Servicing Transfers and Pending Loan Modifications: What To Do When Your Mod Gets Lost in the Shuffle
In the past year, there has been a massive sell-off of mortgage servicing rights (MSRs), especially for nonperforming loans. In some cases, the transferor retains ownership of the MSRs and merely transfers subservicing to a new servicer. For example, in January 2013, Bank of America and Fannie Mae reached an agreement to transfer servicing for 941,000 loans from Bank of America to two specialty servicers.
Regardless of the form of transfer, borrowers in the loss mitigation process are experiencing significant disruptions as the result of servicing transfers.
In February, the Consumer Financial Protection Bureau (CFPB) expressed “heightened concern” in light of the heavy volume of transfers and the growing chorus of consumer complaints about “service interruptions when their loans are transferred during the loss mitigation process.”
In a bulletin, the CFPB explained:
It appears transferee servicers sometimes fail to honor the terms of trial loan modifications provided by predecessor servicers because relevant documents are not transferred to the transferee servicer, or the transferee servicer does not take adequate steps to identify mortgages subject to trial loan modifications.
In plain English, transferee servicers have made countless borrowers start the maddening loan modification process from scratch, claiming ignorance about pending applications, active trial period plans, and even completed permanent loan modifications. Borrowers who have never missed a payment suddenly find themselves facing foreclosure, and often there is little they can do.
So what is supposed to happen when servicing rights are transferred, and what can a borrower do when something goes wrong?
Existing Federal Law Has Limited Applicability
Although the Real Estate Settlement and Procedures Act (RESPA) has long contained notice provisions relating to servicing transfers, the requirements are not adequate to address most complaints relating to loan modifications.
RESPA applies only to servicing of federally related, first lien mortgages. When servicing of a covered loan is transferred, RESPA requires the transferor and the transferee servicer to give a written Notice of Transfer to the borrower 15 days prior to the transfer. In addition to contact information, the Notice must contain a statement that “the transfer of servicing does not affect any other term or condition of the mortgage documents.” During the 60-day period after the transfer, RESPA prohibits imposition of a late fee if the borrower mistakenly but timely makes payment to the transferor. See 12 C.F.R. § 1024.21.
None of these requirements, however, imposes an obligation to complete review of a pending loan modification application or an obligation to honor a trial period plan. A borrower can make a Qualified Written Request to dispute the failure to apply modified payments correctly or to request information about a modification, but RESPA falls short in imposing meaningful protections for borrowers who are in the middle of a workout.
As discussed below, new rules go into effect next January requiring servicers to adopt policies and procedures to protect borrowers during a servicing transfer, but it is too soon to tell if servicers will actually comply with those policies. Presently, servicer compliance with the policies of MHA and GSEs, federal and state laws, various settlement agreements, and consent orders has been woefully lacking. It is difficult to believe one more set of rules will finally tip the scales in favor of borrowers.
Servicing Transfers of HAMP Eligible Loans
Most large servicers and many small ones are participating servicers in the Making Home Affordable (MHA) program, which includes HAMP. Participating servicers must comply with specific guidelines to transfer servicing rights for HAMP eligible loans. The requirements are set forth in Section 1.4 of the MHA Handbook for Servicers of Non-GSE Loans.
Generally, a transferor may not use a transfer to avoid its obligations under HAMP. Instead, the transferee servicer must assume the transferor’s obligations under HAMP for all eligible loans. Servicers are supposed to complete the transfer “with as little disruption as possible to the borrower.” As it turns out, a significant amount of disruption is possible despite certain obligations imposed on both the transferor and transferee servicers.
For example, the transferor must timely convey accurate and complete “information, documentation and data” to the transferee about the loans. All data on transferred loans must be brought up to date and made complete in the HAMP Reporting Tool prior to transfer.
The transferee must have an internal quality control process to review the loans and confirm that all information has been received. Within 30 days after a transfer, the transferee servicer must notify the borrower in writing and provide a toll-free number and at least one other method for the borrower to directly contact the new relationship manager and to submit any documents.
When a transferred loan modified under HAMP is owned or guaranteed by Fannie Mae, additional requirements are imposed:
[T]he transferor servicer must advise the transferee servicer that mortgage loans modified under HAMP are part of the portfolio being transferred and must confirm that the transferee servicer is not only aware of the special requirements for these mortgage loans, but also agrees to assume the additional responsibilities associated with servicing these mortgage loans. The transferee servicer must assume all of the responsibilities and duties of HAMP.
Fannie Mae Single-Family Servicing Guide, chapter VII, sec. 609.07.04. That assumption of responsibilities does not release the transferor, who remains contractually liable to Fannie.
Of course, the MHA program imposes a great many other rules on participating servicers. In the absence of any meaningful oversight and enforcement by the Treasury Department and Fannie Mae, servicers have flagrantly ignored those rules, as too many borrowers can attest. Unfortunately, HAMP does not give injured borrowers an express right to enforce the rules and courts have routinely held that borrowers have no right to sue for HAMP violations, which would include violations of rules relating to servicing transfers.
