Consumer Compliance Outlook: Third Issue 2021

Mortgage Servicers’ Duties Under Regulation X to Respond to Notices of Error and Requests for Information

By Alinda Murphy, Senior Examiner, Federal Reserve Bank of Kansas City

In 2020, according to Home Mortgage Disclosure Act (HMDA) data, lenders originated 13.2 million closed-end HMDA loans, a 67 percent increase from 2019.¹ These new loans are a subset of the larger market of outstanding one- to four-family residential mortgage loans, which reached nearly $11 trillion in 2020, according to Federal Reserve data.² For mortgage servicers, the large number of outstanding closed-end loans increases compliance risk.

Regulation X requires servicers to timely and properly respond to a written error notice and/or requests for information pertaining to a servicing issue. A servicer’s failure to comply can lead to examination issues and legal risk because of the potential for consumer harm. To facilitate compliance, this article reviews a servicer’s obligations in responding to error notices under §1024.35 and requests for information under §1024.36, which may increase because COVID-19 forbearances and foreclosure moratoriums are expiring. This article is part of a series of recent Consumer Compliance Outlook articles on error resolution requirements for federal consumer protection laws.³

DEFINITIONS

Before reviewing the requirements under §1024.35 and §1024.36, it is important to clarify key definitions.

Federally Related Mortgage Loans

Regulation X, which implements the Real Estate Settlement Procedures Act (RESPA), applies to a federally related mortgage loan. The regulation generally defines this term as a loan secured by a lien on a residential property, where there is or will be a structure for one to four families, or a manufactured home and meeting certain other requirements.⁴

The regulation exempts business purpose loans, temporary financing, loan conversions, assumptions without the lender’s approval, secondary market transactions, and loans secured by vacant or unimproved land from the scope of its coverage.⁵

Mortgage Loan

The servicer requirements in subpart C⁶ of Regulation X only apply to a mortgage loan, a subset of federally related mortgage loans, that is defined as a “federally related mortgage loan, as that term is defined in §1024.2 subject to the exemptions in §1024.5(b) but does not include open-end lines of credit (home equity plans).”⁷

Qualified Written Request (QWR)

RESPA defines Qualified Written Request (QWR) as written correspondence (excluding notices on a payment coupon or other payment medium the servicer supplied) that provides reasons that the borrower believes an error occurred or sufficient detail to make a request for information and includes information so that the servicer can identify the borrower’s name and account from the information provided.⁸

In 2013, the Consumer Financial Protection Bureau (Bureau) significantly amended Regulation X to implement the Dodd‒Frank Act amendments to RESPA.⁹ The amendment retained the QWR requirement of responding to error notices and requests for information but expanded them and separately codified them: §1024.35 addresses error resolution procedures, while §1024.36 addresses requests for information. The Official Staff Commentary clarifies this change: “A qualified written request is just one form that a written notice of error or information request may take. Thus, the error resolution and information request requirements in §§1024.35 and 1024.36 apply as set forth in those sections irrespective of whether the servicer receives a qualified written request.”¹⁰ The 2013 final rule also retained the prior exclusion of home equity plans from the servicing requirements in Subpart C, as noted previously.¹¹

Small Servicer

A small servicer is defined as a servicer, together with any affiliates, of 5,000 or fewer mortgages, a Housing Finance Agency, or a nonprofit entity servicing 5,000 or fewer mortgage loans for which it is the creditor.¹² The 2013 final rule generally exempted small servicers from the requirements in §§1024.38-41,¹³ but not from the error resolution procedures and request for information requirements in §§1024.35 and 1024.36.¹⁴

Error Notice versus Request for Information

A servicer must determine whether a borrower’s written communication is an error notice, information request, or both. This distinction is important because the compliance requirements differ depending on the request. The regulation clarifies that servicers must focus on the substance of the communication:

A servicer should not rely solely on the borrower’s description of a submission to determine whether the submission constitutes a notice of error under §1024.35(a), an information request under §1024.36(a), or both. For example, a borrower may submit a letter that claims to be a Notice of Error that indicates that the borrower wants to receive the information set forth in an annual escrow account statement and asserts an error for the servicer’s failure to provide the borrower an annual escrow statement. Such a letter may constitute an information request under §1024.36(a) that triggers an obligation by the servicer to provide an annual escrow statement. A servicer should not rely on the borrower’s characterization of the letter as a Notice of Error, but must evaluate whether the letter fulfills the substantive requirements of a notice of error, information request, or both.¹⁵

ERROR RESOLUTION REQUIREMENTS (§1024.35)

Regulation X provides the legal framework for borrowers to submit notices to their servicer of a covered error related to the servicing of their mortgage, and the servicers’ duties in responding.

