Office of the Executive Secretary Consumer Financial …€¦ · · 2015-03-17Office of the...

Krista J. Shonk Vice President, Mortgage Finance

& Senior Regulatory Counsel 202-663-5014

[email protected]

March 16, 2015

Ms. Monica Jackson

Office of the Executive Secretary

Consumer Financial Protection Bureau

1700 G Street N.W.

Washington, D.C. 20552

Re: Docket No. CFPB-2014-0033; RIN 3170-AA49

Amendments to the 2013 Mortgage Rules Under the Real Estate Settlement Procedure Act

(Regulation X) and the Truth in Lending Act (Regulation Z)

The American Bankers Association (“ABA”)1 is pleased to comment on the Consumer Financial

Protection Bureau’s (“the Bureau” or “CFPB”) proposed amendments2 to the mortgage servicing

rules contained in Regulation X and Regulation Z (the “Servicing Rules” or “the Rules”). The

Bureau issued the Rules in January 2013 and created a highly detailed regulatory framework for

mortgage servicing.

As banks worked to implement the new requirements, they identified numerous questions regarding

how to interpret and apply the Rules. To address these concerns, the Bureau issued multiple

clarifying amendments.3 We appreciate that the Bureau is continuing to address ambiguities and

other challenges posed by the Servicing Rules. However, ABA is concerned that some aspects of the

proposal would incorporate additional regulatory requirements into an already extensive and complex

regulatory framework.

Mortgage servicers should service loans in a manner that is accurate, transparent, timely, and

responsive to borrowers. To achieve this objective, Federal regulation and oversight should promote

high-quality servicing across all servicer types, sizes, and business models. However, the Bureau’s

Servicing Rules already exceed the requirements mandated in the Dodd-Frank Act and we are

concerned that the continued layering of detailed regulatory requirements, combined with the

unfavorable capital treatment of servicing assets adopted by the Federal banking agencies, will

continue to decrease the value proposition of mortgage servicing for banks of all sizes. Consumers

1 The American Bankers Association is the voice of the nation’s $15 trillion banking industry, which is composed of

small, regional and large banks that together employ more than 2 million people, safeguard $11 trillion in deposits

and extend more than $8 trillion in loans. Learn more at aba.com.

2 79 Fed. Reg. 74176 (Dec. 15, 2014).

3 78 FR 44685 (July 24, 2013), 78 FR 60381 (Oct. 1, 2013), 78 FR 62993 (Oct. 23, 2013), CFPB Bulletin

2013–12, Implementation Guidance for Certain Mortgage Servicing Rules (Oct. 15, 2013), and 79 FR 65300, 65304

(Nov. 3, 2014).

http://aba.com/

Docket No. CFPB-2014-0033; RIN 3170-AA49 Consumer Financial Protection Bureau

March 16, 2015

Page 2

(particularly those in rural areas) will be hurt, not helped, if rulemakings result in further

consolidation in the servicing industry.

Our concern regarding the viability of mortgage servicing for insured depository institutions is not

merely academic. Our members tell us that they are reevaluating their business models, assessing the

costs and risks of new servicing and capital regulations, and are recalculating the minimum number

of loans that they need to service in order for servicing to remain a viable business proposition. The

ability to recruit and retain highly skilled staff in certain geographic locations is also an important

consideration as banks reassess their servicing strategy.

We also believe that some aspects of the proposed amendments are off-balance. The cumulative

technological costs and legal risk associated with implementing the proposed changes relating to

successors in interest, customers in bankruptcy, and customers who have filed cease communication

notices is out of proportion relative to the limited number of consumers who might derive a

meaningful benefit from the proposal. For example, some of our members have a very small

number of mortgage borrowers who are in bankruptcy. However, these institutions would be

required to incur all of the systems costs associated with complying with the proposed amendments.

The expense per loan of complying with these regulatory requirements applicable to such a narrow

group of borrowers is an excessive burden, particularly for community banks. Borrowers would not

benefit if high-quality servicers exit the business due to expensive regulatory demands that do not

benefit the majority of their customers.

With the foregoing in mind, ABA submits the following recommendations regarding the proposed

amendments. In addition, we note the highly detailed nature of the proposed amendments and the

accompanying preamble material, and we anticipate that banks will identify additional concerns

associated with the proposed changes after the comment period closes. We also foresee that banks

will have many interpretive questions regarding any final rule, particularly if the Bureau adopts the

amendments largely as proposed. ABA requests that the Bureau provide timely responses to these

inquiries in a form that is widely available to all servicers.

Below are the highlights of ABA’s position on key aspects of the proposal:

Successors in Interest. ABA requests that the Bureau limit the successor in interest

provisions to situations involving the death of an obligor. In the event that the Bureau elects

to adopt the rule as proposed, we recommend that servicers be protected from RESPA

liability as to non-obligor successors.

Lender-Placed Insurance. We support the Bureau’s effort to improve the rules applicable to

lender-placed insurance notices.

Definition of Delinquency. We generally support the Bureau’s proposed definition of

“delinquency.” However, we are troubled that banks that choose to credit payments to the


March 16, 2015

Page 3

oldest outstanding payment would be precluded from ever foreclosing on a mortgage loan

that is delinquent on a rolling basis. We request that the Bureau provide banks the flexibility

to adopt policies and procedures that establish when a bank will commence foreclosure in

rolling delinquency situations.

Early Intervention – Bankruptcy and FDCPA. ABA requests that the Bureau not adopt the

proposed amendments to the early intervention requirements in bankruptcy and FDCPA

situations. The proposal is overly complicated and would require banks to expend significant

resources to provide early intervention communications that would provide questionable

benefit to a narrow subset of borrowers. In addition, the proposal would potentially conflict

with state law and the interpretations of individual bankruptcy courts.

Loss Mitigation.

Collection of Documents and Information. We request that the Bureau revise the

proposed amendments to clarify that servicers may still include in their waterfall a

determination of whether the borrower wishes to remain in the home.

Reasonable Date to Submit Missing Information. We request that the Bureau

establish a bright line test of 30 calendar days for a borrower to submit missing

information.

Short-term Repayment Plans. Requiring that a bank attempt to collect documents and

information to evaluate a loss mitigation application for all loss mitigation options

when a borrower specifically requests a short-term repayment plan is not consistent

with or reflective of the needs or wants of borrowers and would lead to erroneous

perceptions of inadequate customer service (i.e., the bank is not listening to me).

Written Notice of Complete Application. We recommend that the foreclosure sale

date be removed from the written notice of complete application. ABA also requests

that the Bureau provide a model form to facilitate compliance with the written notice

requirement.

Information Not in a Borrower’s Control. ABA finds this aspect of the proposal

confusing and believes that it would be difficult to track and to demonstrate

compliance. We are also concerned that the Bureau or examiners will later attempt to

specify when a bank can make a loss mitigation determination without third-party

information.

Foreclosure Referral – Subordinate Liens. ABA strongly supports permitting a

servicer of a subordinate lien to join the foreclosure action of a senior lienholder even

though the subordinate lien is not more than 120 days past due.

Repeat Requests for Loss Mitigation. ABA does not oppose considering a borrower

for loss mitigation multiple times. However, any requirement to do so should permit


March 16, 2015

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restrictions on the frequency and number of times that a servicer is required to

comply with the loss mitigation requirements over the life of a loan.

Servicing Transfers. We are concerned that requiring transferee servicers to comply

with the loss mitigation timelines applicable to transferor servicers would require

transferees to obtain detailed information on the loans being transferred prior to the

transfer date, which may not be legally permissible under privacy laws and other

restrictions on unrelated companies sharing loan information. We are also concerned

about situations where a transferor servicer uses most of the time allotted under the

Servicing Rules for reviewing loss mitigation applications and responding to

borrower appeals. We recommend that transferee servicers be given a reasonable

extension of time in these circumstances.

Periodic Statements.

Acceleration and Trial Modifications. We request that the Bureau also address

situations where a bank accelerates a loan and the borrower subsequently enters a

trial loan modification. In addition, banks should be able to provide a reinstatement

amount that is “good through” a specified date and provide the borrower with contact

information for obtaining an up-to-date reinstatement amount. ABA members would

also find it helpful for the Bureau to develop additional model periodic statements to

demonstrate various trial modification and acceleration scenarios.

