Mortgage Servicing Quality Control

Notable Audit Findings:  July – December 2018

In excess of 60,000 mortgage servicing Quality Control reviews were conducted during the second half of 2018 with nearly 2,000 unique audit exceptions cited by TENA auditors during that period. Those audit results were analyzed to identify emerging trends and common findings with the following audit findings identified as being notable.

1. Audit Finding: (S002-12-017) The periodic statement did not meet all “Transaction Activity” content and layout requirements.

The Truth in Lending Act under §1026.41: Periodic Statements for Residential Mortgage Loans defines transaction activity as: “A list of all the transaction activity that occurred since the last statement.  For purposes of this paragraph (d)(4), transaction activity means any activity that causes a credit or debit to the amount currently due.  This list must include the date of the transaction, a brief description of the transaction, and the amount of the transaction for each activity on the list.” 

Relative to the above requirement, the CPFB, in their Spring 2017 (Issue 15) Supervisory Highlights, provided additional interpretation of what constitutes a “brief description of the transaction”.  It stated: “The phrases “Misc. Expenses” and “Charge for Service” were not adequate or specific enough to comply with the rule’s requirement.”  It further directed servicers to “provide more specific descriptions in order to facilitate consumer understanding of the fees and charges imposed.”

TENA Recommendation: To ensure that sufficient detail is being provided to the borrower, review how charges and/or fees are being labeled in your firm’s servicing system and how they are being transposed onto the periodic billing statement. A targeted quality control audit on a population of loans which includes a variety of transactions is an effective way to test a firm’s processes regarding this issue.

For guidelines regarding this matter, consult:  TILA 12 C.F.R. § 1026.41(d)(4) , CFPB Supervisory Highlights – Spring 2017 (Issue 15)

2. Audit Finding:  (S006-14-147) The notice of right to receive all appraisals/valuations was not mailed or delivered to the borrower within 3 days after the servicer received the borrower’s loss mitigation application.

The Equal Credit opportunity Act (ECOA) §1002.14: Rules on Providing Appraisal Reports indicates, “A creditor shall mail or deliver to an applicant, not later than the third business day after the creditor receives an application for credit that is to be secured by a first lien on a dwelling, a notice in writing of the applicant’s right to receive a copy of all written appraisals developed in connection with the application.”

TENA identified that upon the receipt of an application for loss mitigation, this required notice is frequently not being sent within the required three business day timeframe (and in many instances, not being sent at all).

TENA Recommendation:  Analyze your firm’s policies and procedures to ascertain that effective triggers are in place to ensure that the Right to Receive Appraisal Notice is prepared and delivered in a timely manner.  Review ECOA’s definition of a “loss mitigation application” to confirm that the processes within your firm are properly synched to the receipt of such applications.

For guidelines regarding this matter, consult:  ECOA 12 C.F.R. § 1002.14(a)(2) ,  ECOA 12 C.F.R. § 1002.2 (f)

3. Audit Finding: (S005-06-010) There is no evidence that a disclosure of the payoff procedures was sent to the borrower(s).

TENA identified multiple instances in which a FHA borrower, or an Authorized Third Party (ATP), had expressed their intent to prepay the outstanding loan balance, yet there is no evidence that the Borrower was provided the required Payoff Disclosure.  FHA SFHPH 4000.1 – III.A.1.e.(v)(3) indicates, “When notified of the Borrower’s intent to prepay, the Mortgagee must send the Payoff Disclosure and copy of the payoff statement directly to the Borrower, even if the Mortgagee is dealing with an Authorized Third Party.”

TENA Recommendation:  Exam your firm’s payoff procedures and validate that prepayment requests are properly handled and that they effectively trigger the generation and delivery of a Payoff Disclosure to the Borrower(s).  Specifically analyze that this process is consistently employed even when the intent to prepay was initiated by an authorized third party.

FHA has provided a model Payoff Procedure Disclosure that is available on HUD.Gov.

For guidelines regarding this matter, consult: FHA SFHPH 4000.1 – III.A.1.e.(v)(3) , FHA SFHPH 4000.1 – III.A.1.m.(ii)(B) , FHA Payoff Procedure Disclosure Model Document

4. Audit Finding: (S003-12-043) The servicer force-placed flood insurance on the property; however, the written notice to the borrower did not contain all the required information.