Written notice requirements. Only written notices from the borrower or the borrower’s agent¹⁶ are subject to the error resolution requirements;¹⁷ thus, oral borrower communications do not trigger these requirements.¹⁸ In addition, the written notice must include the borrower’s name, sufficient information to identify the borrower’s mortgage loan account, and a description of the error the borrower believes has occurred. Written communications on payment coupons or on other payment forms do not qualify as error notices.¹⁹

Requiring specific addresses for notification. Servicers may require mortgage loan borrowers to send error notices and requests for information to a specific address, as long as the servicer provided written notice to the borrower of the address and lists it on any website of the servicer.²⁰ A servicer may accept error notices and information requests online but only in addition to receiving notices of error by mail.²¹

Covered errors. Regulation X defines the type of errors subject to the regulation, which we list in Table 1: Covered Errors Under §1024.35(b). Comment 35(b)-1 clarifies that this does not include errors related to mortgage loan origination, underwriting, sale, or securitization. An error notice related to a decision to sell, assign, or transfer mortgage loan servicing is not covered unless the error relates to the servicer’s failure to transfer accurate and timely information to a transferee servicer regarding a borrower’s mortgage loan account, as stated in error 8 in Table 1.

Table 1: Covered Errors Under §1024.35(b)

1. Not accepting a conforming payment

2. Not applying an accepted payment to principal, interest, escrow, or other charges under the terms of the loan or applicable law

3. Not crediting a payment on date of receipt as required under §1026.36(c)(1)

4. Not timely paying taxes, insurance, or other charges servicer agreed to collect and pay per §1024.34(a) or refunding an escrow account balance per §1024.34(b)

5. Imposing a fee the servicer lacks a reasonable basis to impose

6. Not providing an accurate payoff statement under §1026.36(c)(3) when requested

7. Not providing accurate information regarding loss mitigation options and foreclosure per §1024.39

8. Not timely and accurately transferring servicing information to a transferee

9. Making the first foreclosure notice or filing in violation of §1024.41(f) or §1024.41(j)

10. Violating prohibition on foreclosure sale in certain circumstances under §1024.41(g) or (j)

11. Any other error relating to the servicing of a borrower’s mortgage loan

Investigation and response requirements. A servicer has two options in responding to a written notice of a covered error. It can either 1) correct the error(s) the borrower identified and notify the borrower of the corrections made in accordance with the notice requirements discussed below, or 2) conduct a reasonable investigation, unless one of the investigation exceptions listed in Table 4: Exceptions Under §1024.35(g)(1), (f)(2) applies.²²

If the servicer investigates and discovers a different and/or additional error, it must:

correct the error(s);
notify the borrower in writing of the error(s) identified;
describe the action taken to correct them, including the effective date; and
provide the servicers’ contact information, including a telephone number.

The time frames for completing the investigation, which vary depending on the nature of the error and whether the borrower is in foreclosure, are listed in Table 2: Investigation Time Frames.

Requesting additional borrower information. A servicer may request more documentation than was submitted but cannot require a response as a condition for investigating the error. The servicer also cannot conclude an error did not occur without conducting a reasonable investigation, even if the borrower did not provide the requested information.²³

Time Frames to Acknowledge Receipt of Error Notice and Conduct Investigation

Acknowledgment. The servicer must provide a written acknowledgment of receipt of the error notice within five days (excluding weekends and legal public holidays).²⁴

Table 2: Investigation Time Frames²⁵
Error Type or Circumstance	Resolution Time Limit*
Failure to provide an accurate payoff balance amount upon the borrower’s request	Seven (7) days
Pending foreclosure, per in-scope errors 9 and 10, in Table 1	Prior to the foreclosure sale or 30 days, whichever is earlier
All other errors	Thirty (30) days
*Time frames begin when the error notice is received and exclude weekends and legal public holidays.

Extending the error resolution time frame. For errors not related to a payoff statement, first notice or filing regarding foreclosure, or the prohibition on a foreclosure sale (see errors 6, 9, and 10), the servicer may extend the resolution time frame by 15 days, excluding weekends and legal public holidays. To extend the time frame, the servicer must notify the borrower of the extension in writing before the end of the 30-day period and state the reason for extending it.²⁶.

