# Mortgage Servicing Rules Under the Truth in Lending Act (Regulation Z) > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2013-01241 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** February 14, 2013 - **Citation:** 78 FR 10902 ## Text BUREAU OF CONSUMER FINANCIAL PROTECTION 12 CFR Part 1026 [Docket No. CFPB-2012-0033] RIN 3170-AA14 Mortgage Servicing Rules Under the Truth in Lending Act (Regulation Z) AGENCY: Bureau of Consumer Financial Protection. ACTION: Final rule; official interpretations. SUMMARY: The Bureau of Consumer Financial Protection is amending Regulation Z, which implements the Truth in Lending Act and the official interpretation to the regulation, which interprets the requirements of Regulation Z. This final rule implements provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding mortgage loan servicing. Specifically, this final rule implements Dodd-Frank Act sections addressing initial rate adjustment notices for adjustable-rate mortgages, periodic statements for residential mortgage loans, prompt crediting of mortgage payments, and responses to requests for payoff amounts. This final rule also amends current rules governing the scope, timing, content, and format of disclosures to consumers regarding the interest rate adjustments of their variable-rate transactions. Concurrently with the issuance of this final rule, the Bureau is amending Regulation X, which contains companion rules implementing amendments to the Real Estate Settlement Procedures Act of 1974. DATES: This final rule is effective on January 10, 2014. FOR FURTHER INFORMATION CONTACT: Regulation Z (TILA): Whitney Patross, Attorney; Marta Tanenhaus or Mitchell E. Hochberg, Senior Counsels, Office of Regulations, at (202) 435-7700. Regulation X (RESPA): Whitney Patross, Attorney; Jane Gao, Terry Randall or Michael Scherzer, Counsels; Lisa Cole or Mitchell E. Hochberg, Senior Counsels, Office of Regulations, at (202) 435-7700. SUPPLEMENTARY INFORMATION: I. Summary of the Final Rule The Bureau of Consumer Financial Protection (Bureau) is amending Regulation Z, which implements the Truth in Lending Act (TILA) and the official interpretation to the regulation (the 2013 TILA Servicing Final Rule). The final rule implements provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding mortgage loan servicing. 1 Specifically, this final rule implements Dodd-Frank Act sections addressing initial interest rate adjustment notices for adjustable-rate mortgages (ARMs), periodic statements for residential mortgage loans, prompt crediting of mortgage payments, and responses to requests for payoff amounts. This final rule also amends current rules governing the scope, timing, content, and format of disclosures to consumers occasioned by the interest rate adjustments of their variable-rate transactions. Concurrently with the issuance of this final rule, the Bureau is amending Regulation X, which contains companion rules implementing amendments to the Real Estate Settlement Procedures Act of 1974 (the 2013 RESPA Servicing Final Rule). 1 Public Law 111-203, 124 Stat. 1376 (2010). On August 10, 2012, the Bureau issued proposed rules that would have amended Regulation X, which implements RESPA, 2 as well as Regulation Z, which implements TILA, 3 regarding mortgage servicing requirements. 4 The Proposed Servicing Rules proposed to implement the Dodd-Frank Act amendments to TILA and RESPA with respect to, among other things, periodic mortgage statements, disclosures for ARMs, prompt crediting of mortgage loan payments, requests for mortgage loan payoff statements, error resolution, information requests, and protections relating to force-placed insurance. In the 2012 RESPA Servicing Proposal, the Bureau also proposed to use its authority to adopt requirements relating to servicer policies and procedures, early intervention with delinquent borrowers, continuity of contact, and procedures for evaluating and responding to loss mitigation applications. 5 The proposals sought to address fundamental problems that underlie many consumer complaints and recent regulatory and enforcement actions, as set forth in more detail below. 2 See Press Release, U.S. Consumer Fin. Prot. Bureau, Consumer Financial Protection Bureau Proposes Rules to Protect Mortgage Borrowers (Aug. 10, 2012) available at http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-proposes-rules-to-protect-mortgage-borrowers/. The proposal was published in the Federal Register on September 17, 2012. 