What’s old is new again. 2021 will bring a new U.S. Administration and hopefully positive developments with regard to the COVID-19 pandemic, but it also is likely to see further adverse economic impacts. Various financial models are predicting differing trajectories for potential recession and economic recovery. What we do know is that 2020 has resulted in sizeable income loss and employment interruption for many. In the face of all this challenge, the CFPB is likely to focus in 2021 on consumer loss mitigation process and transparency. Getting it right is paramount for lenders and servicers as 2021 customer contact volumes will increase with the potential sunset of COVID-19 relief measures.
Recently, the CFPB announced a consent decree with Seterus, Inc. and its successor-in-interest Kyanite Services, Inc. The clear priority is helping consumers avoid foreclosure, a risk we know will continue throughout 2021. The lengthy consent decree covers loss mitigation conduct from 2014 through 2018, years in the past. But the violations asserted and the consent Decree conclusions preview 2021 priorities and hot buttons. Transparency and accountability are two themes that should serve consumer lenders and servicers well and mitigate regulatory and litigation risk. Importantly, the Order highlights risks associated with process automation in servicing. In addition to laser focus on requirements and process, lenders and servicers may want to consider adopting customer experience approaches like ombudspeople or “secret shoppers” to get a real sense of how employees and systems are interacting with and serving customers.
CFPB Allegations: Defective Acknowledgement Letters
The CFPB Consent Order announcement focuses on the adverse impact of defective loss mitigation acknowledgement letters: “… some borrowers were delayed or deprived of a reasonable opportunity to get their loss mitigation applications completed and evaluated, and were delayed in receiving or deprived of the protections against prohibited foreclosure activities to which they were entitled under Regulation X. Some borrowers suffered improper foreclosure activity as a result. Borrowers also incurred injuries such as negative credit reporting, additional late fees, and additional interest as a result of defective acknowledgment notices that delayed or impaired their ability to obtain the benefits of a loss mitigation option.”
Application Completeness and Foreclosure Alternatives:
In complying with RESPA Regulation X, servicers generally must implement loss mitigation processes which (i) inform borrowers of the documents and information they must provide to complete the application; (ii) provide borrowers a reasonable date to submit the documents and information; (iii) evaluate complete applications received early enough in the foreclosure process for all alternatives to foreclosure; and (iv) provide certain foreclosure protections to borrowers. 12 C.F.R. § 1024.41.
Notice and Follow Up Request:
Within 5 days of receipt, servicers must provide a written notice receipt of a loss mitigation application along with clear information as to whether the application is complete or incomplete. 12 C.F.R. § 1024.41(b)(2)(i)(B). If not complete, the notice must flag for the consumer which additional documents and information are required and provide a reasonable date for submission. 12 C.F.R. §§ 1024.41(b)(2)(i)(B), 1024.41(b)(2)(ii).
The Consent Order describes in detail certain process programming which the servicer and a third party vendor undertook in an attempt to comply with these obligations, but which failed. According to the Consent Order, a host of problems led to serious errors and harm. For example, systems information did not transfer from one area to another as necessary. Acknowledgment letter process coding was not detailed enough to distinguish various scenarios, leading to unclear and inaccurate acknowledgements of certain borrower submissions. “As a result of its reliance on this inaccurate data and coding and the faulty communication between various computer systems, Seterus sent out thousands of Acknowledgment Notices that contained one or more errors. Certain Acknowledgment Notices inaccurately listed documents that Seterus had received as missing, inaccurately listed documents that had not been received as having been received, or both.” Consent Order, paras. 23 and 24.
Importantly, the Consent Order concludes sometimes more is not better. Apparently, at certain times and under certain circumstances, the servicer sent acknowledgement letters to borrowers for each new document, even if not required under Reg. X. In the CFPB’s view, this process led to borrower confusion and misunderstandings. Adding insult to injury, some “corrected” letters contained the same defect due to letter automation processes, which had not been adequately addressed.
Testing & Getting It Right:
The Consent Order conduct provisions contain the expected compliance requirements paragraphs. Interestingly, however, two specific provisions go farther, requiring testing to ensure operational compliance and specifically requiring effective vendor oversight:
“b. implement procedures to ensure that before a foreclosure action is taken it is permitted under Regulation X, 12 C.F.R. § 1024.41, and implement testing to ensure foreclosure protections are properly being afforded to borrowers;
”c. implement processes and controls to oversee and monitor its vendors who provide services in connection with loss mitigation applications to ensure that Respondent’s use of those vendors does not result in violations of Regulation X, 12 C.F.R. § 1024.41.”
Consent Order, para. 74 (b) and (c).
Ultimately, the Bureau ordered payment of almost $5 million in consumer redress to loss mitigation borrowers whose loans were foreclosed and those whose were not, plus a $500,000 civil money penalty for the unfair and deceptive acts and practices in violation of the Consumer Financial Protection Act of 2010 (CFPA), 12 U.S.C. §§ 5531 and 5536.
Conclusion and Takeaways:
2021 will involve substantial on-going loss mitigation and borrower assistance activity as we emerge from the COVID-19 pandemic. Forbearance options, balloon loan modifications and other consumer payment relief will need to be implemented correctly and seamlessly. Volumes of consumer inquiries will increase, as will the intensity of focus from state and federal regulators and others. Leveraging automation and technology to help process flow and efficiency is critical, but equally critical is ensuring the correctness of those processes. Lenders and servicers ought to consider the customer experience carefully and take note of potential friction points and risks. Proactively monitoring and managing consumer inquiry volumes will be important, as will be training and scalability of operations. Throughout the tumultuous year that was 2020, consumers have seen more than ever the power of making their voices heard on social media and through grass roots efforts. Assessing consumer experience and sentiment real time in 2021 likely will be critical to avoiding missteps and mitigating regulatory, reputation and litigation risk.