each of the documents previously submitted, and the
status of any pending applications.
Compliance with the notice, application processing, and denial appeals
processes may also include a large staffing component, as well as the
servicing systems changes that will be necessary to trigger, track, and
facilitate each of the of those processes.


Demonstrate good faith
Taking action before the rules become final could provide a helpful fact to
have in hand if the CFPB ever identified non-compliance with the final
servicing rules. The factors the CFPB must consider when determining
whether to impose civil money penalties include the size of financial
resources, good faith, the gravity of the violation, the severity of risk to the
consumer, the history of prior violations, and such other matters as justice
may require.
2
Notably, good faith is the only favorable factor among them.
Taking early, proactive steps to comply with new regulatory requirements
while they are still in the proposed stage can demonstration a servicers good
faith. Such a demonstration of good faith could, under the statutory factors,
mitigate the risk that the CFPB would try to get the companys attention by
imposing large civil money penalties if it later found that the company was
not fully compliant with those requirements.
Taking an early, proactive approach can also be helpful in getting the CFPB
analysis process started on a good footing. A proactive approach
demonstrates commitment to compliance and will produce documentation
that can give confirmation to examiners that the firm is aware of its
servicing compliance issues and is already taking steps to address them.
Comment on the proposals
Industry participants may want to submit comments on the loss mitigation
provisions, or any other aspects of the proposals that they believe the CFPB
should reconsider.
The loss mitigation proposals largely codify across the servicing industry
some of the requirements that various servicers have agreed to under
consent orders and the NMS, Servicers that are operating under the consent
orders or NMS may have views on the appropriateness of making failures to
comply with those agreed-upon requirements into RESPA violations, which
make them subject to possible private actions for violations as well as to
adverse regulatory action. Servicers that are not operating under the consent
orders and the NMS may have views on the appropriateness of also
imposing those requirements on them without their consent.
The loss mitigation provisions may be candidates for change because,
unlike most of the other proposals, the requirements under loss mitigation
proposals are not specified under any provision of Dodd-Frank. Rather, the
loss mitigation provisions are proposed under the CFPBs general authority
under Dodd-Frank to impose any obligation on mortgages servicers that the
CFPB finds, by regulation, to be appropriate to carry out the purposes of

2
See Dodd-Frank, 1055(c)(3).


RESPA.
3
As a result, the CFPB has far more flexibility to make changes to
the loss mitigation provisions than it does to make changes to most of the
other provisions of the proposals.
Industry participants also may wish to comment on the implementation
period. The CFPB has stated that it plans to finalize these and other
mortgage-related rules by January 2013, and the CFPB is requesting
comment on the length of the implementation period it should include in
the final rules. The CFPB believes that while the final rules should be made
effective immediately, some of these standards may require more
substantial changes and hence may require more time to roll out. Dodd-
Frank permits the CFPB to provide for an implementation period of up to 12
months, but the CFPB will likely want a factual basis for whatever
implementation period or periods it adopts in the final rules. Therefore, the
CFPB is more likely to provide an implementation period approaching 12
months if it receives strong, factual industry comments supporting such a
period.

3
12 U.S.C. 2606(k)(1)(C).


CFPB proposal with TILA
amendments

The CFPB is proposing to amend Regulation Z, which provides the Truth in
Lending Act (TILA), and to also amend the official interpretation of the
regulation
4
. The proposed amendments roll out the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the Dodd-Frank Act or DFA)
provisions regarding mortgage loan servicing. Specifically, this proposal
implements Dodd Frank Act sections addressing:
Periodic billing statements for residential mortgage loans;
Interest rate adjustment notices for adjustable-rate mortgages
(ARMs); and
Prompt crediting of mortgage payments and response to requests
for payoff amounts.
Periodic billing statements
The CFPB proposed rule would require servicers of closed-end residential
mortgage loans, excluding reverse mortgages, to send a periodic statement
for each billing cycle.
5
These statements must meet the timing, form, and
content requirements provided for in the rule. In particular, statements will
be required to explicitly breakdown principal, interest, fees, escrow, and due
dates. The CFPB proposed rules leverage requirements included in Dodd
Frank and provide more detail including sample forms.
6
The CFPB has also
included an exception for small servicers that service 1,000 or fewer
mortgage loans and that only service mortgage loans that the servicer has
originated or hold in their loan portfolio. The rules also would exempt fixed
rate loans where the servicer provides the borrower with coupon books, so
long as the coupon book contains certain information specified in the rule
and certain other information is made available to the consumer.
While periodic billing statements are already required, the key change
proposed by the CFPB relates to the grouping of the periodic statement
contents.
7
Based on the CFPBs own outreach and the results of analysis
conducted by an outside firm, the CFPB believes the proposed statements
will be easier for most borrowers to understand. For example, the amount
due would be grouped with information around payment due date and late
fees, while the explanation of the amount due would require a breakdown
showing the allocation to principal, interest, and escrow, as well as the total
sum of any fees or charges imposed, and any amount of past due payment.

