Consumer Compliance Requirements for Servicers of Purchased Mortgage Loans
An article in this issue of Consumer Compliance Outlook (CCO) discusses the laws and regulations that apply to purchasers of residential mortgage loans. As considerations of mortgage servicing arise with purchasing a mortgage loan (depending on whether the servicing rights are also purchased and, if so, whether they are retained or sold), we are publishing this companion article on the applicable duties of the servicer under the following laws and regulations: the Real Estate Settlement Procedures Act (RESPA), the Truth in Lending Act (TILA), the Equal Credit Opportunity Act (ECOA), the Fair Housing Act (FHA), the Flood Disaster Protection Act (FDPA), the Fair Credit Reporting Act (FCRA), the Servicemembers Civil Relief Act (SCRA), and the Federal Trade Commission Act.
REAL ESTATE SETTLEMENT PROCEDURES ACT
RESPA and Regulation X, its implementing regulation, govern different aspects of loan origination and servicing of federally related mortgage loans, as defined in 12 C.F.R. §1024.2. If the purchaser of a mortgage loan acquires the servicing rights for such a loan, RESPA and Regulation X would apply. See 12 C.F.R. Part 1024.
For further reading, see Richele S. Brady, “Escrow Accounting Rules: Are You in Compliance?” (CCO, Second Issue 2018), and Alinda Murphy, “Mortgage Servicers’ Duties Under Regulation X to Respond to Notices of Error and Requests for Information” (CCO, Third Issue 2021). This issue of CCO also includes an article on the Federal Reserve’s top-cited Regulation X violations and ways to mitigate this risk.
TRUTH IN LENDING ACT
TILA addresses the potential liability of an assignee when a consumer credit agreement is transferred or sold at 15 U.S.C. §1641(f). The companion article in this issue on obligations of loan purchasers discusses this provision for purchasers. Specifically, §1641(f) clarifies that a servicer is not subject to liability unless it also owns the loan.1 For example, if a financial institution purchases a mortgage loan and retains a servicer to service it, the servicer is not subject to assignee liability because it does not own the loan.
FAIR LENDING
Equal Credit Opportunity Act
Servicers’ ECOA Obligations
In May 2022, the Consumer Financial Protection Bureau released an advisory opinion to clarify that ECOA continues to apply after loan origination. Thus, servicers must ensure they are not discriminating in the servicing of a loan on a prohibited basis.2
Furnishers’ Obligations Under ECOA
Section 1002.10(c) of Regulation B imposes the following furnishing requirements on creditors, including their assignees, if they choose to furnish loan information to consumer reporting agencies:3
- To reflect on new accounts the participation of both spouses if the applicant’s spouse is permitted to use or is contractually liable on the account (other than as a guarantor, surety, endorser, or similar party)
- To reflect on existing accounts the participation of both spouses within 90 days of receiving a written request from one of the spouses
- To report spousal participation on an account to the consumer reporting agencies in a manner that will enable the agencies to provide access to the information in the name of each spouse
- To furnish information in the name of the spouse about whom the information is requested when responding to an inquiry for an account designated to reflect both spouses’ participation4
For additional information, see Maureen Yap, “Furnishers’ Obligations for Consumer Credit Information Under the CARES Act, FCRA, and ECOA” (CCO, Second Issue 2020).
Fair Housing Act
Section 805 of the FHA, 42 U.S.C. §3605, prohibits discrimination in the availability or terms and conditions of residential real estate–related transactions on the prohibited bases of race, color, religion, national origin, sex, handicap, or familial status. This requirement extends to servicers. “The application of different standards or procedures in administering foreclosures, late charges, penalties, reinstatements, or other collection procedures is unlawful.”5
FLOOD DISASTER PROTECTION ACT OF 1973
The National Flood Insurance Act, as amended by the FDPA, requires a regulated lending institution or federal agency lender that makes, increases, extends, or renews a loan secured by improved real estate or mobile homes located, or to be located, in a special flood hazard area (SFHA) where flood insurance is available under the National Flood Insurance Program (NFIP) to provide a notice to the borrower and to ensure the loan is covered by flood insurance for the term of the loan for the lesser of the loan balance or the maximum amount of insurance available under the NFIP. The implementing regulations for the FDPA refer to a loan for which flood insurance is required as a designated loan. Loans sold to certain government-sponsored enterprises6 are also subject to the flood insurance purchase requirements.