Multiple errors. If the error notice includes multiple servicing issues, a servicer may choose to apply different time frames for the allegations, as permitted.²⁷ For example, if an error notice asserts the servicer failed to provide an accurate payoff balance upon the borrower’s request per §1024.35(b)(6), or imposed a fee improperly per §1024.35(b)(5), the servicer may choose to respond separately by responding to the first error notice no later than seven days after receiving it and responding to the second one no later than 30 days after receiving it. The servicer could also take steps to extend the resolution time frame for the second notice for an additional 15 days.

Completing the investigation. After the investigation, the servicer must notify the borrower of the resolution in writing, as show in Table 3: Completing the Investigation:²⁸

Table 3: Completing the Investigation
Investigation Result	Notice Contents Required
Asserted error occurred and is corrected	Correction made Effective date of correction Contact information, including a telephone number, for obtaining further assistance Note: Under §1024.35(f)(1), if the servicer corrects an error and notifies the borrower of the correction in writing within five days (excluding weekends and holiday), some requirements do not apply
No error occurred	The determination that no error occurred Reason(s) for the determination Borrower’s right to request documents the servicer relied on in reaching the determination How to request the documents the servicer relied on Contact information, including a telephone number, for further assistance
Error different from asserted error occurred	Error(s) identified Action taken to correct the error Effective date of the correction Contact information, including a telephone number, for further assistance

Documentation request. When a servicer determines no error occurred and the borrower requests copies of documents on which the servicer relied, the servicer must comply within 15 days after receiving the request (excluding weekends and legal public holidays) at no charge. The servicer does not have to provide confidential, proprietary, or privileged documentation and may instead state why it was not provided.²⁹

Exceptions. The regulation contains three exceptions to the error notice acknowledgment and response requirements, as shown in Table 4: Exceptions Under §1024.35(g)(1), (f)(2).

Table 4: Exceptions Under §§1024.35(g)(1), (f)(2)

Duplicate error: when a borrower resubmits a previously addressed error notice, without providing new or material information

Overbroad error: when the servicer cannot reasonably determine the specific error alleged to have occurred; if a servicer can reasonably identify an error in an otherwise overbroad notice, the servicer follows §§1024.35(d), (e), and (i)

Untimely notice: a notice delivered more than one year after the servicing of the mortgage loan has been transferred to another servicer or the mortgage loan was discharged

Error before foreclosure sale: when the error pertains to the first notice or filing for foreclosure or a foreclosure order or sale received within seven days or fewer before a foreclosure, the § 1024.35(d) and (e) requirements do not apply; instead, the servicer must make a good faith attempt to respond to the borrower orally or in writing

Prohibited practices. Servicers may not charge a fee or require a borrower to make a payment not yet due as a condition for responding to an error notice.³⁰ In addition, for 60 days after receiving the error notice, servicers may not report adverse information about an alleged payment error to a consumer reporting agency.³¹ Except for covered errors in §1024.35(b)(9) and (10) (listed as errors 9 and 10 in Table 1), servicers can pursue applicable legal remedies during or after error resolution process.³²

REQUESTS FOR INFORMATION REQUIREMENTS (§1024.36)

A servicer must comply with any written requests for information related to servicing containing: (1) the name of the borrower, (2) information that enables the servicer to identify the borrower’s mortgage loan account, and (3) information the borrower is requesting.

Written notice requirements. As with error notices, notices on payment coupons or other forms of payment provided by the servicer is not a request for information. A servicer may also establish an address for information requests, which must be the same address as that established for a notice of error. A servicer is not required to handle requests for payoff balances as information requests.³³

Acknowledgment and timing requirements. After receiving a written information request, the servicer must follow specific acknowledgment, timing, and notice processes.³⁴

Acknowledgment. As with error notices, the servicer must provide a written response acknowledging the information request within five days after its receipt (excluding weekends and legal public holidays).³⁵

Responses and time frames. The time frame for responding to an information request is based on the type of information requested.