Customers in Bankruptcy. We request that the Bureau not adopt the proposed

amendments requiring the provision of periodic statements to borrowers in

bankruptcy. If the Bureau does require periodic statements in bankruptcy situations,

we request clarification regarding the disclosure of pre-petition and post-petition

payments and when the first modified statement should be filed after a customer files

for bankruptcy under Chapter 12 or 13 of the Bankruptcy Code.

Small Servicer Exemption. ABA supports the Bureau’s effort to ensure that banks that offer

collection contract services are not disqualified from the small servicer exemption. However,

we believe that the proposed one loan per 12-month period for each seller-financer is overly

restrictive. We also support grandfathering existing collection contracts from the regulatory

limit.

Charged-Off Loans. Loans that a bank charged off prior to the effective date of the proposed

amendments should not be subject to the periodic statement requirement.

Effective Date. ABA recommends an effective date of at least 18 months for the successor in

interest, early intervention, and periodic statement amendments. We support an effective

date of 280 days for the remaining aspects of the proposal.


March 16, 2015

Page 5

I. Successors in Interest

A. Background.

The Servicing Rules currently require that servicers maintain policies and procedures to ensure that,

upon notification of the death of a borrower, the servicer can promptly identify and facilitate

communication with the successor(s) in interest with respect to the deceased borrower’s mortgage

loan.4 The Bureau is proposing to significantly expand regulatory requirements regarding successors

in interest5 and broaden the types of transfers of property interests that would be covered by the

Servicing Rules. Specifically, the proposal would:

Require servicers to communicate with potential successors in interest and to have

policies and procedures for confirming the identity and ownership interest of such

individuals;

Specify reasonable and unreasonable documentation requirements for confirming a

successor’s ownership interest in a property;

Expand the categories of the types of property interests covered by the successor in

interest rules to include successors who acquire an ownership interest in property as a

result of death, divorce, legal separation, transfers to a family trust, or a transfer to a

spouse or child;

Apply all of the Servicing Rules in Subpart C6 to successors in interest who have

acquired an ownership interest in the property regardless of whether the successor in

interest is liable on the mortgage loan obligation; and

Protect successors in interest from acceleration.

The proposed rule is intended to help successors in interest avoid foreclosure. We support this

objective and believe that servicers should engage in clear, timely, and responsive communications

4 12 C.F.R. 1024.38(b)(1)(vi). In October 2013, the Bureau issued Bulletin 2013-12 to provide implementation

guidance regarding this requirement.

5 For the purposes of this proposal, the Bureau is referring to successors in interest who have been transferred a legal

interest in a property securing a mortgage loan from a borrower on the mortgage loan; the successor in interest may

not necessarily have assumed the mortgage loan obligation (i.e., legal liability for the mortgage debt) under State

law, and the servicer may not necessarily have agreed to add the successor in interest as obligor on the mortgage

loan. 79 FR 74180.

6 Subpart C of the Servicing Rules addresses servicing transfers; escrow accounts; error resolution; information

requests; lender-placed insurance; servicing policies, procedures, and requirements; early intervention; continuity of

contact; and loss mitigation.

http://files.consumerfinance.gov/f/201310_cfpb_mortgage-servicing_bulletin.pdf


March 16, 2015

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with successors in interest to achieve an orderly resolution of the situation. In fact, effective

communication is in the best interest of the successor and the servicer.7

However, as explained below, ABA believes that providing loan-related information to a successor in

interest who is not liable on the note would violate the financial privacy of living obligors. We are

also troubled by the expanded scope of property transfers covered by the proposal, the legal risk

associated with identifying and confirming a successor’s ownership interest in the property, and the

provision of all borrower rights to non-obligors. Finally, the proposal’s requirement to disclose

account information could increase the risk for fraud and identity theft. Our detailed comments are

set forth below.

B. Privacy Concerns.

The proposal would require that banks provide a variety of account-related disclosures to successors

in interest, respond to information requests regarding the mortgage loan account, and provide

periodic statements to such individuals. The disclosure of loan information involving living obligors

is particularly worrisome. Providing this type of information to individuals who are not obligated on

the mortgage loan is wholly inconsistent with customers’ expectation that banks keep financial

information confidential. In addition, State privacy laws may preclude a servicer from providing

loan-related information unless such information sharing pertains to the enforcement of the loan or is

authorized by the existing borrower(s).8

The proposed expansion of the type of property transfers covered by the proposal raises significant

privacy concerns associated with providing loan information to non-obligors. For example:

Divorce. The proposal would apply to transfers of property in situations involving divorce.

Just because there is a divorce decree does not mean that it would be appropriate for a bank

to disclose account-related information to a non-obligated, former spouse who has obtained

7 For example, portfolio lenders directly incur credit losses associated with non-performing loans and therefore have

every incentive to provide quality servicing and to communicate with successors in interest who may be

experiencing difficult circumstances in their lives. We also note that banks that service loans that they originated

but sold into the secondary market face significant reputation risk and potential loss of other banking relationships

with the customer if they are unresponsive to successor in interest situations. Banks that service loans for others

generally must remit principal and interest payments to investors even when a loan becomes delinquent. Therefore,

servicers in various types of servicing arrangements have a financial incentive to (1) communicate with successors

in interest to increase the likelihood that the mortgage loan remains performing and (2) take steps to provide a new

loan to the successor or to arrange a loss mitigation plan for successors who are obligors on the existing loan.

8 We also note that some state supreme courts have found a right to financial privacy under state law. See Charnes

v. DiGiacomo, 612 P.2d 1117 (Colo. 1980), holding that an individual has an expectation of privacy in records of his

financial transactions held by a bank in Colorado.


March 16, 2015

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title to the property. Doing so would require banks to disclose information that the obligated

spouse may not want to be disclosed. 9

Estate Planning. The proposal would apply to transfers of property from parents to children

and to transfers involving family trusts. If living parents transfer the mortgaged property for

estate planning purposes and keep making scheduled loan payments, a bank would be

required to provide servicing-related disclosures and loan account information to children

who may be phishing for financial information about their parents.

Electronic Statements. Privacy would also be a concern in situations where a living borrower has

requested to receive periodic statements electronically. Commonly, online banking systems are set

up such that when a customer logs onto the bank’s online banking portal, s/he is taken to a dashboard

containing links to detailed information regarding every account the customer has with that particular

institution. Banks could not simply “turn off” a successor in interest’s access to these other accounts.

Other Financial Information. The Internal Revenue Service requires that lenders send borrowers a

Form 1098 each year detailing the amount of mortgage interest that the borrower paid during the tax

year. This form is a key piece of information because borrowers may deduct mortgage interest from

their taxable income. Servicing platforms assume that all notices, disclosures, periodic statements,

and other communications involving the mortgage loan should be provided to the borrower. Because

these systems cannot distinguish between information that should be sent exclusively to the borrower

and information that should be provided to the successor in interest, there is a high risk that a non-

obligor successor in interest would receive the Form 1098 of a living borrower. This would be a

significant breach of privacy.

Summary. We fundamentally disagree with the CFPB’s conclusion that a non-obligated successor

with a mere, possibly unperfected, ownership interest in mortgaged property has a right to detailed

information regarding the mortgage loan. While we appreciate the Bureau’s objective of preventing

unnecessary foreclosure in successor in interest situations, we believe that the privacy implications of

the proposed rule for living obligors constitute significant overreach by the Bureau and are altogether

inconsistent with a borrower’s expectation of privacy and confidentiality.

We recognize that there could potentially be situations where a non-obligated successor in interest is

at risk of foreclosure because a living obligor is delinquent or stops making payments on the

mortgage loan. In this situation, banks strongly object to being placed in the middle of a dispute

9 We are also concerned about the implications for domestic violence situations where the abusing spouse receives

the home as part of a divorce or legal separation agreement. In this situation, the abuser could request and obtain

loan account records and contact information for the fleeing spouse. Disclosing the information would put banks in

a very difficult situation, particularly if the fleeing spouse were to be harmed following the disclosure of

information. This situation is not routine, but it does happen.


March 16, 2015

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between the two parties (e.g., a divorce situation). There are other, more appropriate legal channels

through which these problems should be addressed. We also note that most state laws require banks

initiating foreclosure to conduct a title search and notify all lienholders and all parties with an

ownership interest in the property. Prior to that, non-obligated parties with an ownership interest in a

mortgaged property do not have a right to receive detailed loan account information.