If a transferee refuses to complete review of a pending application or honor a trial modification, a borrower’s only option in many cases is to escalate the matter. Contact information and forms for escalating disputes over a servicer’s failure to comply with MHA guidelines are available on the HAMP website.
If a borrower’s loan was permanently modified under HAMP and a transferee servicer refuses to honor the modification even after escalation, the borrower will have a claim for breach of contract. If a borrower fully complied with the terms of a trial period plan and the servicer failed to convert to a permanent modification, some courts have allowed borrowers to proceed with claims based on promissory estoppel, breach of contract, and even fraud. See, e.g., Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547, 556‑557 (7th Cir. 2012).
Despite the improving state of the law, most borrowers struggling financially would prefer to avoid filing expensive litigation to enforce a loan modification agreement that was supposed to ease their financial burdens. Unfortunately, for some litigation may be the only way to avoid foreclosure.
Servicing Transfers Under the National Mortgage Settlement
In 2012, five of the nation’s then-largest mortgage loan servicers entered into a 49-state settlement arising out of the robosigning scandal and other fraudulent foreclosure practices. As a result, Bank of America, Wells Fargo, Citi, Chase and GMAC/Ally are all required to service loans in compliance with standards set forth in Exhibit A to the consent judgments.
The settlement requires that, when servicing is transferred to a new servicer or subservicer, the transferor must inform the transferee whether a loan modification is pending. The contract between the parties must obligate the transferee “to accept and continue processing pending loan modification requests” and “to honor trial and permanent loan modification agreements.”
In a rare and important twist, the settlement provides that:
Any contract for transfer or sale of servicing rights shall designate that borrowers are third party beneficiaries [of the requirements to continue processing requests and to honor existing agreements].
That means that, if a borrower’s loan is serviced by one of the Big Five servicers and the transferee fails to honor the loan modification, the borrower has a legal right to enforce the servicers’ contract provision and could bring a claim against the transferee.
When one of the Big Five servicers acquires new servicing rights, they also must agree to continue processing pending applications and honor existing trial and permanent modifications entered into by the transferor.
If the transferor or transferee servicer is a party to the settlement, the borrower first should attempt to resolve the problem with the servicer. If that fails, the borrower can file complaints online with the CFPB and with their state attorney general. In Oregon, you can file an online complaint with the Department of Justice at https://justice.oregon.gov/forms/consumer_complaint.asp. The settlement monitor is no longer accepting complaints directly. If all else fails, the borrower can sue to enforce the servicing contract as a third party beneficiary.
Federal Regulator Increases Scrutiny of Servicing Transfers
As a result of the rising tide of both servicing transfers and resulting consumer complaints, the Consumer Financial Protection Bureau has announced that, for some transactions, it will require servicers to submit “informational plans” describing how they will address the transfer risks to consumers. CFPB examiners will assess “the policies, procedures, systems, and controls that servicers have established” to address transfer risk, including adequate staffing and training.
After January 10, 2014, when RESPA’s new mortgage servicing rules go into effect, most servicers will be required to have appropriate policies and procedures to protect consumers during MSR transfers. In particular, the transferor must have policies and procedures in place to ensure that the transferee will have available “all necessary documents and information” after the transfer, including information regarding the status of workout discussions and any workout agreement entered into with the borrower. Borrowers, however, do not have a private right to enforce the policy requirements.
It remains to be seen whether CFPB’s new focus and the pending rules will result in a reduction of negligent and predatory servicing practices as part of servicing transfers.
Some States Are Doing More
In light of past failures of federal regulators to rein in predatory servicing practices, some states are taking action independently to protect their citizens.
For example, earlier this year Colorado passed a law that requires the transferor to notify the transferee servicer if a loan modification is pending and requires the transferee to honor any trial period plan or permanent loan modification entered into with the transferor. Washington and California law impose similar requirements. There is no counterpart in Oregon.
Although RESPA preempts state laws requiring greater notice to borrowers of a servicing transfer, it does not expressly preempt other transfer-related requirements. Lenders, however, have promised to test the scope of federal preemption of new state servicing laws, while consumer advocates argue that post-Dodd Frank, such laws are enforceable.
To summarize, when servicing of a loan is transferred, federal law requires the servicers to give written notice to the borrower. Applicable guidelines generally require the transferor to notify the transferee about any pending or active modification and to transfer complete and accurate information about the modification to the transferee.
The transferee is generally obligated to continue processing any pending request for modification and to honor any trial or permanent modification entered into by the transferor. Beginning next January, servicers will be required to have effective policies and procedures in place to ensure that these requirements are met.
Despite the existence of such requirements, borrowers’ options for enforcing the rules when a servicer fails to comply are often limited and, in the case of litigation, prohibitively expensive.
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