If the borrower requested the identity, address, or other relevant contact information of the owner or assignee of the mortgage loan, the servicer must respond no later than 10 days after receiving the request (excluding weekends and legal public holidays).
For all other information requests, the servicer must respond no later than 30 days after receiving the request (excluding weekends and legal public holidays).[36]

Extending the response time frame. The response time frame may not be extended if the request is for the identity, address, or other relevant contact information about the owner or assignee of the mortgage. For all other information requests, the time frame may be extended by 15 days (excluding weekends and legal public holidays); however, the servicer must notify the borrower of the extension and the reason(s) for the extension in writing before the end of the 30-day response period.[37]

Requests from potential successors in interest. In 2016, the Bureau amended the requirements for responding to information requests from a potential successor in interest to a borrower’s property because “it had received reports of servicers either refusing to speak to a successor in interest or demanding documents to prove the successor in interest’s claim to the property that either did not exist or were not reasonably available.”³⁸ The amendment requires servicers to acknowledge an information request indicating the requestor may be a successor in interest,³⁹ provided sufficient information is included to identify the mortgage loan. ⁴⁰

The servicer must acknowledge an information request in accordance with the time frames discussed previously. The servicer must also provide a notice that: (a) describes the documentation required to confirm successor’s identity and ownership interest, and (b) provides contact information with telephone number for further assistance.⁴¹ Alternatively, a servicer may send a combined acknowledgment and notice to the requestor within five days after receiving the request (excluding weekends and legal public holidays).⁴²

If the response to the servicer’s notice does not provide sufficient information to identify the requestor’s identity and ownership interest, the servicer may:

provide a response that includes examples of documents typically accepted to establish identity and ownership interest in a property;
indicate the requestor may obtain a more individualized description of required documents by providing additional information;
specify the additional information necessary to enable the servicer to identify the required documents; and
provide contact information, including a telephone number, for further assistance.

If a potential successor in interest subsequently provides the required information specified by the servicer orally or in writing, the servicer must treat the new information, together with the original request, as a new, nonduplicative request, received as of the date the required information was received, and must respond accordingly.⁴³

The responses provided to potential successors in interest do not have to provide any other information than specified previously.⁴⁴

Completing the process (§1024.36(d)(1)). A servicer must respond to an information request as follows, depending on the circumstances:

If the requested information is available, the servicer must provide it and contact information in writing.

If the information is not available, the servicer must send the borrower a written notice stating:

the information is not available to the servicer,
the basis for the determination, and
contact information that includes a telephone number for further assistance.

A servicer may conclude requested information is unavailable after conducting a reasonable search. Comment 36(d)(1)(ii)-2 provides examples.

Exceptions (1024.36(f)). In Table 5: Exceptions for Information Requests, we list the exceptions for acknowledging and responding to information requests.

Table 5: Exceptions for Information Requests
Request Type	Features
Duplicative	Substantially the same as the request to which the servicer has already responded
Confidential, proprietary, or privileged	Contains confidential, proprietary, or privileged information
Irrelevant	Contains information not directly related to the borrower’s mortgage loan
Overbroad/unduly burdensome	Request for an unreasonable volume of information or a request that would be impossible to respond to without exceeding the response timeframes or incurring unreasonable costs relative to the circumstances
Untimely	Received over a year after mortgage servicing was transferred to another servicer or the mortgage loan was discharged

For information requests subject to these exceptions, the servicer must still notify the borrower in writing that an exception applies and identify it. The notice must be provided not later than five days (excluding weekends and legal public holidays) after determining the exception applies.

PROHIBITED PRACTICES

Servicers may not assess a fee or require a payment that is owed as a condition of responding to the information request.⁴⁵ However, a servicer may charge a fee for providing a beneficiary notice under applicable state law. Unlike error notices, a request for information does not affect furnishing information to the consumer reporting agencies or pursuing allowable remedies provided in the loan agreement.⁴⁶

SOUND PRACTICES

A prior Outlook article titled “Mortgage Servicing: Managing Change”⁴⁷ discussed sound servicing practices for managing change that also apply here:

Maintain error resolution and information request policies and procedures that align with the complexity of mortgage servicing operations.
Provide adequate staff training that includes written procedures, where needed.
Develop internal controls and reviews for error resolution and information requests.
Remember that, if you use a third-party mortgage loan servicer, your institution remains responsible for vendor compliance and risk management.
Inform borrowers of servicer written error resolution and information request procedures in advance so they are aware of where to address error notices and information requests.
Review error notices and requests for information to monitor how mortgage loan servicing policies and procedures are affecting consumers.

CONCLUSION

As COVID-19 mortgage forbearances and moratoriums expire, servicers may see an increase in error notices or information requests from borrowers. It is important servicers’ compliance management systems are able to timely acknowledge, investigate, and comply with Regulation X. Specific issues should be discussed with your primary regulator.