C. Periodic Statements and Coupon Books.

In addition to the privacy concerns described above, we emphasize the need for banks to maintain a

formalized approach to providing periodic statements regarding a borrower’s loan account. Where

an obligor is still living, periodic statements or coupon books should be sent to that individual, not

someone who simply has an ownership interest in the property. When the obligor is deceased, this

information should be sent to any remaining obligors or to “the estate of John Doe” (borrower). The

estate is charged with settling the decedent’s debts and making timely payments on the mortgage

during the estate’s administration. This approach would help to ensure that the administrator of the

estate is aware that the mortgage loan obligation exists.

D. Loss Mitigation.

The proposal would grant successors in interest the same loss mitigation procedural rights and legal

protections as borrowers who are responsible for repaying the mortgage loan. In other words, a

successor in interest who is not liable on the note would be treated the same as a borrower for

purposes of the loss mitigation rules.

No Right to Modification or Assumption. We request that the Bureau clarify that a successor in

interest is not entitled to receive an offer of loss mitigation, nor is s/he entitled to assume the

mortgage loan obligation by virtue of being a successor in interest. If a successor is not an obligor on

the existing loan, banks will commonly review the successor’s financial information and conduct the

requisite underwriting to determine whether the successor meets the bank’s credit criteria for the

origination of a new loan. Many banks do not permit the modification and simultaneous assumption

of a mortgage loan by a non-obligated successor. Even if a bank permits assumption generally, a

successor in interest does not have an automatic right to assume the loan obligation. As we noted at

the outset of this letter, banks have multiple incentives to communicate with and provide basic

information to successors in interest. 10 Banks want to make sure that the mortgage loans that they

service are performing assets; foreclosure is the least economically beneficial option for all parties.

However, not all successors in interest will have the financial means to repay the mortgage loan.

10 See page 6, footnote 7.


March 16, 2015

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Multiple Successors and Conflicting Interests. Applying the loss mitigation requirements in the

existing Servicing Rule to situations involving multiple successors in interest would be particularly

challenging. It is common for successors to have conflicting views as to what they want to do with

the property securing the loan obligation. For example, one successor may want to work out a

financing agreement with the bank, while another successor wants a disposition option. The proposal

would require banks to treat successors in interest the same as borrowers, but there is no guidance on

how banks should respond to conflicting instructions from these parties.

It is inappropriate for banks to be in the middle of disputes between successors, particularly in

situations where the mortgage loan is not performing. The foreclosure process can be an incentive

for heirs to settle their disputes. However, we are concerned that a successor in interest could use the

loss mitigation procedural protections as a delay tactic while the successors attempt to reach an

agreement on how to handle the property. Banks should not incur the financial expense of holding a

delinquent loan because non-obligor successors cannot agree on what they want to do with the

property that they have inherited.

We also note that the loss mitigation provisions of the current Servicing Rules apply only to

mortgage loans that are secured by a borrower’s principal dwelling. If the Bureau moves forward

with this proposal, we request the CFPB to confirm that the scope of the existing loss mitigation rules

will also apply to successors in interest. In cases where there are multiple successors in interest, we

recommend that the Bureau clarify how the loss mitigation rules apply when one successor resides in

the home but another successor does not. Similarly, we request guidance on how the loss mitigation

rules would apply if one successor has a minority share and lives in the property and the remaining

successors reside elsewhere.

E. Legal Risk of Identifying Successors and Determining Ownership Interest.

Identification of Successors in Interest. Upon being notified of the death of a borrower or of any

transfer of the property securing a mortgage loan, servicers would be required to “identify and

facilitate communication with any potential successors in interest regarding the property” (emphasis

added). ABA is concerned that this requirement could be interpreted to imply that banks have a

regulatory obligation to seek out potential successors in interest.

The Servicing Rules should clarify that it is the obligation of a successor in interest to notify banks of

their ownership interest in the property; banks should not be required to track down successors in

interest. Any requirement to do so would be particularly problematic in situations where there are

multiple successors in interest. There is a risk that a bank could conduct the requisite outreach, but

that additional successors could surface at a later point in time. The requirement to “identify… any

potential successor in interest” could subject banks to civil liability or litigation where the servicer

has not identified all successors in interest and the successors ultimately end up in a dispute as to the

appropriate course of action regarding the property securing the mortgage loan.


March 16, 2015

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We also note that the proposal uses the term “potential successors in interest.” By definition, a

successor in interest is someone who has already acquired title to the property through the

appropriate legal transfer process. The term “potential” is confusing and adds to the ambiguity

regarding a bank’s obligation to identify successors in interest.

Confirmation of Successor’s Ownership Interest. The proposal would also require that banks

confirm a successor’s ownership interest in a property. While banks can perform a certain level of

due diligence regarding successors in interest, Federal regulation should not require banks to make a

legal determination regarding ownership.

When confirming a successor in interest, servicers should be able to request documents that evidence

official, legal determinations of the potential successor in interest’s claim. Confirming a party as a

successor in interest is, at heart, a legal determination, which could conflict with unknown factual

and legal circumstances, including competing legal claims from other parties. Because state property

laws and court rulings may be inconsistent, or factual circumstances may not be fully disclosed to a

bank, even significant research may not lead to the correct determination in every case. Servicers

should at all times be able to request an official determination with regard to a successor in interest’s

claim, such as a binding court determination or a recorded transfer of interest.

The significant expansion of the types of property interests covered by the proposed amendments

would be particularly onerous for community banks. Commonly, small banks do not have in-house

legal staff and therefore do not have sufficient personnel or expertise to confirm a successor in

interest’s ownership in the property. In addition to engaging expertise to evaluate a successor’s

ownership interest, banks would need to hire outside counsel to review and compare the Bureau’s

rules to state law requirements. Even banks with in-house counsel are not legal experts on a 50-state

basis and may still incur legal expense by retaining counsel to provide local review.

F. Potential for Abuse.

Because the Bureau’s proposal would significantly expand the successor in interest requirements to

include successors who acquire an ownership interest in property as a result of divorce, legal

separation, transfers to a family trust, or a transfer to a spouse or a child, ABA is concerned that the

rules could be manipulated in order to disrupt and delay the foreclosure process. For example, in the

loss mitigation context, a borrower who does not qualify for a loan modification could potentially

circumvent the denial by transferring the property to his or her spouse and having that individual

reapply for loss mitigation, thereby triggering the prohibition on acceleration, the loss mitigation

procedural requirements, and appeal rights. If the spouse is denied or declines the loss mitigation

that is offered, s/he could conceivably transfer the property to an adult child or family trust, which

would start the process over again. Because the proposed amendments would allow unlimited loss


March 16, 2015

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mitigation applications over the life of a loan, this could conceivably occur. This outcome would be

inconsistent with the Bureau’s stated objective of preventing unnecessary foreclosures.

G. Impact to Other Legal and Regulatory Requirements.

ABA believes that treating a non-obligated third-party as a bank customer for purposes of the

Servicing Rules would have implications for a wide variety of laws and regulations to which banks

are subject.

First, we are concerned that the proposal attempts to provide non-obligors with a private right of

action under the Real Estate Settlement Procedures Act (“RESPA”). For example, the existing

Servicing Rule enables a borrower to bring a private right of action or a class action lawsuit against a

servicer who does not comply with the Bureau’s loss mitigation procedures. We question the

Bureau’s authority to provide a private right of action to an individual who is not liable on the

mortgage loan. Moreover, it is misdirected public policy to extend borrower rights, including a right

of action, to a non-obligated third party.

Second, the proposal could impact when a loan is charged off for accounting purposes. Banks

generally charge off a loan when it is 180 days delinquent and they analyze a variety of factors to

estimate what the charge off would eventually be. It would not be uncommon for impacted loans to

exceed the 180-day delinquency mark if successors in interest were to receive the panoply of

protections available to obligors under the Servicing Rules. It is possible that regulatory guidance

may be needed on this issue.