4
2012 Truth in Lending Act (Regulation Z) Mortgage Servicing Proposal:
http://files.consumerfinance.gov/f/201208_cfpb_tila_proposed_rules.pdf
5
2012 Truth in Lending Act (Regulation Z) Mortgage Servicing Proposal:Section 1.C: Summary (1.
Periodic billing statements) available at
6
Sample forms are included in Appendix H-28 as referenced in Section 1026.41 Periodic Statements for
Residential Mortgage Loans (41 (C), Sample forms) of CFPB proposal available at
7
Referred in Section 1026.41 Periodic Statements for Residential Mortgage Loans of CFPB proposal
available at http://files.consumerfinance.gov/f/201208_cfpb_tila_proposed_rules.pdf


The proposed periodic statement is also designed to provide additional
information to borrowers in several scenarios: partial payments, payment-
option loans, and delinquency.
Potential impact to servicers:
For some servicers, these new requirements will have minimal impact given
the similarities between requirements under the NMS and/or their current
practices. However, for others, the proposed periodic statements may
require some servicers or their vendors to:
Develop new forms or to reformat existing forms and systems to
cover additional content requirements (such as payments received,
breakdown of payments, and results of late or delinquent
payments);
Collate or develop the additional information required to provide
borrower scenarios around partial payments, payment-option loans
and delinquency within the statement;
Create/update policies and procedures to include the required fields
in the periodic statements; and
Train current and new staff on updated processes and/or
requirements as necessary.
Adjustable-rate mortgage interest-rate
adjustment notices
The CFPB proposed rule would require servicers to provide a notice
regarding the initial interest rate reset or adjustment of a hybrid adjustable
rate mortgage at the end of the introductory period either (a) between 210
and 240 days prior to such reset, or (b) at establishment of the mortgage if
the first reset occurs during the first six months of the mortgage.
8
The CFPB
states
9
that the objective of this new notification is to provide borrowers
enough time in advance of the initial rate change to consider their options.
In light of this initial notice, servicers would no longer be required to
provide an annual notice if a rate adjustment would not result in an increase
in the monthly payment.

8
Referred under Section 1V - Discussion of Major Proposed Revisions (Timing of current and proposed
ARM regulations) of CFPB proposal available at
9
Succinct statement of the objectives of the proposed rule (VIII Regulatory Flexibility Act) of CFPB
proposal available at http://files.consumerfinance.gov/f/201208_cfpb_tila_proposed_rules.pdf


In addition, the CFPB is proposing to change the minimum timing of when
the notice of subsequent interest rate changes is required. Under current
rules, servicers must provide consumers with notice of subsequent interest
rate change at least 25 days before a payment at a new level is due. This
would be extended to at least 60 days before the new payment is due.
10

The CFPB is also proposing new interest-rate adjustment disclosure forms.
11

These changes include an explanation of how the new rate and payment
would be determined, when the adjustment would take effect, a good-faith
estimate of the amount of the new mortgage payment, and dates of future
interest-rate adjustments.
The proposed initial reset ARM disclosure may require some servicers or
their vendors to:
Develop new forms or to reformat existing forms to cover additional
content requirements (such as an explanation of how the new rate
and payment would be determined, including how the index may be
adjusted, such as by the addition of a margin);
Acquire new or updated software to populate information required
in the initial interest rate change notification, since the notification
is required more than six months prior to first reset of interest rates;
Create/update policies and procedures to address the change in
timeframe as well as reset notifications where applicable; and
Train current and new staff on updated processes and requirements,
as necessary.
Prompt payment crediting and payoff
payments
The CFPB is proposing a rule
12
that would require servicers to process and
post payments received from borrowers in a timely manner. The proposed
rules also would clarify servicers obligations when they receive a partial
payment. Specifically, once there are sufficient funds in the account to cover
a full contractual payment, the servicer must apply those funds to the oldest
outstanding payment due, which would benefit the borrower by reducing
the period of delinquency by one billing cycle.

