On April 26, 2017, the CFPB issued a press release and its latest Supervisory Highlights, which spotlight the CFPB’s recent enforcement efforts in the areas of mortgage loan origination, mortgage loan servicing, and student loan servicing. The Supervisory Highlights reflect what the CFPB sees as common problems in each area, and may signal what conduct the CFPB will be paying particular attention to in its future enforcement efforts.
In the Supervisory Highlights, the CFPB reports that originators do not consistently comply with Regulation Z’s requirement to make a “good faith determination” that residential mortgage loan borrowers have a “reasonable ability to repay” loans according to their terms. In enforcing Regulation Z, the CFPB will look to originators’ underwriting policies and procedures to determine whether they used appropriate documentation to verify borrowers’ income and assets.
Specifically, the CFPB emphasizes that originators must comply with three rules under Regulation Z to meet the “good faith determination” requirement. First, originators must consider third-party documentation to determine a borrower’s assets and income, and take sufficient steps to verify independently the accuracy of those documents. Second, to the extent that underwriters only use a borrower’s assets (and not income) to underwrite a loan, the originator must both verify the borrower’s assets, and confirm that the borrower can repay the loan in view of other debts. Third, lenders cannot consider the size of a borrower’s downpayment alone in determining ability to repay, absent other supporting verified income or assets.
The CFPB also reports that servicers are not consistently complying with Regulation X’s time frames for evaluating loan modification applications. The CFPB also states that some servicers do not maintain the policies and procedures necessary to ensure that they properly evaluate loss mitigation applications received from borrowers within the timeframes mandated by Regulation X, and do not consistently implement the foreclosure protections required by the statute.
The Supervisory Highlights also identifies issues with escrow account management and monthly statements. With respect to escrow accounts, the CFPB observed that some servicers misuse one borrower’s account to pay insurance premiums owed by other borrowers. Regarding monthly statements, the CFPB reminds servicers that Regulation Z requires fees to be described clearly, and not by vague terms such as “Misc. Expenses” and “Charge for Service.”
Student Loan Servicing
The CFPB noted two problems in servicing accounts that are supposed to be in deferral. First, servicers sometimes receive incorrect information about students’ enrollment status (e.g., incorrect information reflecting that a student is no longer in school) that causes premature termination of deferment status. Once the mistake is discovered, servicers generally put the loan back into deferment status, but sometimes fail to reverse charges resulting from the premature deferment termination—such as late fees and capitalized interest—resulting in inflated principal balances for affected students.
Additionally, the CFPB asserts that some servicers provide misleading information about how interest is capitalized during successive deferment periods. Specifically, the CFPB reports that some servicers provide information that makes it appear that interest for all deferment periods would be capitalized at the same time, at the conclusion of all deferment periods. In fact, however, interest capitalizes at the end of each deferment period, meaning that the borrower will have to pay additional interest on interest that was capitalized during prior deferment periods. The CFPB states that it considers this representation to be material because students could opt not to agree to successive deferment periods if it were clear that doing so would result in paying interest on interest accrued during prior deferment periods.
As always, the CFPB’s Supervisory Highlights provide useful insight into what the CFPB is focusing on and what it considers to be some of the potentially problematic trends in the consumer financial services industry. Mortgage loan originators and servicers and student loan servicers should pay particular attention to this month’s publication and ensure that the practices described by the CFPB are not occurring in their own organizations.