Third, the proposal may impact a variety of other banking laws and regulations. Discussions with

our Servicing Working Group have triggered a variety of questions regarding what a bank’s

compliance obligations would be under the following requirements if the Bureau adopts the

successor in interest provisions as proposed:

OFAC Equal Credit Opportunity Act

Bank Secrecy Act Fair Debt Collection Practices Act

Gramm-Leach-Bliley Act

Servicemembers Civil Relief Act

State privacy and debt collection

laws

H. Application of the Ability-to-Repay Rule.

One common question associated with successors in interest is how the Bureau’s Ability-to-

Repay/Qualified Mortgage Rule (“the ATR/QM Rule”) applies to successor in interest situations. On

July 17, 2014, the Bureau issued an interpretive rule stating that the addition of a successor as an

obligor on a mortgage loan does not trigger the ATR/QM Rule if the successor previously received


March 16, 2015

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an interest in the property securing the mortgage by operation of law, such as through inheritance or

divorce.11 Creditors may rely on the interpretive rule as a safe harbor under section 130(f) of the

Truth in Lending Act (“TILA”). In the July 2014 interpretive rule, the Bureau said that it plans to

incorporate this interpretation into the Regulation Z Commentary at a later date. We request that the

Bureau also incorporate the interpretive rule into the Servicing Rules or the Commentary thereto.

We believe that referencing the interpretive rule would help to increase servicer awareness of the

Bureau’s position on this issue.

I. Recommendations.

As we stated at the outset of this letter, ABA strongly believes that all borrowers should receive high-

quality mortgage servicing. We are supportive of the Bureau’s efforts to refine and clarify the

Servicing Rules; however, we strongly urge the Bureau not to adopt the proposed requirements

regarding successors in interest. We also recommend that the Bureau consider the costs and risks

that banks would incur relative to the limited number of successors likely to be impacted by the

proposal and the actual benefits that they would receive. We are particularly concerned about the

privacy and confidentiality risks for living obligors.

For the foregoing reasons, ABA requests that the Bureau limit the successor in interest provisions to

situations involving the death of an obligor. In the event that the Bureau elects to adopt the rule as

proposed, we recommend that servicers be protected from RESPA liability as to non-obligor

successors.

II. Lender-Placed Insurance

The existing Servicing Rules require servicers to provide an initial notice and a reminder notice

before assessing a fee or a charge related to lender-placed insurance. These notices must include a

statement that a borrower’s hazard insurance has expired or is expiring, as applicable. The rules do

not address what a notice must state if a borrower has insufficient coverage. This has been

problematic because the rules also prohibit a servicer from including in the notices any information

other than that expressly required by the Bureau; however, servicers may provide

such an explanation on a separate piece of paper in the same transmittal as the lender-placed

insurance notice. The Servicing Rules also currently prohibit servicers from including the mortgage

loan account number on the notices. However, a servicer may provide the account number on a

separate piece of paper in the same transmittal.

The proposed amendments would remedy these issues by requiring that lender-placed insurance

notices state that (1) the borrower’s hazard insurance is expiring, has expired, or provides insufficient

coverage, as applicable, and that (2) the servicer does not have evidence that the borrower has hazard

11

79 FR 41631 (July 17, 2014).


March 16, 2015

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insurance coverage past the expiration date or evidence that the borrower has hazard insurance that

provides sufficient coverage, as applicable. Servicers would also be permitted to include the

borrower’s mortgage loan account number in the lender-placed insurance notices.

ABA and its insurance subsidiary, the American Bankers Insurance Association (“ABIA”)12

appreciate that the Bureau is working to remedy the unintended consequences of the rules applicable

to lender-placed insurance and we strongly support the proposal.

III. Definition of Delinquency

The Bureau has defined the term “delinquency” for some, but not all provisions of the Servicing

Rules. For example, the “120 Day Rule” prohibits a servicer from making the first notice or filing

for foreclosure unless a borrower’s mortgage loan obligation is more than 120 days delinquent.13

However, the 120 Day Rule does not specify how banks should calculate whether a borrower is 120

days past due, particularly in “rolling delinquency” situations.14

To address this uncertainty, the Bureau proposes to create a definition of delinquency that would

apply to all provisions in Subpart C. Under the proposal, a borrower and a borrower’s mortgage loan

obligation would be delinquent beginning on the date a periodic payment sufficient to cover

principal, interest, and escrow (if applicable) is due and unpaid. Importantly, the proposal would also

mandate that if a servicer applies payments to the oldest outstanding periodic payment, a payment by

a delinquent borrower would advance the date the borrower’s delinquency began.15 The preamble to

the proposal states that the Bureau will monitor payment crediting practices to evaluate whether and

to what extent servicers are choosing to foreclose on borrowers who are one or two payments behind,

including whether such foreclosure practices raise consumer protection concerns that should be

addressed through guidance or rulemaking.

12

The American Bankers Insurance Association is a subsidiary of the American Bankers Association and represents

banks that are actively engaged in the business of insurance, principally as producers; insurance companies; and

third party administrators that provide insurance products and services to banks.

13 12 C.F.R. 1024.41(f).

14 Rolling delinquencies occur when delinquent borrowers resume making payments on the loan without making up

for past missed payments. In some cases, the borrower may start and stop making payments multiple times. Even

though the borrower may resume making scheduled monthly payments, s/he never becomes fully current on the loan

and is unresponsive to loss mitigation outreach efforts. As a result, rolling delinquencies involve borrowers who are

continuously behind on their mortgage payments but never become more than 120 days delinquent (i.e., four missed

payments).

15 The Bureau is not proposing that servicers be required to apply payments to the oldest outstanding periodic

payment.


March 16, 2015

Page 14

A. Rolling Delinquencies.

ABA members report that they generally calculate delinquency and apply payments in a manner that

is consistent with the proposal. However, we are troubled that banks that choose to credit payments

to the oldest outstanding payment would be precluded from ever foreclosing on a mortgage loan that

is delinquent on a rolling basis. As we explained in our October 24, 2014 letter, it is not uncommon

for some borrowers to be chronically delinquent without ever becoming 120 days past due.16

Allowing rolling delinquencies to continue in perpetuity raises safety and soundness concerns,

particularly for portfolio lenders. While banks strongly prefer to work with borrowers to resolve the

delinquency or to modify the underlying mortgage loan, it is well documented that some borrowers

simply are not responsive to outreach efforts. It is imperative that banks holding the credit risk for a

loan have the ability to exercise some degree of business judgment in determining when it is

appropriate to initiate foreclosure proceedings for mortgage loans that are delinquent on a rolling

basis.

Applying payments to the oldest outstanding periodic payment can be beneficial to consumers.

However, establishing a bright line rule whereby banks applying this payment crediting methodology

would be precluded from initiating foreclosure on a rolling delinquency would incentivize banks not

to adopt this payment crediting approach. This would not benefit consumers, and we request that the

Bureau provide banks the flexibility to adopt policies and procedures that establish when a bank will

commence foreclosure in rolling delinquency situations. It is important that creditors be able to

make a business decision as to when they will foreclose in these situations.

B. Acceleration.

In response to industry inquiries on how to treat rolling delinquencies, Bureau staff has informally

suggested that a servicer could accelerate the mortgage loan if permitted under state law and the loan

contract. Under this approach, a servicer could commence foreclosure after 120 days if the borrower

does not pay the accelerated amount. ABA requests that the Bureau incorporate this unofficial, oral

guidance into the Servicing Rule or its accompanying commentary.

16

ABA’s August 2014 Rolling Delinquency Survey assessed the frequency with which rolling delinquencies occur

and gathered information regarding how banks manage mortgage loans that are delinquent on a rolling basis.

27 percent of respondents reported that 20% - 40% of delinquent loans serviced for their own loan

portfolios constitute rolling delinquencies.

79 percent of respondents said that less than 20 percent of delinquent loans serviced for investors constitute

rolling delinquencies.

33 percent of respondents reported that 20% - 40% of rolling delinquencies are 60-89 days past due.

http://www.aba.com/Advocacy/commentletters/Documents/ABALetterRollingDelinquencies102414.pdf


March 16, 2015

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IV. Early Intervention – Bankruptcy and FDCPA

The Servicing Rules require servicers to make live contact with and provide written notices to

delinquent borrowers (collectively, “early intervention”). Currently, the rules provide a broad

exemption from the live contact and written notice requirements when a borrower is in bankruptcy or

has filed a cease communications notice under the Fair Debt Collection Practices Act (“the

FDCPA”). The Bureau is proposing to significantly expand the live contact and written notice

requirements in certain bankruptcy and FDCPA scenarios.

ABA believes that the proposal is overly complicated and would require banks to expend significant

resources to provide early intervention communications that would provide questionable benefit to a

narrow subset of borrowers. In addition, the proposal would potentially conflict with state law and

the interpretations of individual bankruptcy courts. For these reasons, we request that the Bureau not

adopt the proposed amendments to the early intervention requirements in bankruptcy and FDCPA

situations.