10
Referred under Section 1V - Discussion of Major Proposed Revisions (Timing of current and proposed
ARM regulations) of CFPB proposal available at

11
1026.20(c)(2) of CFPB proposed rules available at
12
Summary of CFPB proposed rules under Overview (I) available at


In addition, if a servicer holds a partial payment in a suspense or unapplied
funds account, the servicer must disclose on the periodic statement the
amount of funds held in such account. This is not a new requirement to
some servicers as it is also required under the NMS servicing standards.
However, under the CFPB proposed rules, the servicer must also disclose
when such funds will be applied to the outstanding payments due on the
account, which is not required under the NMS standards.
The proposed rules
12
also require servicers to send an accurate payoff
balance to a customer no later than seven business days after receipt of a
written request from the borrower for such information.
Most existing servicing requirements such as those stated in NMS and TILA
require servicers to credit a payment to the consumers loan account as of
date of receipt, except when a delay in crediting does not result in any
charge to the consumers or in the reporting of negative information to a
consumer reporting agency. The proposed new requirement
12
restates the
existing regulation with the only change that the existing regulation applies
to each of the payments. The new process to handle partial payments
(anything less than a thorough contractual payment) may impose a cost on
servicers who have different crediting practices. In order to meet the new
requirement servicers may need to:
Develop or update software to handle payment hierarchies and rules
around payment application;
Update policies and procedures to address: the timeliness of
suspense payments and payments not posted at receipt due to
various reasons (such as ineligible borrower name and/or loan
number or bankruptcy), address the tighter processing required for
payments received through each of the sources including Lockbox,
ACH, branches, as well as addressing the affect of this CFPB
proposed rule on payments in suspense, unidentified payments, and
partial payments holds;
Analyze payment volumes and capacity models to determine when
additional staff or OT is required throughout the month to allow for
adherence to required timelines; and
Train current and new staff on updated processes and requirements,
as necessary.


CFPB proposal with RESPA
amendments

The CFPB is proposing to amend Regulation X, which enables the Real
Estate Settlement Procedures Act of 1974 (RESPA). The proposed
amendments
13
enable the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) provisions regarding mortgage loan
servicing. Specifically, this proposal requests comment regarding proposed
additions to Regulation X to address six servicer obligations:
Limitations on obtaining force-placed hazard insurance;
Notices of error or information requests from a borrower;
Establishing reasonable policies and procedures for maintaining
and managing information and documents relating to borrower
mortgage loan accounts;
Early intervention efforts with delinquent borrowers;
Continuity of contact with delinquent borrowers; and
Enabling procedures to enable complete loss mitigation applications
are reasonably evaluated before proceeding with a scheduled
foreclosure sale.
Force-placed insurance (FPI)
The CFPB proposed rule would prohibit a servicer from obtaining FPI unless
there is a reasonable basis to believe the borrower has failed to comply with
the loan contracts requirements to maintain property insurance.
14
The
CFPB proposed rule sets forth a mandatory process servicers must follow
before imposing any charge on a borrower for force-placed insurance and a
mandatory process for terminating force-placed insurance upon receipt
from the borrower of evidence confirming borrower-purchased hazard
insurance coverage.
For example, the mandatory process requires that, before charging a
borrower for force-placed insurance, a servicer must send, via first-class
mail, up to two notices to the borrower. If the servicer has not received from
the borrower any demonstration of insurance coverage 30 days after
sending the first notice, the servicer must mail a second notice to the
borrower. The servicer would not be permitted to charge the borrower for
FPI until 15 days after the servicer has sent the second notice.
These requirements may be new for servicers that are not under the scope of
NMS; however, servicing standards prescribed under NMS rules for set-up
and terminating force-placed insurance appear to be consistent with those
under the proposal.

13
Summary of 2012 Real Estate Settlement Procedures Act (Regulation X) Mortgage Servicing Proposal
available at http://files.consumerfinance.gov/f/201208_cfpb_respa_proposed_rules.pdf
14
Section 1024.37 Force-Placed Insurance of 2012 Real Estate Settlement Procedures Act (Regulation
X) Mortgage Servicing Proposal available at
http://files.consumerfinance.gov/f/201208_cfpb_respa_proposed_rules.pdf


To comply with the new requirements, servicers will need to establish and
maintain accurate billing practices, ensure cancellations are processed
timely and refunds are provided when applicable. In addition, servicers
should analyze and revise their current force-placed insurance statement
forms to:
Update the current statement to include the additional content
requirements which is depicted in sample forms provided by the
CFPB;
Update the monitoring of borrower interaction to adhere to
timeframe requirements, if currently not compliant;
Create/update policies and procedures to address the new
requirements, including, but not limited to the time frames and the
content of notifications to the borrower; and
Track and analyze each of the charges to confirm they are being
reasonable and bona fide, and train staff on new requirements,
including but not limited to periodic reporting of insurance renewal
dates for both escrowed and non-escrowed loans, exception
reporting of loans without notifications and a forced place insurance
charge, and analysis of the forced place contact to evaluate the
reasonableness of the fee.
Error resolution and information
requests
The CFPB proposal includes a set of requirements for investigating and
correcting errors and for responding to borrower inquiries. This approach
would incorporate, but not be limited to, RESPAs use of the qualified
written request to address servicing issues, as defined by RESPA.
Specifically, servicers would be required to correct errors relating to
allocation of payments, final balances for purposes of paying off the loan,
avoiding foreclosures, or other standard servicers duties.
15
Servicers would
be required to acknowledge the request or complaint within five days and
would have to correct or respond to the borrower with the results of the
investigation generally within 30 to 45 days.