A loan assignee that is a regulated lending institution assumes responsibility for FDPA compliance. This includes the duty to force place flood insurance in a timely manner when a policy lapses or when the amount of insurance is insufficient, and to monitor flood map changes to stay apprised of Federal Emergency Management Agency (FEMA) changes to the map. If the real property securing a loan is not in an SFHA when purchased, but FEMA subsequently remaps the property into an SFHA, the map change triggers flood insurance compliance requirements. In addition, if the servicer for a designated loan changes, the assignee must notify FEMA or its designee of the change of servicer within 60 days after the effective date of the change for a loan covered by an NFIP policy.7 This notice may be provided electronically.8 This issue of CCO also includes an article on the Federal Reserve’s top-cited FDPA violations and ways to mitigate this risk.
FAIR CREDIT REPORTING ACT
Furnishers’ Obligations Under the FCRA
The FCRA, as implemented by Regulation V, regulates persons furnishing information to a consumer reporting agency. Furnishers generally have multiple duties under §623 of the FCRA (15 U.S.C. §1681s–2), and Subpart E of Regulation V, (12 C.F.R. §§1022.40–42) that may apply to an assignee of a loan that furnishes information about the loan to the consumer reporting agencies:
- The duty to provide accurate information
- The duty to correct and update information
- The duty to notify the consumer reporting agencies that the consumer disputes furnished information
- The duty to provide notice when a consumer voluntarily closes an account
- The duty to provide notice of delinquency of accounts
- The duty to take certain actions after receiving notice of identity theft
- The duty to notify a consumer regarding reporting negative information to consumer reporting agencies (model forms are available in Appendix B to Regulation V)
- The duty to investigate a consumer’s dispute filed directly with the furnisher about furnished information
- The duty to investigate a consumer’s dispute filed with the consumer reporting agencies about furnished information
- The duty to establish reasonable policies and procedures for the accuracy and integrity of furnished information
For further information, refer to the CCO article “Furnishers’ Obligations for Consumer Credit Information Under the CARES Act, FCRA, and ECOA.”
FCRA Rules for Sharing Information with Affiliates
Section 624 of the FCRA restricts a person’s ability to share certain consumer data the person obtained with its affiliates. As the FCRA broadly defines “person” in §603(b),9 this restriction applies to the servicer. When a servicer receives consumer information about mortgage loans it will be servicing, affiliates of the servicer may not use the information to advertise to or solicit the consumer unless it has been clearly and conspicuously disclosed to the consumer that the information may be communicated for purposes of making solicitations and the consumer is provided an opportunity to prohibit such solicitations. If the consumer opts out, that election will be effective for five years unless the consumer revokes it. Upon expiration, the restriction applies unless the consumer is provided the opportunity to opt out for another period of at least five years. These rules do not apply when the institution already had a preexisting relationship with the consumer, among other exceptions.
For example, suppose a consumer obtains a mortgage loan from a bank, which sells it to a third party, and the third party sells the servicing rights to a servicer. The servicer has an affiliated insurance company, which is interested in soliciting the consumer for insurance products. Unless an exception applies, the affiliate cannot use the information from the loan to solicit the consumer. However, if the consumer is given an opportunity to opt out and chooses not to, the affiliate may move forward with solicitation. For additional information, see Dean A. Pankonien and Diane van Gelder, “Affiliate Marketing Rules” (CCO, Fourth Quarter 2008).