A. Complexity and Cost-Benefit

The proposed amendments to the early intervention requirements would add significant complexity

to a regulatory construct that is already highly technical in nature. The proposal would have the

practical effect of requiring that banks obtain and record information regarding the chapter of the

bankruptcy code under which the borrower filed, classify the type of bankruptcy involved for

regulatory compliance purposes, distinguish between the bankruptcy status of joint obligors, and

track each bankruptcy court’s local rules and orders for potential conflict with the Bureau’s

requirements in jurisdictions where the bank services mortgage loans. When the early intervention

requirements conflict with other law, a bank would most likely need to document this fact and the

rationale for its actions in order to defend against potential regulatory criticism and legal liability.

We anticipate that banks would take similar steps to comply with the early intervention requirements

in situations where a borrower issues a cease communications notice under the FDCPA.

Practically speaking, the proposed amendments would require all bank servicers to incur significant

costs to comply with complex regulatory requirements that would apply to a very limited universe of

loans. Banks would need to develop new technological capabilities to facilitate compliance with the

proposal. For example, we understand that some servicing platforms do not capture and track

bankruptcy filings by chapter of the bankruptcy code, nor do they track the bankruptcy status of each

obligor on the loan. In addition, some servicing systems are structured such that all servicing-related

notices and other loan-related information are sent to a single address or such that all correspondence

is sent to all obligors on the loan. As a result, significant reprogramming would be necessary to

enable banks to comply with the proposed early intervention requirements in situations where an

obligor in bankruptcy would not receive early intervention but a co-borrower who is not in

bankruptcy must receive early intervention communications.


March 16, 2015

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While technology may provide some assistance in complying with the proposed rules, we are very

concerned that the complex and fact-specific nature of the proposed early intervention amendments

would significantly increase a bank’s risk of non-compliance in bankruptcy and FDCPA situations.

As proposed, the rules would have the practical effect of requiring that every bank have staff

dedicated to handling loans subject to bankruptcy protections and who are skilled in applying the

Bureau’s early intervention requirements in these situations. This staff expertise would be required

for every bank – regardless of the number of borrowers at that institution who are going through

bankruptcy. The proposed revisions are a good example of the continued layering of regulatory

requirements, technological demands, and required staff expertise that are leading banks to reassess

whether mortgage servicing continues to be consistent with the broader business strategy of their

individual institutions.

B. Bankruptcy Court Interpretations.

The Bureau has concluded that requiring banks to send written notices to delinquent borrowers who

have filed for bankruptcy is consistent with bankruptcy law. In reaching this conclusion, the Bureau

reasoned that the written notice does not contain a demand for payment and therefore would not

violate the Bankruptcy Code’s automatic stay.17 We question whether the Bureau has the authority

to interpret whether its live contact and written notice requirements would violate the automatic stay.

This interpretation is within the jurisdiction of individual bankruptcy courts, and we are concerned

that the Bureau’s proposal omits this fact.

Even if the Bureau were to specify that banks would not be required to send a written notice if doing

so would violate local bankruptcy rules or a court order, banks would still need to track the rules of

each bankruptcy court, as well as court orders relating to a bank’s borrowers, for potential conflict

with the Bureau’s requirements. If a bank were to determine not to send a written notice due to

conflict with other law, it would most likely need to document this fact as well as the rationale for its

decision in order to mitigate regulatory criticism.

C. Written Notice/Availability of Loss Mitigation

In addition to the complexity, tracking difficulties, and potential conflict with bankruptcy court

interpretations, we question the practical value of providing written notices to borrowers in

bankruptcy. The proposal would require that a bank send a written notice to a delinquent borrower in

bankruptcy if the bank offers loss mitigation to financially troubled borrowers. The Bureau believes

that borrowers who have filed for bankruptcy should have the opportunity to obtain information

about available loss mitigation options.

17

The automatic stay requires that creditors immediately halt all collection efforts, lien enforcement, and judicial or

extra-judicial actions against the borrower (11 U.S.C. 362).


March 16, 2015

Page 17

While it is a laudable objective to educate borrowers about loss mitigation, the practical value of

providing such information to borrowers may be limited. Borrowers who have filed for bankruptcy

are likely to have already received written early intervention notices and other outreach, such as

telephone calls, prior to filing for bankruptcy. In addition, there is a reduced likelihood that a

borrower in bankruptcy would meet a bank’s credit and underwriting criteria necessary to obtain a

loan modification.

D. State Debt Collection Requirements

Servicers would continue to be exempt from the live contact requirement in situations where a

borrower sends a cease communication notice pursuant to section 805(c) of the FDCPA. However,

the Bureau proposes that if a servicer offers loss mitigation, the servicer must send a delinquent

borrower a modified written notice, even if the borrower has submitted a cease communication

request. Importantly, a servicer could only rely on the FDCPA exemption if the servicer is subject to

the FDCPA with respect to a particular borrower. Therefore, if the servicer is not acting as a debt

collector for purposes of the FDCPA, the servicer must continue to comply with all of the early

intervention requirements even if a servicer receives a cease communication notice from the

borrower.

ABA understands that some states and localities have adopted FDCPA-like debt collection laws

containing strict prescriptions on how creditors may communicate with borrowers. Therefore,

providing a written notice required by the Bureau may be a prohibited communication under state

debt collection law.

Even if the Bureau were to take the position that banks would not be required to send a written notice

if doing so would violate state or local law, banks would have to track the rules of each jurisdiction

for potential conflict with the Bureau’s requirements. As with bankruptcy situations, if a bank were

to determine not to contact a borrower as required in the early intervention rules due to conflict with

other law, the bank would likely need to document this fact and the rationale for its decision in order

to mitigate regulatory criticism.

IV. Loss Mitigation

In promulgating the Servicing Rules, the Bureau exercised its discretionary rulemaking authority to

(1) issue various timing and procedural requirements governing loss mitigation for distressed

borrowers; (2) establish certain restrictions on the referral of a mortgage loan to foreclosure; and (3)

provide new borrower rights. These loss mitigation rules are very technical, and unsurprisingly,

servicers have identified many questions over the past two years with respect to this aspect of the

Servicing Rule. We appreciate the Bureau’s effort to provide certainty regarding the interpretation

and application of the loss mitigation requirements.


March 16, 2015

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A. Collection of Documents and Information.

The Servicing Rules require that servicers exercise reasonable diligence in obtaining documents and

information necessary to complete a borrower’s loss mitigation application. The Bureau is proposing

to clarify that a servicer may stop collecting documents and information pertaining to

a particular loss mitigation option after receiving information confirming that the borrower is

ineligible for that loss mitigation alternative. The proposed commentary would further state that a

servicer may not stop collecting documents and information for any loss mitigation option based

solely upon the borrower’s stated preference for a particular loss mitigation option.

Shortly after the Bureau finalized the Servicing Rules, a common industry question was whether the

requirement to evaluate a borrower for all loss mitigation options upon receipt of a complete loss

mitigation application meant that a servicer must evaluate a borrower for all loss mitigation options if

it is clear that the borrower is interested only in a non-home retention option. In response to this

question, Bureau staff indicated that an owner or investor could incorporate into the initial steps of its

waterfall an evaluation of whether the borrower desires to remain in the home. Under this approach,

if the borrower is not interested in home retention options, the waterfall could permit the servicer to

proceed directly to the evaluation of a short-sale or deed-in-lieu of foreclosure. In the denial letter,

the servicer could explain that it is not offering a loan modification because the borrower indicated

that s/he does not want to remain in the home.18

We are concerned that the proposed commentary could be interpreted to require servicers to continue

collecting documents and information for loss mitigation options that the borrower has specifically

indicated that s/he does not want. Such a requirement could frustrate the borrower and negatively

impact important communication between the two parties. Therefore, we request that the Bureau

revise the proposed amendments to clarify that servicers may still include in their waterfall a

determination of whether the borrower wishes to remain in the home.

B. Reasonable Date to Submit Missing Information

Under the current Servicing Rules, when a borrower submits an incomplete loss mitigation

application at least 45 days before a scheduled foreclosure sale, the servicer must select a reasonable

date by which the borrower should return documents and information to complete the application.