15
Section 1024.35 Error Resolution Procedures and 1024.36 Requests for Information of 2012 Real
Estate Settlement Procedures Act (Regulation X) Mortgage Servicing Proposal available at


Currently, servicers are required to respond to qualified written requests.
Qualified written requests must be in writing and must relate to the
servicing of the mortgage loan. Through these proposed rules, the CFPB
appears to make the restrictions and circumlocutions inherent in the
language of the written request provisions obsolete. Any valid qualified
written request is a valid notice of error or information request and even an
invalid qualified written request may still be a valid notice of error or
information request.
The proposed rule
16
provides a finite list of nine types of covered errors to
which the error resolution provisions would relate:
1. Failure to accept a payment that conforms to the servicers written
requirements for the borrower to follow in making payments;
2. Failure to apply an accepted payment to principal, interest, escrow,
or other charges under the terms of the mortgage loan and
applicable law;
3. Failure to credit a payment to a borrowers mortgage loan account
as of the date of receipt;
4. Failure to pay taxes, insurance premiums, or other charges,
including charges that the borrower and servicer have voluntarily
agreed that the servicer should collect and pay, in a timely manner,
or to refund an escrow account balanced;
5. Imposition of a fee or charge that the servicer lacks a reasonable
basis to impose upon the borrower;
6. Failure to provide an accurate payoff balance amount upon a
borrowers request;
7. Failure to provide accurate information to a borrower for loss
mitigation options and foreclosure;
8. Failure to accurately and timely transfer information relating to the
servicing of a borrowers mortgage loan account to a transferee
servicer; and,
9. Failure to suspend a scheduled foreclosure sale.
With this rule it appears that the CFPB is proposing broader, more
consumer-friendly error resolution and information request procedures.
These do not seem to overlap with existing requirements, such as existing
RESPA provisions, or the direct dispute procedures under Fair Credit
Reporting Act where the dispute involves erroneously furnishing negative
information to a consumer reporting agency. The proposal appears to
address that lack of overlap by suggesting that the CFPB expects servicers
would abide by the stricter standard in order to comply with each of the
requirements.

16
Section 1024.35 Error Resolution Procedures of 2012 Real Estate Settlement Procedures Act
(Regulation X) Mortgage Servicing Proposal available at


Aside from the requirement to respond in writing to notices of error and
inquiries, servicers not already in compliance with the provision would need
to:
Train current and new staff on new processes;
Create/update policies and procedures;
Develop new or updated software and hardware in order to access
the information required to address notices of error and inquiries;
and
Establish robust SLAs, enhanced MIS system and reporting to
monitor compliance with error resolution timeframes and borrower
information requests.
Some servicers that have high touch customer service model, or those that
have updated their processes per consent order guidelines, may already be
compliant with many of the proposed provisions on error resolution and
responding to information requests.
Information management policies and
procedures
The CFPB proposed rules
17
would require a servicer to establish reasonable
policies and procedures for maintaining and managing information and
documents relating to: borrower communications, error resolution,
information requests, loss mitigation (including, without limitation, loan
modification actions), foreclosure, and other servicer operations. It states
that the servicer may determine the specific methods by which it will
provide reasonable information management policies and procedures to
achieve the required objectives. Servicers appear to have the flexibility to
design the operations that are reasonable in light of the size, nature, and
scope of the servicers operations.

