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From Banking and Finance Law Daily, August 21, 2013

CFPB highlights mortgage servicing problems and need for robust compliance management

By John M. Pachkowski, J.D.

The Consumer Financial Protection Bureau has released it latest issue of Supervisory Highlights which reviews the development of the bureau’s supervision program and shares key findings from its supervisory activities in order to help the industry limit risks to consumers and comply with federal consumer financial laws. The report highlights examination work completed between November 2012 and June 2013.

Some of the topics covered in the Supervisory Highlights include: the CFPB’s expectations for compliance management systems (CMSs); the risks faced by consumers in mortgage servicing at both bank and nonbank entities; and the provision of adverse notices under the fair lending laws.

Commenting on the release of the Supervisory Highlights, CFPB Director Richard Cordray noted, “Our examinations of banks and nonbanks allow us to correct problems before more consumers are affected. Today’s report highlights both the mortgage servicing problems throughout the industry and the challenges of making sure that nonbanks are following federal law. Fixing both is a priority for us.”

Compliance management. The CFPB expects every entity it supervises to have an effective CMS adapted to its business strategy and operations. The bureau notes that a CMS allows a supervised to: (1) establish its compliance responsibilities; (2) communicate those responsibilities to employees; (3) ensure that responsibilities for meeting legal requirements and internal policies are incorporated into business processes; (4) review operations to ensure responsibilities are carried out and legal requirements are met; (5) takes corrective action; and (6) updates tools, systems, and materials, as necessary.

In creating a CMS, the CFPB does not require entities to structure their CMS in any particular manner, but the CMS should have the following interdependent control components: (1) oversight by the entity’s board of directors and management; (2) a compliance program; (3) a consumer complaint management program; and (4) an independent compliance audit. The CFPB noted that when all of these components are strong and well-coordinated, a supervised entity should be successful at managing its compliance responsibilities and risks.

Through its supervisory work, the CFPB found that nonbanks are more likely to lack a robust CMS, as their consumer compliance-related activities have not been subject to examinations at the federal level for compliance with federal consumer financial laws prior to the Bureau’s existence. The bureau found that nonbanks generally lack formal policies and procedures, have not developed a consumer compliance program, or do not conduct independent consumer compliance audits.

Mortgage servicing. The Supervisory Highlights also focused on the risks to consumers in mortgage servicing at both bank and nonbank entities. The CFPB noted that its examiners have “uncovered problems that can be harmful to consumers.” The bureau focused on three practices: servicing transfers, payment processing, and loss mitigation.

Examiners found noncompliance with the requirements of the Real Estate Settlement Procedures Act to provide disclosures to consumers about transfers of the servicing of their loans. In other reviews, examiners noted lack of controls relating to the review and handling of key documents necessary to ensure the proper transfer of servicing responsibilities for a loan.

Regarding payment processing, the CFPB found that servicers provided borrowers with inadequate change in address notices resulting in late payments; excessive delays in handling the cancellation of private mortgage insurance payments, resulting in late fees; and property taxes being paid later than expected, resulting in borrowers’ inability to claim a tax deduction for the year they planned.

Finally, the bureau examiners discovered issues related to various aspects of loss mitigation, including: inconsistent borrower solicitation and communication; long application review periods; poor procedures for requesting missing or incomplete information from consumers; and deceptive communications to borrowers about the status of loan modification applications.

Adverse action notices. The CFPB also placed additional focus on bank and nonbank compliance with fair lending laws and regulations—the Home Mortgage Disclosure Act (HMDA) and the Equal Credit Opportunity Act (ECOA). The bureau noted that some lenders are not complying with various aspects of the adverse action notification requirements under ECOA and Regulation B. In such instances, the CFPB has directed the entities to develop and implement plans to ensure that the appropriate monitoring and internal controls are in place to detect and prevent future violations.

MainStory: TopStory CFPB DoddFrankAct EqualCreditOpportunity Loans Mortgages RESPA TruthInLending

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