The Bureau instructs servicers to consider four milestones:

The date that information will be considered stale or invalid;

18

This approach was discussed at various industry conferences, including the Bureau’s October 16, 2013 Servicing

Teleconference.


March 16, 2015

Page 19

The 120th day of the borrower’s delinquency;

The date that is 90 days before a foreclosure sale; and

The date that is 38 days before a foreclosure sale.

Servicers have inquired how to determine the reasonable date when the nearest remaining milestone

is not scheduled to take place for a significant amount of time. Servicers have questioned whether

they must select a reasonable date that allows the borrower months to return the necessary

documents, or whether the servicer may select an earlier date in order to encourage the borrower to

respond more promptly.

Under the proposal, a reasonable period of time would not be less than seven days. In addition, a

servicer would be required to preserve maximum borrower rights when setting a reasonable date for

the borrower to supply missing information. A servicer would still be expected to consider the four

milestones listed above when setting a reasonable date.

ABA members have expressed a strong need for greater certainty in setting a reasonable date. The

proposed approach is unclear and would be cumbersome and difficult to apply. In addition, the

requirement that a servicer preserve maximum borrower rights would make the application of this

standard particularly challenging and would potentially expose a servicer to liability. It would also

be difficult to track “reasonable dates” that maximize borrower rights on a case-by-case basis. For

these reasons, ABA recommends that the Bureau establish a bright line test of 30 calendar days. This

approach would be simpler to apply from a systems perspective and would help to reduce “fair

servicing” risk.

C. Short-Term Repayment Plans

The Servicing Rules generally prohibit servicers from offering borrowers a loss mitigation option

based upon a borrower’s incomplete loss mitigation application. However, servicers are permitted to

offer a short-term forbearance program based upon an incomplete application.

The Bureau is proposing to allow servicers to offer short-term repayment plans based on an

evaluation of an incomplete loss mitigation application. Only those plans that are designed to cure a

delinquency would be permitted. The plans could include no more than three months of payments

due and a repayment period could last no more than six months. A servicer could offer a longer-term

repayment plan, but servicers would be prohibited from doing so based on an incomplete application.

Importantly, where a servicer offers a short-term repayment plan based on an incomplete application,

the application would still be subject to all other loss mitigation rules (i.e., reviewing the application

for completeness, exercising reasonable diligence to obtain missing information, acknowledging the

receipt of the loss mitigation application, etc.).


March 16, 2015

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We appreciate the additional flexibility the Bureau is attempting to provide with respect to this aspect

of the proposal. However, the proposed rule illustrates some of our broader concerns with the

Bureau’s loss mitigation rules and the presumptions behind them. The Servicing Rules are not

always consistent with or reflective of the needs or wants of borrowers. The Bureau should not

assume that all borrowers want full loss mitigation or that a formal loss mitigation program is always

appropriate. It is not uncommon for borrowers to experience a short-term hardship and to

specifically request to set up a repayment plan.

We are concerned that the rule frustrates borrowers and leads to erroneous perceptions of inadequate

customer service (i.e., the bank is not listening to me). For example, despite the fact that a borrower

requests a repayment plan, the bank would have to send the borrower a full loss mitigation

application package, review the borrower’s loss mitigation application, notify the borrower whether

his or her application is complete or incomplete, and send the borrower communications requesting

additional information needed to evaluate the borrower for all loss mitigation options – despite the

fact that the borrower specifically requested a repayment plan.19 We understand the Bureau’s

objective of ensuring that servicers do not evade their obligation to evaluate a loss mitigation

application. However, the Servicing Rules should not bog down the customer relationship with red

tape or assume that borrowers are uninformed or do not have preferences as to how they wish to

manage financial obligations during times of short-term financial hardship.

D. Written Notice of Complete Application.

The Servicing Rules require that a servicer send an acknowledgment notice confirming that it has

received the borrower’s loss mitigation application. Because many loss mitigation applications are

incomplete at this stage, a borrower may never receive verification that s/he has supplied all of the

necessary information and that the application is complete. To address this issue, the Bureau is

proposing to require that servicers provide a “written notice of complete application” confirming that

the borrower’s loss mitigation application is complete.

The written notice of complete application would need to meet content requirements specified by the

Bureau. As proposed, the notice must state whether a foreclosure was scheduled as of the date the

servicer received the complete application and, if so, the date of that scheduled sale. We believe that

it would be confusing to borrowers to include the foreclosure sale date on a written notice informing

the borrower that his or her loss mitigation application is complete. Similarly, including the

foreclosure sale date could be misleading in situations where a bank has filed a motion to postpone

the foreclosure sale but has not yet received a response from the court. Therefore, we recommend

19 The proposal would permit servicers to suspend due diligence during repayment, but we note that banks would be required to request “missing” information until repayment begins.


March 16, 2015

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that the foreclosure sale date be removed from the written notice of complete application. We also

request that the Bureau provide a model form to facilitate compliance with the written notice

requirement.

E. Information not in the Borrower’s Control.

Under the existing Servicing Rules, the servicer must evaluate the borrower for loss mitigation within

30 days of receiving a complete loss mitigation application if the servicer received the complete

application more than 37 days before a foreclosure sale. A complete loss mitigation application

includes all the information the servicer requires from a borrower. Therefore, a loss mitigation

application may be complete for purposes of the Servicing Rule even if a servicer requires additional

information that is not in the borrower’s control. This aspect of the regulation can be problematic

because servicers do not always obtain necessary information from third parties in time to meet the

30 day requirement (examples include homeowners association payoff information, approval from

the loan owner, investor, or mortgage insurance company, etc.).

To address this problem, the proposed amendments would require that servicers exercise reasonable

diligence to obtain documents or information that is not in the borrower’s control. Specifically,

A servicer must request the documents by a date that will enable it to comply with the 30-day

requirement.

After the first 30 days, the servicer acts with reasonable diligence by attempting to obtain the

documents or information from the appropriate person as quickly as possible.

In general, a servicer would not be permitted to deny a complete loss mitigation application

solely because the servicer has not received documents or information not in the borrower’s

control; a servicer must complete all possible steps in the evaluation process within 30 days

of receiving a complete application notwithstanding delay in receiving information from a

third party.

If the servicer is unable to make a determination within 30 days, the servicer must provide

the borrower a written notice with content specified by the Bureau.

ABA finds this aspect of the proposal confusing and believes that it would be difficult to track and to

demonstrate compliance. We are also concerned that the Bureau or examiners will later attempt to

specify when a bank can make a loss mitigation determination without third-party information. It is

critical that a bank not be second-guessed as to whether it needs certain information to evaluate a

borrower for loss mitigation.


March 16, 2015

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F. Foreclosure Referral – Subordinate Liens.

Servicers are prohibited from initiating the foreclosure process unless a borrower’s mortgage loan is

more than 120 days delinquent. The current rules provide an exception that permits a servicer to file

for foreclosure before the borrower is 120 days past due when the servicer is joining the foreclosure

action of a subordinate lienholder. However, a similar exemption does not exist for situations where

the servicer is joining the foreclosure action of a senior lienholder. The Bureau is proposing to

permit a servicer of a subordinate lien to join the foreclosure action of a senior lienholder even

though the subordinate lien is not 120 days past due.

ABA strongly supports this proposed revision. It would enable banks to protect their security interest

in a mortgaged property in situations where a third party has obtained a superior lien. For example,

in some jurisdictions, tax lien purchasers become superior lienholders and are permitted to foreclose

on the tax liens that they purchase following a passage of time established by statute. In some

jurisdictions, courts have also conferred so-called “super-priority” status on foreclosing homeowners’

associations.20 In these situations, a servicer who joins the foreclosure action of the superior

lienholder could violate the 120-day rule if the mortgage loan is not more than 120 days delinquent.

Permitting servicers to join the foreclosure action of a senior lienholder in these types of situations

would not decrease consumer protection because the borrower would already be facing a foreclosure

action on the property even if the mortgage loan is not 120 days past due.

G. Repeat Requests for Loss Mitigation.

The existing Servicing Rules require servicers to comply with the loss mitigation requirements for a

single, complete loss mitigation application for a borrower’s mortgage loan account. In other words,

servicers are only required to comply with the loss mitigation rules one time over the life of a

mortgage loan. The Bureau is proposing to eliminate all restrictions on repeat borrower requests for

loss mitigation.