17
Section 1024.38 Reasonable information management policies and procedures of 2012 Real Estate
Settlement Procedures Act (Regulation X) Mortgage Servicing Proposal available at


Under the proposal, servicers policies and procedures must be reasonably
designed to meet the following objectives:
1. Achieve objectives
18
for:
a. Accessing and Providing Accurate Information
b. Evaluating Loss Mitigation Options
c. Facilitating Oversight of, and Compliance by, Service Providers
d. Facilitating Servicing Transfers
2. Comply with standard requirements
19
for:
a. Provisions for record retention
b. Identification of a servicing file
Upon initial analysis, there does not appear to be any significant difference
in the CFPB proposed rules around information management policies and
procedures and those that some servicers are already required to comply
with under other servicing requirements (such as NMS and OCC). The
nature of this proposed rule is more guidance based consistent with those
consent order requirements, and the CFPBs proposed requirement to retain
documents for one year after servicing transfer is less stringent than the
requirements under the consent orders. As a result, this requirement will
likely have little impact on servicers already subject to consent orders.
In contrast, for servicers that are not operating under consent orders, the
proposed new requirements for information management will likely require
them to consider making a variety of changes, including:
Making each of the borrower documents and information available
in one centralized location to facilitate providing complete servicing
file to borrower upon request or to servicing personnel managing
inquiries from delinquent borrowers;
Developing or improving automated systems to record or track
borrower communications;
Training current and new staff on the policies and procedures
around accessing and providing accurate information, evaluating
loss mitigation options, facilitating service transfers and compliance
by service providers;
Monitoring staff adherence to the policies and procedures; and
Developing processes for retaining mortgage files until one year
after a mortgage loan is paid in full or the servicing of a mortgage
loan is transferred to a successor servicer, if not already in place.
The CFPB is still analyzing the scope of these provisions to determine which
servicers would and would not be included subject to them.

18
Details on objectives are described in the 1024.38(b) section of CFPB proposed rules.
19
Details around Standard requirements are described in 1024.38(c) section of CFPB proposed rules.


Early intervention with delinquent
borrowers
The CFPB proposal includes rules
20
to spur engagement between servicers
and borrowers in an attempt to increase borrowers ability to avoid
foreclosure. Per the CFPB, early intervention may benefit borrowers by
reducing avoidable interest costs and by limiting the impact on borrowers
credit reports.
20
regarding early intervention with delinquent
borrowers would require servicers to provide delinquent borrowers with two
notices. First, the servicer would be required to make good faith efforts (no
later than 30 days after the payment due date) to notify a borrower orally
that the borrowers payment is late and that loss mitigation options may be
available, if applicable. This is consistent with the Regulation AB and USAP
monthly contact requirements.
Second, the servicer would be required to provide a written notice, no later
than 40 days after the payment due date
20
, with information concerning the
foreclosure process, housing counselors and the borrowers State housing
finance authority, and, if applicable, loss mitigation options available to the
borrower. This requirement would be consistent with the Federal Housing
Authority (FHA) required notifications for delinquent borrowers as well as
state required breach letters. However, services may still need to make
adjustments to meet the new timelines and incorporate the required
information. For example, GSE servicers servicing loans for borrowers
determined to be at lower risk for foreclosure may have processes that
currently do not comply with proposed CFPB rules.
Some servicers have recently made significant changes as part of other
regulatory actions including Single Point of Contact (SPOC). However, the
CFPBs proposed rules appear to raise the bar with additional requirements
and deadlines. Therefore, in order to meet the proposed new requirements
for early intervention with delinquent borrowers, servicers may need to:
Update their written notices templates to incorporate the entire
required content prescribed in CFPB proposed rules such as, a
statement explaining that foreclosure is a legal process to end the
borrowers ownership of the property and an estimate, expressed in
a number of days from the date of a missed payment, of when the
servicer makes the referral to foreclosure etc.; and

20
Section 1024.38 Reasonable information management policies and procedures of 2012 Real Estate
Settlement Procedures Act (Regulation X) Mortgage Servicing Proposal available at


Develop or enhance tracking and exception reporting to monitor
timely contact with borrower.
Servicers would also need to make sure that they are equipped to be able to
contact borrowers and to introduce SPOCs earlier in the default process as
noted in the section below.
Continuity of contact with delinquent
borrowers
The CFPB proposals include rules requiring continuity of contact with
delinquent borrowers.
21
Specifically, servicers must provide borrowers who
meet the requirements for the proposed oral notification under the CFPBs
proposed early invention provision with live phone access to the assigned
personnel (SPOC). The proposal would require that servicers maintain
reasonable policies and procedures designed to make sure that the assigned
personnel perform an enumerated list of functions, such as having access to
certain information about the borrowers.
21
The proposal provides conditions
that define the duration of continuity of contact. The proposal
21
also
provides exemptions, for example, that certain delays and failures that
disrupt continuity of contact do not violate the rule.
As noted above, the continuity of contact with delinquent borrowers
procedures in this proposal may overlap with Regulation AB, USAP, and
FHA requirements or other regulations, but the CFPB proposal appears to
set the expectation that servicers would abide by the more stringent
standard in order to comply with each of the requirements.
Some servicers may already be compliant with these requirements, but
similar to early intervention, SPOCs may need to be introduced earlier
during the default process to increase the contact time with the borrower. In
addition, the proposed new requirements may require servicers to:
Develop a staffing model use to identify the workforce required to
meet demand; and
Develop and provide effective training addressing numerous
delivery channels on multiple default mortgage topics and
incorporating internal and external sources of expertise. Areas
covered may include on-boarding, orientation, compliance,
leadership, process changes, and system usage, among others.