ENDNOTES

¹ See https://www.consumerfinance.gov/about-us/newsroom/ffiec-announces-availability-of-2020-data-on-mortgage-lending/. The Bureau noted that an additional 432,000 loans were originated in 2020 where institutions did not specify whether originations were closed-end or open-end.

² The Federal Reserve publishes this information as part of the data it collects on “Financial Accounts Guide” (Households and nonprofit organizations; one- to four-family residential mortgages liability as of Q1 2021).

³ See Scott Sonbuchner, “Error Resolution and Liability Limitations Under Regulations E and Z: Regulatory Requirements, Common Violations, and Sound Practices,” and Scott Sonbuchner, “Error Resolution and Liability Limits for Prepaid Accounts and Foreign Remittance Transfers.” Both articles were published in Consumer Compliance Outlook Issue 2 2021.

⁴ See 12 C.F.R. §1024.2(b).h.

⁵ See 12 C.F.R. §1024.5(b) (exemptions to RESPA and Regulation X).

⁶ See 12 C.F.R. §§1024.30-41.

⁷ See 12 C.F.R. §1024.31 (emphasis added).

⁸ See 12 U.S.C. § 2605(e)(1)(B).

⁹ See 76 Federal Register at 10696 (February 14, 2013).

¹⁰ See Comment 31(a)(10)-2 (emphasis added).

¹¹ See 76 Federal Register at 10721 (“The Bureau believes it is necessary and appropriate at this time not to apply the requirements in subpart C to open-end credit (home equity lines).”

¹² See 12 C.F.R. §1026.41(e)(4).

¹³ See 12 C.F.R. §1024.30(b)1).

¹⁴ A small servicer is also subject to the prohibition on foreclosure referral in §1024.41(f). See 12 C.F.R. §§1024.30(b)(1) and 1024.41(j).

¹⁵ See Regulation X, Comment 2 for definition of Qualified Written Request in §1024.31.

¹⁶ See Comment 1024.35(a)-1 that identifies the process a servicer may use to verify if someone claiming to be the borrower’s agent has authority to act on the borrower’s behalf.

¹⁷ See 12 C.F.R. §1024.35(a).

¹⁸ See 12 C.F.R. §1024.35(a).

¹⁹ See 12 C.F.R. §1024.35(a).

²⁰ See 12 C.F.R. §1024.35(c).

²¹ See Comment 35(c)-4.

²² See 12 C.F.R. §1024.35(e)

²³ See 12 C.F.R. §1024.35(e)(2).

²⁴ See 12 C.F.R. §1024.35(d).

²⁵ See 12 C.F.R. §1024.35(e)(3)(i).

²⁶ See 12 C.F.R. §1024.35(e)(3)(ii).

²⁷ See Comment 35(e)(3)(ii)-1.

²⁸ See 12 C.F.R. §1024.35(e)(1).

²⁹ See 12 C.F.R. §1024.35(e)(4).

³⁰ See 12 C.F.R. §1024.35(h)

³¹ See 12 C.F.R. §1024.35(i)(1).

³² See Comment 35(h)-1 and §1024.35(i)(2).

³³ See 12 C.F.R. §1024.36(a) & (b).

³⁴ Per 12 C.F.R. §1024.36(e), these time frames do not apply if the servicer provides in writing the requested information to the borrower as well as contact information that includes a telephone number for further assistance within five days after receiving the request (excluding weekends and holidays).

³⁵ See 12 C.F.R. §1024.36(c).

³⁶ See 12 C.F.R. §1024.36(d)(2)(i).

³⁷ See 12 C.F.R. §1024.36(d)(2)(ii).

³⁸ See 81 Federal Register at 72,160, 72,165 (October 19, 2016).

³⁹ Requests for information from the agent of a potential successor in interest are also subject to these provisions. See Comment 36(i)-2.

⁴⁰ See 12 C.F.R. §1024.36(i)(1).

⁴¹ See 12 C.F.R. §1024.36(i)(1).

⁴² See 12 C.F.R. §1024.36(e). Section 4.6.4 of the Bureau’s Small Entity Compliance Guide for Regulation X clarifies that this applies to successors in interest.

⁴³ See 12 C.F.R. §1024.36(i)(2).

⁴⁴ See 12 C.F.R. §1024.36(d)(3).

⁴⁵ See 12 C.F.R. §1024.36(g).

⁴⁶ See 12 C.F.R. §1024.36(h).

⁴⁷ See Katie Ringwald, “Mortgage Servicing: Managing Change,” Consumer Compliance Outlook (Fourth Issue 2020).