ABA does not oppose considering a borrower for loss mitigation multiple times. However, we

strongly believe that any requirement to do so should include restrictions on the frequency and

number of times that a servicer is required to comply with the loss mitigation requirements over the

life of a loan.

Under the proposal, if a bank were to modify a mortgage loan and the borrower were to become

delinquent in six months and submit a second loss mitigation application, the servicer would be

required to go through the loss mitigation process again despite having just completed it.

20 SFR Investments Pool 1, LLC v. U.S. Bank, N.A., 334 P.3d 408 (Nev. 2014).


March 16, 2015

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Providing an unlimited right to the Rule’s loss mitigation procedures would provide borrowers with

an incentive to abuse these protections for the sole purpose of delaying foreclosure. To avoid this

result, the Bureau should limit the frequency with which banks would be required to apply the loss

mitigation rules for repeat loss mitigation applications.

There is precedent for this approach. For example, in bankruptcy law, the nature of the automatic

bankruptcy stay changes based on the number of times a borrower has previously filed for

bankruptcy in the last year. Likewise, the Federal banking agencies’ Uniform Retail Credit

Classification and Account Management Policy states that open-ended accounts should not be re-

aged more than once within any 12-month period and no more than twice in any five-year period.

Requiring a borrower to perform under a loss mitigation arrangement for a minimum period of time

before the loss mitigation requirements are triggered again would also help to provide a more

effective allocation of bank resources by enabling banks to focus their loss mitigation personnel on

helping borrowers who are in genuine need of assistance, such as those filing their first loss

mitigation application rather than those who may be manipulating the loss mitigation process.

H. Servicing Transfers.

With two exceptions, the proposal would require that a transferee servicer comply with the Servicing

Rule’s loss mitigation requirements within the same timeframes that were applicable to the transferor

servicer. 21 We understand the Bureau’s objective of ensuring that consumers are not disadvantaged

when their mortgage loans are transferred from one servicer to another. However, to comply with

the proposed rule, banks would need to obtain detailed information on the loans being transferred

prior to the transfer date, which may not be legally permissible under privacy laws and other

restrictions on unrelated companies sharing loan information. In addition, there may be

circumstances where the transferor uses most of the time permitted for evaluation of the loss

mitigation application and responding to borrower appeals. In these circumstances, it would be

extraordinarily difficult, if not impossible, for a transferee servicer to comply with the timeframes

established in the loss mitigation rule. We recommend that transferee servicers be given a reasonable

extension of time in these situations.

In the same vein, ABA is concerned that the Bureau’s expectation regarding the transfer of loan

information may not be realistic in the merger and acquisition context. We understand from

21

Under the two exceptions, a transferee servicer would receive an additional five days to provide the written notice

acknowledging receipt of the borrower’s loss mitigation application. In addition, the proposal would provide that a

transferee servicer that acquires servicing through an involuntary transfer has at least 15 days after the transfer to

evaluate a borrower’s pending complete loss mitigation application.


March 16, 2015

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unofficial, oral guidance that the Bureau has taken the position that loans serviced by a “small

servicer” would need to comply with the requirements applicable to “large servicers” on the date that

the merger or acquisition is complete. It would not be an efficient allocation of resources for the

small servicer to come into compliance with the large servicer rules before the transaction is

finalized, particularly if the loans serviced by the small institution will be subsequently boarded onto

the large servicer’s servicing platform. As mentioned above, we are concerned that privacy laws

and other restrictions on sharing customer information may preclude banks from onboarding

mortgage loans before the transaction is final. For these reasons, we request that the Bureau adopt a

transition period for small servicers in the merger and acquisition context that parallels the transition

period that 12 CFR 1026.41(e)(4)(iii) provides to small servicers that cross the 5,000 loan threshold

through growth via other means.

V. Periodic Statements

A. Trial Modifications and Acceleration.

The Bureau is proposing to clarify how banks should disclose the Amount Due and the Explanation

of Amount Due when a loan has been (1) modified on a trial basis and (2) accelerated.

For trial modifications:

The Amount Due may be disclosed as either the trial payment or the amount due under the

loan contract.

The Explanation of Amount Due must include both the trial payment and the amount due

under the contract.

In the case of acceleration:

The Amount Due is the lesser amount that will be accepted to reinstate the loan, not the entire

accelerated balance.

The Explanation of Amount Due must include both the reinstatement amount and the

accelerated amount.

We appreciate the Bureau’s effort to clarify how banks should disclose trial modifications and

acceleration on the periodic statement. We request that the Bureau also address situations where a

bank accelerates a loan and the borrower subsequently enters a trial loan modification. Specifically,

we request guidance regarding what information should be included on the periodic statement and

what, if any, information should be eliminated (e.g., trial payment, the accelerated amount, and the

amount due under the loan contract). ABA members would also find it helpful for the Bureau to

develop additional model periodic statements to demonstrate various trial modification and

acceleration scenarios.


March 16, 2015

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As with other aspects of the proposed rule, we anticipate that banks will need to engage in additional

programming to be able to disclose the reinstatement amount and the accelerated amount on the

periodic statement. Our members expect to encounter challenges in pulling data from their servicing

platforms and incorporating it into systems that generate periodic statements. In some cases,

reinstatement amounts are calculated manually and can change daily (i.e., with accrual of attorneys’

fees), making it impossible to guarantee that reinstatement amounts will be accurate on periodic

statements sent post-acceleration. Banks should be able to provide a reinstatement amount that is

“good through” a specified date and provide the borrower with contact information for obtaining an

up-to-date reinstatement amount.

B. Customers in Bankruptcy.

The proposal would require servicers to send modified periodic statements to borrowers who have

filed for bankruptcy, subject to certain exceptions, with content varying depending on the chapter of

the Bankruptcy Code involved. For the following reasons, we request that the Bureau not adopt the

proposed changes.

Automatic Stay. As we explained above regarding written notices under the early intervention

requirement, we believe that there is a risk that bankruptcy courts will determine that periodic

statements will violate the automatic stay. If the Bureau is unable to ensure that bankruptcy courts

will find periodic statements to violate the automatic stay, it should not require banks to send

periodic statements to borrowers in bankruptcy or after a bankruptcy discharge has been received by

the customer. At a minimum, the Bureau should request that the National Conference of Bankruptcy

Judges support a safe harbor for servicers that provide periodic statements.

Pre- and Post-Petition Payments. Under the proposal, banks would be required to create a second

accounting of the bankruptcy plan as well as an accounting pursuant to the contractual terms of the

loan. Importantly, a Chapter 13 plan does not permanently modify the contractual terms of the

underlying agreement until the plan completes. Significantly, a large percentage of plans do not

complete.

Chapter 13 trustees’ records are the official record of the Chapter 13 plan payments, and as such, are

the best source for the customer to receive repayment information. There is a significant question as

to how a bank would receive input from bankruptcy courts and trustees as to the borrower/debtor

data necessary to populate the data fields required by the proposed periodic statements. Bankruptcy

trustees may not report real-time information as to borrower pre- and post-petition payments, and

they may not have the technological capability to export that information to banks in electronic

formats that are compatible with various loan servicing platforms. Therefore, the modified periodic

statement may not include the borrower’s most current payment information. Once the plan


March 16, 2015

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completes, there are specific Bankruptcy Code and rule provisions that require the mortgage to be

deemed current, which requires creditors to modify their records as applicable.

We are also concerned that the proposal to disclose pre-petition and post-petition payments could be

interpreted to require disclosure of whether specific funds received, but not yet applied, will be

applied to pre- or post-petition payments while these funds are held in a suspense account. These

accounting decisions are made with respect to payments at the time the funds are applied, not at the

time of receipt. Periodic statements would therefore be unable to disclose the intended use of funds

prior to their application. Further, we do not believe that any servicing system currently allows for

this pre-application accounting. As a result, implementing the proposed changes regarding pre- and

post-petition charges would be very difficult. If the Bureau requires banks to send periodic

statements to borrowers in bankruptcy, banks should be able to note payments as received and

indicate their allocation at the time of application according to the loan contract.

Cost-Benefit. We also question the cost-benefit of requiring banks to incur significant costs to

develop the capability to populate the content required by the modified periodic statement. Some

banks report that only a handful of their mortgage borrowers have filed for bankruptcy. As a result,

these institutions would incur substantial costs associated with developing and testing new periodic

statement capabilities that would potentially benefit a very limited universe of borrowers. We also

believe that there is a risk that a bank could invest the time and resources necessary to develop

modified periodic statements only to have a bankruptcy court in their market area(s) subsequently

determine that the periodic statement violates the automatic stay.