21
Section 1024.40 Continuity of Contact of 2012 Real Estate Settlement Procedures Act (Regulation X)
Mortgage Servicing Proposal available at


Loss mitigation procedures
22
for loss mitigation procedures state that
servicers that offer loss mitigation options to borrowers would be required
to roll out procedures and controls to complete loss mitigation to make sure
applications are reasonably evaluated before proceeding with a scheduled
foreclosure sale.
While various initiatives are starting to bring standardization to significant
portions of the market, it has been challenging to establish a consistent set
of national procedures and expectations regarding loss mitigation given the
investor nuances and program rules that exist today.
22
The CFPB says that,
because so much loss mitigation activity is ongoing, and because the activity
has potentially significant impacts on both individual borrowers and the
health of the larger housing market and economy, consistent uniform
minimum regulations would be appropriate and useful to set borrower and
servicer expectations and provide necessary consumer protections.
Loss mitigation procedures in this proposal may overlap with MHA
guidelines, OCC and Fed consent orders, the NMS settlement, and
regulations of other agencies, but the CFPB proposal appears to set the
expectation that servicers would abide by the more stringent standard
across each of the requirements.
The requirement that servicers evaluate borrowers for each of the loss
mitigation programs for which the borrower may be eligible and the
requirement that potential foreclosure activities are appropriately put on
hold upon receiving a complete package may have a significant impact on
the current processes for servicers who are not already compliant under the
NMS. For example, The 90-day timeline requirement between the time a
borrower submits a complete loss mitigation application and the time the
servicer conducts a foreclosure sale, may delay foreclosures, including those
that are, as a practical matter, inevitable. Also, any lengthening of time until
foreclosure sale will also increase the time during which servicers will have
the expense of providing borrowers with continuity of contact.

22
Section 1024.41Loss Mitigation procedures of 2012 Real Estate Settlement Procedures Act
(Regulation X) Mortgage Servicing Proposal available at


Operationally, the proposed new requirements may require servicers,
particularly those that are not already subject to the NMS, to:
Employ additional staff in order to meet the proposed 30-day
timeline for evaluation when large numbers of borrowers submit
applications;
Allocate staff, develop and document policies and procedures, and
conduct training necessary to support the required appeals process;
and
Develop adequate system support and business triggers to be able to
manage foreclosure holds and releases throughout the entire process. Some
of this may already be in place as a result of existing standards such as the
NMS standards.


Conclusion

The Consumer Financial Protection Bureau has commenced its efforts to
develop a set of national servicing standards for each of the servicers
through the proposed changes to the Truth in Lending Act (TILA) and the
Real Estate Settlement Procedures Act (RESPA) described above. Based on
our analysis of the proposal, it appears that the CFPB has targeted various
hot topic areas that have already undergone significant change for some
servicers over the past 12 to 24 months, and has effectively extended that
change to a broader range of market participants.
The result is a new set of stringent standard that exists in the context of a
variety of other, somewhat overlapping requirements. Given the multiple
regulating bodies that have developed these various standards and
requirements, it is important for servicers to align their compliance efforts
and to increase the extent to which they can maintain operational processes
that meet compliance requirements and that also enable them to meet their
business objectives.
In light of these proposed new requirements, servicers may have to take a
thorough approach to adjust their current practices to be compliant to the
new guidance, including:
Conducting gap analyses across servicing processes;
Increasing focus on capacity analysis and planning;
Improving servicing policies, procedures, and controls (both to
achieve compliance objectives as well as increasing efficiencies);
Planning to Upgrade IT systems to address new requirements;
Enhancing staff skills through development of training programs
and capacity analysis;
Establishing and communicating timely and transparent of
servicing compliance attestation and testing;
Developing a robust complaint resolution process that includes a
feedback loop; and
Enhancing compliance monitoring to prevent and/or detect control
breakdowns and the implications on the control environment and
risk assessment.
Servicers have an opportunity to comment on the CFPBs proposed new
servicing standards during a comment period that ends on October 9th,
2012. Therefore, it is important for servicers to understand the potential
impact of these changes on their current processes as soon as possible, in
order to provide specific feedback to CFPB on aspects of the proposals
believed to work well as well as those believed to be unworkable or
inappropriate, recommending more workable alternative approaches
compatible with the CFPBs consumer protection mission. Note that the loss
mitigation proposals are proposed under the CFPBs general authority to
impose obligations on servicers and are not specifically required by Dodd-
Frank and so may provide the industrys greatest opportunity to impact the