SERVICEMEMBERS CIVIL RELIEF ACT
The SCRA10 is a federal law that protects servicemembers, with some of the benefits accorded to servicemembers also extended to servicemembers’ spouses, dependents, and other persons subject to the obligations of servicemembers. The SCRA covers issues such as mortgage foreclosure, mortgage interest rates, credit card interest rates, rental agreements and evictions, automobile repossessions, automobile leases, and installment loans.11
Among other protections, the SCRA limits the amount of interest a creditor can charge a servicemember for a credit obligation or liability incurred prior to entry into active-duty service. Specifically, creditors, including purchasers of loans, may not charge higher than a 6 percent interest rate for the duration of a servicemember’s period of active duty plus one year thereafter.12 The SCRA’s interest rate limitations are triggered if a borrower of a purchased loan enters into active duty service and provides written notice and proof of military service to the creditor.13 Additionally, a creditor (including an assignee) cannot sell, seize, or foreclose on a servicemember’s real property secured by a mortgage during, or within one year after, a servicemember’s period of active duty without a court order.14 The SCRA also ensures protections against repossession of a servicemember’s property and against default judgments in civil cases.15
The Department of Defense maintains a database of persons in active duty, which creditors can check to determine if the SCRA applies.16
UNFAIR OR DECEPTIVE ACTS OR PRACTICES (UDAP)
Section 5(a) of the Federal Trade Commission Act, codified at 15 U.S.C. §45(a), prohibits “unfair or deceptive acts or practices in or affecting commerce.”17 This prohibition applies to any aspect of an institution’s products and services, including the servicing of purchased mortgage loans. The Federal Reserve has published joint guidance with the Federal Deposit Insurance Corporation (FDIC) on the legal standards for determining if a practice is unfair or deceptive.18
In the context of purchased mortgages, one area where UDAP issues may arise is through communications with the borrower. For example, a purchaser that encouraged borrowers to make payments by phone but failed to disclose a $25 fee for telephone payments could potentially be cited for an unfair or deceptive act or practice.
CONCLUSION
Purchasing residential mortgage loans may allow a financial institution to generate additional revenue and income while avoiding the complexities and costs associated with mortgage loan origination. However, as discussed in this article, the servicer has corresponding compliance obligations as the servicer of the loan. Financial institutions should raise specific issues and questions with their primary regulators.
ENDNOTES
1 TILA relies on the definition of servicer in §2605(i)(2) of RESPA. Note also that under 12 C.F.R. §1026.39(a), a servicer is not required to provide a mortgage loan transfer notice unless it owns the loan.
2 “Revocations or Unfavorable Changes to the Terms of Existing Credit Arrangements,” 87 FR 30097 (May 18, 2022).
3 12 C.F.R. §1002.10.
4 12 C.F.R. §1002.10(c).
5 Federal Reserve Board, Consumer Compliance Manual, Federal Fair Lending Regulations and Statutes, Fair Housing Act, at p. 2 (emphasis added). See also 24 C.F.R. §100.130(b).
6 The mandatory flood insurance purchase requirement under the FDPA applies to loans purchased by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
7 Flood Q&A Servicing 2, 87 FR at 32893. See also Servicing 7, 87 FR at 32894. (“If a lender is acquired by or merges with another lender, the duty in connection with NFIP policies to provide notice for the loans being serviced by the acquired lender will fall to the successor lender in the event that notification is not provided by the acquired lender prior to the effective date of the acquisition or merger.”)
8 See, e.g., 12 C.F.R. §208.25(j)(2); Flood Q&A Servicing 4, 87 FR at 32894.
9 15 U.S.C. §1681a(b).
10 50 U.S.C. §3901 et seq.
11 50 U.S.C. §3901 et seq.
12 50 U.S.C. §3937(a)(1); see also Margo A. Anderson, “Compliance Requirements for the Servicemembers Civil Relief Act” (CCO, Second Quarter 2011).
13 50 U.S.C. §3937(b)(1)(A).
14 50 U.S.C. §3953.
15 50 U.S.C. §§3931, 3952(a).
16 For further information, see Lanette Meister, Lorna Neill, Amal Patel, and Vivian Wong, “Servicemember Financial Protection: An Overview of Key Federal Laws and Regulations” (CCO, Second Issue 2017).
17 15 U.S.C. §45(a).
18 Federal Reserve Board and the FDIC, “Unfair or Deceptive Acts or Practices by State-Chartered Banks” (March 11, 2004).