First Statement After Bankruptcy Filing. The proposed rule does not specify the point in time when

a bank should begin sending modified periodic statements to borrowers who have filed bankruptcy

under Chapter 12 or Chapter 13 of the Bankruptcy Code.

For these types of bankruptcies, the proposal would require servicers to disclose the amount of any

post-petition payments and post-petition fees. The Commentary to the proposal explains that “post-

petition payments are payments made under a plan of reorganization to satisfy the mortgage loan’s

periodic payments as they come due after the bankruptcy case is filed.”

The moment a borrower files a bankruptcy case under any chapter of the Bankruptcy Code, the

automatic stay goes into effect. However, at this stage, if a borrower files for Chapter 12 or 13

bankruptcy, a repayment plan has not yet been filed by the borrower or approved by the court.

Therefore, there would likely be a period of time between the point that the automatic stay is

triggered (thereby prohibiting the servicer from sending a “regular” periodic statement) and the point

that the court approves the borrower’s repayment plan. Accordingly, we request that the Bureau

specify when banks should send the first modified periodic statement to borrowers in Chapter 12 and

Chapter 13 bankruptcy.


March 16, 2015

Page 27

V. Small Servicer Exemption

The Bureau exempted small servicers from various requirements under the Servicing Rules.22 To be

eligible for the small servicer exemption, a servicer must (1) service 5,000 or fewer mortgage loans

and (2) only service mortgage loans that the servicer or an affiliate own or originated. After the

Servicing Rules were finalized, questions arose as to whether engaging in “collection contract”

activities on behalf of seller-financers disqualify a bank from the small servicer exemption.23

Under the proposed amendments, collection contracts involving seller-financers would not be

considered in determining whether a bank qualifies for the small servicer exemption. The proposal

would define a seller-financer as a natural person, estate, or trust that provides seller financing for the

sale of only one property in any 12-month period. In addition, the financing must have a repayment

schedule that does not result in negative amortization and must have a fixed rate or an adjustable rate

that is adjustable after five or more years. If the financing has an adjustable rate, it must be

determined by the addition of a margin to an index rate and subject to reasonable rate adjustment

limitations. The index must be based on a widely available index.

Collection contract activities are very common among community banks and ABA is very

appreciative of the Bureau’s work to address this issue that is important to these institutions and their

customers. We believe that the Bureau’s consideration of this matter is compatible with Section

1022(b) of the Dodd-Frank Act, which requires the Bureau to analyze the potential benefits and costs

of regulation to consumers and covered persons, including the potential reduction of access to

financial products or services; the impact on depository institutions with $10 billion or less in assets;

and the impact on consumers in rural areas.24

We are concerned, however, that the regulatory red tape that would accompany the proposed

amendment would not embody the spirit of section 1022(b). The proposal would require community

22

Small Servicers are exempt from the requirement to provide periodic mortgage statements, certain requirements

relating to obtaining force-placed insurance, general servicing policies and procedures requirements, and certain

requirements relating to communicating with delinquent borrowers and evaluating loss mitigation applications.

23 While collection contract arrangements are fact-specific, they generally involve the provision of deposit services

to a bank customer who has sold real property using owner financing. In this situation, the bank’s customer (the

seller) originated the mortgage loan and is the creditor. As a service to its customer, the bank collects the

borrower’s mortgage payments and deposits the funds into the seller’s bank account. The bank typically keeps a

ledger of principal and interest payments received and usually charges the customer a fee for the service. Banks

engaging in this activity commonly have an agreement with their customers specifying that the bank is responsible

solely for collecting regularly scheduled payments and that it does not have any responsibilities if the loan becomes

delinquent. This practice is also known as contract for deeds or escrow for deeds.

24 12 U.S.C. 5512(b)(1).


March 16, 2015

Page 28

banks to establish various internal controls to track and monitor whether a seller-financer provides

financing for more than one property in any 12-month period. While banks could require seller-

financers to attest that they have not exceeded the regulatory limit, banks have no way of actually

verifying that the seller-financer financed only one transaction per year. In addition, it is unclear

whether a bank would be required to verify that the seller-financer has not engaged in similar

transactions that are being “serviced” by another institution. While we do not believe that seller-

financers with collection contract arrangements with our member banks are financing large quantities

of mortgage loans, we do believe that the limitation of one loan per 12-month period is overly

restrictive. In addition, we are concerned that the internal controls that would have to be established

to ensure compliance with the regulatory limit may create an incentive for small banks to terminate

collection contract relationships.

ABA strongly supports grandfathering existing seller-financed loans such that they will not

disqualify a bank from the small servicer exemption. The collection contract issue was not a concern

that the industry identified until it began to implement the Servicing Rules. Moreover, there been no

official, readily accessible, written guidance from the Bureau regarding how banks should treat

collection contract activities for purposes of the small servicer exemption. Grandfathering existing

contract collection activities will protect these institutions due to the absence of concrete regulatory

guidance and will enable banks to make an informed business decision as to how they prefer to

handle this activity going forward.

VII. Charged-Off Loans

In 2013, the Bureau provided unofficial, oral guidance stating that it expects servicers to provide

periodic statements for mortgage loans that have been charged off. This expectation caught many

banks and vendors by surprise because this requirement is not expressly set forth in the Servicing

Rules and because it has not been industry standard or best practice to provide periodic statements

for charged-off loans in the past.

The Bureau is proposing to expressly state that servicers would not be required to provide a periodic

statement for mortgage loans that a servicer has charged off in accordance with loan-loss provisions

if (1) the servicer will not charge any additional fees or interest on the account and (2) the servicer

provides the consumer a final periodic statement within 30 days of charge off or the most recent

periodic statement.

We appreciate the Bureau’s effort to address the charge-off issue; this matter has been of significant

concern to banks of all sizes, many of which were surprised in October 2013 when the Bureau

provided unofficial, oral guidance stating that the periodic statement requirement applied to charged

off loans.25 Some of our members welcome the proposed revision, while others do not believe that

25

October 16, 2013 webinar.


March 16, 2015

Page 29

the proposal would be helpful. Banks generally agree, however, that loans that were charged off

prior to the effective date of the proposed amendments should not be subject to the periodic

statement requirement. We believe that grandfathering would be warranted in light of the significant

confusion regarding this issue, the limitations of existing servicing platforms and collection systems,

and the fact that the Bureau’s informal interpretation came at a point in implementation where it was

too late for vendors to incorporate periodic statements for charged-off loans into the systems changes

they were rolling out for the January 2014 effective date.

IX. Effective Date

The Bureau generally proposes that the amendments take effect 280 days after publication of a final

rule in the Federal Register; however, the amendments relating to the provision of periodic

statements to customers in bankruptcy would have an effective date of one year after publication.

We do not believe that the proposed effective dates would provide sufficient time for banks to

comply with some aspects of the proposal. If the Bureau adopts the proposed amendments to

successors in interest, early intervention notices, and periodic statements for customers in

bankruptcy, it is imperative that banks be provided adequate time to conduct quality testing. For

example, the proposed content requirements for customers in bankruptcy are entirely new and would

require banks to create an accounting fiction. It is our understanding that systems providers and

banks do not currently have the capability to comply with this aspect of the proposal and it is

imperative that banks have sufficient time to thoroughly test the changes after they are received from

systems vendors. Accordingly, we recommend an effective date of no less than 18 months for the

successor in interest, early intervention, and periodic statement amendments. In fact, once banks and

their vendors begin constructing the required systems for the new periodic statements, they may find

that it will take more than 18 months to come into compliance, particularly if there are a large

number of unresolved questions regarding how to apply the new rules. We support an effective date

of 280 days for the remaining aspects of the proposal.

X. Conclusion

ABA appreciates the opportunity to provide feedback on the proposed amendments to the Servicing

Rules. We request that the Bureau specifically consider whether the Servicing Rules create a

regulatory framework that is workable for servicers of all sizes and business models. We believe that

the cumulative technological and staffing costs and the legal risk associated with implementing the

proposed changes relating to successors in interest, customers in bankruptcy, and customers who


March 16, 2015

Page 30

have filed cease communication notices is out of proportion relative to the limited number of

consumers who might derive a meaningful benefit from the proposal.

Sincerely,

Krista J. Shonk

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