substance of the final rules. The CFPB also has specifically requested
comments on industry views as to what would constitute a reasonable
implementation period.
The CFPB Proposals are designed to and will have a substantial impact on
the mortgage servicing industry. Based on the assistance we have provided
to mortgage servicing companies in connection with consent orders and the
NMS, we believe that firms are more successful in meeting these new
requirements when they can leverage in-house, company specific expertise
with support from external advisors with broad expertise in the servicing
business and risk processes across the industry. Essentially, firms achieve
the most adequate results when they combine what they do well internally
with leading practices or methods that they can use to enhance those areas
where challenges may be greatest.


Appendix Comparison of CFPB proposed
rules vs. existing rules

The CFPB proposed rules, which provide certain Dodd-Frank Act provisions relating to mortgage servicing, are
split into two notices issued under the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act
(RESPA) and cover nine primary topics. We have noted in the tables below the key differences between the
proposed rules in CFPB and other existing requirements (i.e., NMS, consent orders, MHA, etc.).
The CFPB proposal addresses amendments in the following three Truth in Lending Act (TILA) topics:
Topics CFBB proposed rulesCore
objective
Key difference to existing rules (e.g., NMS,
consent orders, Investor rules, MHA etc.)
Periodic statements for
residential mortgage loans
Amends the rule by providing
specific timing, form, and
content requirements provided
for in the CFPB rule. The CFPB
proposal contains sample forms
that servicers could use.
Grouping of Content Proposed rules
requires grouping of the periodic statement
contents to make statements easier to
understand for the borrower. For example,
the amount due would be grouped with
information around payment due date and
late fees, while explanation of amount due
would require a breakdown of the amount
due showing allocation to principal, interest
and escrow, as well as the total sum of any
fees or charges imposed, and any amount of
past due payment.
Payment Handling The proposed rules
require additional information relating
several scenarios relating to partial
payments, payment option loans and
delinquency.
Interest rate adjustment
notices for adjustable-rate
mortgages (ARMs)
Amends the current rules
related to the scope, timing,
content, and format of current
disclosures to borrowers
occasioned by the interest rate
adjustments of their variable-
rate transactions.
Timing of Notifications Under current
rules, servicers must provide borrowers
with notice of interest rate change at least
25 days before a payment at a new level is
due; however, this is being amended under
the proposal to 60 days.
Disclosure Notice the proposal
includes a new disclosure required for the
first interest rate adjustment, which is to be
sent 210 to 240 days prior to first
adjustment (i.e., 7 to 8 months) to provide
borrowers enough time to consider their
options.
Notification Template There are some
changes in the proposed format of the
notifications, including an explanation of
how the new rate and payment would be
determined and when the adjustment will
take effect, a good-faith estimate of the
amount of the new mortgage payment and
dates of future interest-rate adjustments.


Topics CFBB proposed rulesCore
objective
Key difference to existing rules (e.g., NMS,
Prompt crediting of
mortgage payments and
response to requests for
payoff amounts
Amends the rule by adding
specific guidelines on the way
to process and post partial
payments. Also, it requires
servicers to send an accurate
payoff balance to a consumer
no later than seven business
days after receipt of a written
request from the borrower for
such information.
Partial Payments The key change
relates to rules for clarifying servicers
obligations when they receive a partial
payment. Specifically, once there are
sufficient funds in the account to cover a
contractual payment, the servicer must
apply those funds to the oldest outstanding
payment due, which would benefit the
borrower because it would advance the date
of delinquency by one billing cycle. This was
not explicitly required previously, although
is consistent with how servicers processed
payments.
Disclosure In addition, if a servicer
holds a partial payment in a suspense or
unapplied funds account, the servicer must
disclose on the periodic statement the
amount of funds held in such account. This
is not new as it is also required under the
NMS servicing standards. However, under
CFPB proposed rules, the servicer must also
disclose when such funds will be applied to
the outstanding payments due on the
account.

The CFPB proposal addresses amendments in the following six RESPA topics:
Topics Core objective Key difference to existing rules (e.g., NMS,
Force-placed insurance Amends the existing rule by
requiring servicers to send one
notice to the borrower at least 45
days before charging for forced-
place insurance coverage, and a
second notice would be required
no earlier than 30 days after the
first notice. The CFPB proposal
contains model forms that
servicers could use. The CFPB
proposed rule also provides
specific guidelines on how to
handle forced-placed insurance in
case a borrower provides proof of
having their own insurance.
Set-up & Termination of Forced
Placed Insurance These
requirements may be new for servicers
not under the scope of NMS; however,
for servicers in compliance with servicing
standards prescribed under NMS, rules
for set-up and terminating force-placed
insurance seem to be consistent.