The National Flood Insurance Act (NFIA) requires that flood insurance be maintained for the protection of all properties that are located in a Special Flood Hazard Area. If it is determined during the life of the loan that adequate insurance is not properly being retained, the servicer is required to notify the borrower.  TENA’s auditors continue to cite frequent instances in which the written notice sent to the borrower is missing one or more of the required content elements.

The NFIA states:  “The lender or servicer shall notify the borrower under the loan that the borrower should obtain, at the borrower’s expense, an amount of flood insurance for the building or mobile home and such personal property that is not less than the amount under subsection (b)(1) of this section, for the term of the loan.”

TENA Recommendation:  Review your firm’s flood insurance notice and disclosures to ensure that they are in full compliance with NFIA content requirements.

For guidelines regarding this matter, consult: NFIA 42 U.S.C. § 4012a(e)(1), (b)(1)(A)

5. Audit Finding: (S004-07-043) There was no evidence that a delinquency letter was sent to the borrower by the 30th day of delinquency.

As part of the Department of Veteran Affairs collections procedures, a servicer must provide the borrower with a delinquency letter no later than the 30^th day of delinquency if previous contacts have not led to reinstatement of the loan.  The VA Servicer Handbook M26-4 further states:  This letter is a means to alert the borrower to the delinquency and provide information on making the late payments. The letter should:

• State that the loan is in default.
• Emphasize the seriousness of the delinquency and the importance of taking prompt action to resolve the default.
• Report the total amount due.
• Advise the borrower how to contact their servicer in order to make arrangements for curing the default.

TENA has found that the required delinquency letter is frequently being sent late or that it does not contain all of the required content elements.

TENA Recommendation:  Examine your firm’s policies and procedures to confirm procedures are in place to ensure the timely delivery of the VA delinquency letter.  Additionally, a review of the content of the letter should be performed to ensure all required content elements are present.

For guidelines regarding this matter, consult:  VA Servicer Handbook M26-4: 4:01, b

6. Audit Finding: (S990-02-010) It appears the servicer failed to recognize a potential successor in interest.

The Real Estate Settlement Procedures Act (RESPA) defines a Successor in Interest as, “a person to whom an ownership interest in a property securing a mortgage loan subject to this subpart is transferred from a borrower, provided that the transfer is:

• a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
• a transfer to a relative resulting from the death of a borrower;
• a transfer where the spouse or children of the borrower become an owner of the property;
• a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property; or
• a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.”

In audits conducted during the fourth quarter of 2018, TENA consistently observed incidents where the servicer received an oral and/or written request that indicated a successor in interest may exist; however, there was often no corresponding evidence that the servicer either met the RESPA requirement to recognize the potential successor and/or promptly initiated communication to confirm the successor.

TENA Recommendation:  Examine your firm’s policies and procedures to confirm that they adequately address how to handle a potential successor in interest once the circumstance has been identified.  Additionally, consider conducting periodic training of front line staff members who handle phone calls to increase their ability at identifying potential successor in interest situations based on information related to them during the call.

For guidelines regarding this matter, consult: RESPA 12 C.F.R. § 1024.31

7. Audit Finding: The servicer did not provide a modified periodic statement for a borrower in bankruptcy correctly.  (S007-08-073, S007-08-71, and S007-08-068)

In the fourth quarter of 2018 TENA cited numerous issues relative to the Truth in Lending Act (TILA) guidelines that pertain to modified periodic statements for borrowers in bankruptcy.   Below are the top three issues TENA has recently cited regarding the modified periodic statement that is required when a borrower(s) has filed for bankruptcy.

Issue #1: A modified periodic statement for each billing cycle was not provided for a borrower in bankruptcy and there was no evidence that the servicer had an acceptable reason for not providing the modified statement.  

TILA guidelines provide specific acceptable reasons when a servicer does not have to provide a borrower in foreclosure with a modified periodic statement.  TENA’s auditors frequently cited servicers for deviating from those acceptable reasons (which are listed below).

