The amended CFPB Servicing rules regarding Reg Z, which fully take effect in April 2018, cover a range of servicing topics, from defaulted borrower communication and billing statements to insurance, loss mitigation and servicing transfers.
Clayton is in a unique position to observe and share our thoughts about potential risk exposure given the number of servicing quality control reviews we’ve conducted on behalf of our clients. Most notably, we’ve found two main areas of particular concern: billing statement accuracy and servicing transfer related issues.
In addition, we’ll discuss another area of potential risk related to the CFPB amendments — the accuracy of escrow statements.
The amended CFPB rules specifically focus on billing statements and the new requirement to send billing statements to borrowers in active bankruptcy. Everyone knows that managing bankruptcies is a complicated process with multiple nuances, and many servicing systems are not equipped to meet the specific compliance requirements.
Most servicers will need to create new data fields within their tracking systems to produce accurate billing statements for bankruptcy-related loans. This, in turn, will trigger additional monitoring and oversight to maintain compliance.
We’ve found that the handling and posting of payments during bankruptcy has been a widespread issue in our testing environment. Specifically, there is increased risk exposure in pre-and post-petition payment application and treatment, both inside and outside of the bankruptcy plan.
Servicers and sub-servicers have created manual workflow workarounds to address the issue, however, it does open the servicer up to more exposure to calculation errors.
Another challenge servicers face with regard to the preparation of the billing statement is the inability to reconcile sums reflected in their system of record with contract terms or with amounts received. We’ve found that foreclosure information, when applicable, is often incomplete.
The new rule requires the statements to include 1) the monthly post-petition payment amount, 2) the total sum of any post-petition fees imposed since the last statement, 3) any post-petition payment amounts that are past due, and 4) the pre-petition average amount disclosure, which is missing from the billing statement in instances where the servicer has commenced legal action.
To address this, Clayton has developed a new testing module specific to the requirements of billing statements for loans in active bankruptcy. We stress to our clients that a robust servicing quality control program is essential to identify these potential issues with billing statements.
Servicing transfer-related issues continue to present high-risk exposure for servicers and subservicers. As we know, the CFPB has been focused on data integrity for some time – both for general servicing and specifically, related to servicing transfer data.
Transfers, by their very nature, are complex, and can be further complicated when the data being transferred to the new servicer is not accurate or the documents provided are not complete.
This is especially true when the loan being transferred is in “in-flight” loss mitigation review. The amended CFPB rules specifically call out acknowledgement windows for loss mitigation applications as well as reviews of completed applications when servicing transfers occur. In some cases, when the loss mitigation application is received shortly before the transfer or is pending at the time of transfer, these loans can become lost in the shuffle.
Clayton has conducted several data validation reviews for our clients to help ensure that critical data elements transferred onto the system match the applicable loan and/or servicing documents.
Scrutinizing the data helps to prevent issues like required data points not being captured in the transferee servicing system, or that the data and/or codes are being used in a slightly different manner. These types of issues can occur even when both servicers are using the same servicing platform.
Despite the common platform, each servicer has its own nuances on how the data structure is being used.
Our familiarity with these nuances allows us to focus on the areas we have discovered where the highest chance for potential error exists.
A looming risk – escrow statements
Although not explicitly called out in the amended CFPB rules, we’ve observed another area of risk in the accuracy of escrow statements. Escrow-related issues have plagued servicers for quite some time and regulators have been placing scrutiny on this topic over the past few years.
Servicers try to create efficiency by automating the statements much like they do with billing statements. However, we’ve often discovered inaccurate figures being sent to borrowers on their annual escrow statements, especially when the borrower is in default.
To address this, Clayton’s testing covers a recalculation of the dollar amounts represented on the statement as well as a recalculation of the escrow analysis.
Finally, we’ve observed two escrow-related disbursement issues. The first is where servicers have submitted delayed tax disbursements resulting in penalties being assessed, which is a violation of many investor guidelines.
Secondly, some figures included in the estimated annual escrow disbursements have not been supported by documents and/or systems output. Per the CFPB, all estimated annual disbursements must be supported by evidence.
The challenges detailed above cover a small portion of the topics included within the amended CFPB rules. Servicers should be prepared to align their internal processes and systems to meet the complex requirements of the ever-evolving CFPB rules and guidance.
The challenges are not insurmountable, but should be taken into consideration when internally reviewing or externally hiring a trusted compliance/risk management partner.
Clayton has performed more than 500,000 loan reviews of over 50 servicers and sub-servicers since 2012, focused on servicing and regulatory compliance. Where applicable, our testing modules incorporate servicing and regulatory requirements as outlined by Fannie Mae, Freddie Mac, VA, FHA and the CFPB.