Error resolution and
information requests
Amends the existing rule by
requiring servicers to meet certain
procedural requirements for
responding to information
requests or complaints of errors.
The proposal defines specific types
of claims which constitute an error
such as a claim regarding
misapplied payments.
Error Resolution process The key
difference noted relates to the response
time for specific types of claims and
prescribes clearer rules for expected
error resolution.
Information management
policies and procedures
Amends the existing rule by
requiring servicers to establish
reasonable policies and
procedures regarding information
management. The rule specifies
what should be included in the
policies and procedures. Examples
of such include: document
retention, servicing file
requirements, and prompt access
to documents and information.
No Key Differences Upon initial
analysis, there does not appear to be any
significant difference in the CFPB
proposed rules for information
management policies and procedures.
The nature of this CFPB proposed rule is
more guidance-based consistent with
previous consent order requirements.
Document Retention In addition, it
is noted that CFPBs proposed
requirement to retain documents for one
year after servicing transfer is less
stringent than existing rules.
Early intervention with
delinquent borrowers
Amends the rule by requiring
servicers to make good faith
efforts, both verbally and in
writing, to notify delinquent
borrowers of loss mitigation
options. It also provides strict
timeframes of when the servicer
must contact the borrower.
Early Intervention Process Private
lenders and investors, Fannie Mae and
Freddie Mac, and Federal agencies,
already have early intervention servicing
standards in place for delinquent
borrowers. Hence, the CFPB proposed
rules of two written notification and good
faith efforts to contact borrowers may
not be a new requirement to most
servicers, and given the flexibility in the
CFPB proposed rules, may not require
changes to existing practices.
However, exceptions have been noted,
for example GSE servicers servicing
loans for borrowers determined to be at
lower risk for foreclosure may have
processes that currently do not comply
with CFPB proposed rules.


Continuity of contact with
delinquent borrowers
Amends the rule by requiring
servicers to assign dedicated
contact personnel for a borrower
no later than five days after
providing the early intervention
notice.
No Minimum Uniform National
Standard This topic was included in
CFPB proposed rules because there are
currently no minimum uniform national
standards that apply across the mortgage
servicing industry. However, these
requirements are consistent with existing
rules (such as GSE, MHA, NMS, etc.) and
minimal differences have been noted.
Loss mitigation procedures Amends the rule by requiring
servicers that offer loss mitigation
options to borrowers to provide
procedures to enable complete
loss mitigation applications are
reasonably evaluated before
proceeding with a scheduled
foreclosure sale. This process is
commonly known as dual-track.
No Minimum Uniform National
Standard Similar rules related to loss
mitigation procedures already exist (such
as NMS, HAMP, FHFA, etc.); however, it
was noted by CFPB that there is
currently no set of consistent national
procedures and expectations regarding
loss mitigation procedures. Hence, this
was included in CFPB proposed rules.
Appeal of Denial Decision
However, exceptions have been noted;
for example, the CFPB proposed rules set
a minimum standard of 14 days within
which to appeal a denial decision, whilst
NMS requires at least 30 days.

The CFPB has stated that it is planning to finalize these rules by January 2013. The length of time permitted for
implementation is one area that the CFPB is requesting comments on, as it believes that while the final rules
should be made effective immediately, some of these standards may require more substantial changes and hence
more time to roll out. Dodd-Frank permits the CFPB to provide for an implementation period of up to 12 months,
but it will want to be sure that it has a strong factual basis for whatever implementation period or periods it adopts
in the final iteration.


For more information

PwC Consumer Finance contacts

Martin Touhey
Principal
martin.e.touhey@us.pwc.com
206 790 8751
Roberto Hernandez
Principal
roberto.g.hernandez@us.pwc.com
940 367 2386

Annie Liao
Senior Manager
annie.liao@us.pwc.com
646 256 1825

Maureen Magrann
Senior Manager
maureen.c.magrann@us.pwc.com
610 420 8746

PwC Regulatory contacts

Jeff Lavine
Partner
jeff.lavine@us.pwc.com
703 918 1379

David Albright
Principal
david.albright@us.pwc.com
703 918 1364
Anthony Ricko
Managing Director
anthony.ricko@us.pwc.com
978 692 1701
www.pwc.com/consumerfinance
www.pwcregulatory.com
2012 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved.
PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see
www.pwc.com/structure for further details.
This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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