1. Any consumer on the mortgage loan is a debtor in bankruptcy under title 11 of the United States Code or has discharged personal liability for the mortgage loan pursuant to 11 U.S.C. 727, 1141, 1228, or 1328; and
2. With regard to any consumer on the mortgage loan:
   • The consumer requests in writing that the servicer cease providing a periodic statement or coupon book;
   • The consumer’s bankruptcy plan provides that the consumer will surrender the dwelling securing the mortgage loan, provides for the avoidance of the lien securing the mortgage loan, or otherwise does not provide for, as applicable, the payment of pre-bankruptcy arrearage or the maintenance of payments due under the mortgage loan;
   • A court enters an order in the bankruptcy case providing for the avoidance of the lien securing the mortgage loan, lifting the automatic stay pursuant to 11 U.S.C. 362 with regard to the dwelling securing the mortgage loan, or requiring the servicer to cease providing a periodic statement or coupon book; or
   • The consumer files with the court overseeing the bankruptcy case a statement of intention pursuant to 11 U.S.C. 521(a) identifying an intent to surrender the dwelling securing the mortgage loan and a consumer has not made any partial or periodic payment on the mortgage loan after the commencement of the consumer’s bankruptcy

Reaffirmation or consumer request to receive statement or coupon book. A servicer ceases to qualify for an exemption with respect to a mortgage loan if the consumer reaffirms personal liability for the loan or any consumer on the loan requests in writing that the servicer provide a periodic statement or coupon book, unless a court enters an order in the bankruptcy case requiring the servicer to cease providing a periodic statement or coupon book.

Issue #2: The modified periodic statement for a borrower in bankruptcy did not meet all “Account Information” content and layout requirements.

According to TILA guidelines, a periodic statement must have the following “Account Information” listed on the periodic statements that are sent to borrower(s):

The content must include:

1. The amount of the outstanding principal balance;
2. The current interest rate in effect for the mortgage loan;
3. The date after which the interest rate may next change;
4. The existence of any prepayment penalty, as defined in §1026.32(b)(6)(i), that may be charged;
5. The Web site to access either the Bureau list or the HUD list of homeownership counselors and counseling organizations and the HUD toll-free telephone number to access contact information for homeownership counselors or counseling organizations.

TENA has cited a number of instances where the modified periodic statements with missing one or more of the five required elements listed above, with #1 and #5 being the most commonly missed elements.

Issue #3:  The modified periodic statement for a borrower in bankruptcy (chapter 12 or chapter 13) did not include one or more additional required disclosures.

The modified periodic statement for a borrower in chapter 12 or chapter 13 bankruptcy must include the disclosures below, as applicable:

1. A statement that the amount due includes only post-petition payments and does not include other payments that may be due under the terms of the consumer’s bankruptcy plan;
2. If the consumer’s bankruptcy plan requires the consumer to make the post-petition mortgage payments directly to a bankruptcy trustee, a statement that the consumer should send the payment to the trustee and not to the servicer;
3. A statement that the information disclosed on the periodic statement may not include payments the consumer has made to the trustee and may not be consistent with the trustee’s records;
4. A statement that encourages the consumer to contact the consumer’s attorney or the trustee with questions regarding the application of payments; and
5. If the consumer is more than 45 days delinquent on post-petition payments, a statement that the servicer has not received all the payments that became due since the consumer filed for bankruptcy.

During the fourth quarter, TENA has consistently observed periodic statements for borrowers in Chapter 13 bankruptcy were missing one or more of the above required disclosures.

TENA Recommendation:  Examine your firm’s modified periodic statements for borrowers in bankruptcy to ensure all required content elements are present.  Review your company’s policies and procedures around sending modified periodic statements and confirm they match with current Truth in Lending guidelines.

For guidelines regarding this matter, consult:

• TILA 12 C.F.R. § 1026.41(e)(5)
• TILA 12 C.F.R. Supplement I, § 1026.41(e)(5)
• TILA 12 C.F.R. § 1026.41(d)(7)
• TILA 12 C.F.R. Supplement I, § 1026.41(d), (f)
• TILA Sample Form of Periodic Statement for Chapter 7 or Chapter 11 Bankruptcy
• TILA Sample Form of Periodic Statement for Chapter 12 or Chapter 13 Bankruptcy
• TILA 12 C.F.R. § 1026.41(f)(3)(vi)