77 FR 57200 (Sept. 17 2012) (2012 RESPA Servicing Proposal). 3 See Press Release, U.S. Consumer Fin. Prot. Bureau, Consumer Financial Protection Bureau Proposes Rules to Protect Mortgage Borrowers (August 10, 2012) available at http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-proposes-rules-to-protect-mortgage-borrowers/. This proposal was also published in the Federal Register on September 17, 2012. 77 FR 57318 (Sept. 17, 2012) (2012 TILA Servicing Proposal; and, together with the 2012 RESPA Servicing Proposal, the Proposed Servicing Rules). 4 The 2013 RESPA Servicing Final Rule and the 2013 TILA Servicing Final Rule are referred to collectively as the Final Servicing Rules. 5 For ease of discussion, this notice uses the term “discretionary rulemakings” to refer to a set of regulations implemented using the Bureau's authorities under section 6(j), 6(k)(1)(E), or 19(a) of RESPA to expand requirements beyond those explicit in RESPA. The “discretionary rulemakings” include requirements relating to servicer policies and procedures, early intervention with delinquent borrowers, continuity of contact, and procedures for evaluating and responding to loss mitigation applications, as set forth in §§ 1024.38-1024.41. The Bureau is finalizing the Proposed Servicing Rules with respect to nine major topics, as summarized below, as well as certain technical and streamlining amendments. The goals of the Final Servicing Rules are to provide better disclosure to consumers of their mortgage loan obligations and to better inform consumers of, and assist consumers with, options that may be available for consumers having difficulty with their mortgage loan obligations. The amendments also address critical servicer practices relating to, among other things, correcting errors, imposing charges for force-placed insurance, crediting mortgage loan payments, and providing payoff statements. The Bureau's final rules are set forth in two separate notices because some provisions implement requirements that Congress imposed under TILA while other provisions implement requirements Congress imposed under RESPA. 6 6 Note that TILA and RESPA differ in their terminology. Whereas Regulation Z generally refers to “consumers” and “creditors,” Regulation X generally refers to “borrowers” and “lenders.” A. Major Topics in the Final Servicing Rules 1. Periodic billing statements (2013 TILA Servicing Final Rule). Creditors, assignees, and servicers must provide a periodic statement for each billing cycle containing, among other things, information on payments currently due and previously made, fees imposed, transaction activity, application of past payments, contact information for the servicer and housing counselors, and, where applicable, information regarding delinquencies. These statements must meet the timing, form, and content requirements provided in the rule. The rule contains sample forms that may be used. The periodic statement requirement generally does not apply to fixed-rate loans if the servicer provides a coupon book, so long as the coupon book contains certain information specified in the rule and certain other information specified in the rule is made available to the consumer. The rule also includes an exemption for small servicers as discussed below. 2. Interest rate adjustment notices (2013 TILA Servicing Final Rule). Creditors, assignees, and servicers must provide a consumer whose mortgage has an adjustable rate with a notice between 210 and 240 days prior to the first payment due after the rate first adjusts. This notice may contain an estimate of the new rate and new payment. Creditors, assignees, and servicers also must provide a notice between 60 and 120 days before payment at a new level is due when a rate adjustment causes the payment to change. The current annual notice that must be provided for ARMs for which the interest rate, but not the payment, has changed over the course of the year is no longer required. The rule contains model and sample forms that servicers may use. 3. Prompt payment crediting and payoff statements (2013 TILA Servicing Final Rule). Servicers must promptly credit periodic payments from borrowers as of the day of receipt. A periodic payment consists of principal, interest, and escrow (if applicable). If a servicer receives a payment that is less than the amount due for a periodic payment, the payment may be held in a suspense account. When the amount in the suspense account covers a periodic payment, the servicer must apply the funds to the consumer's account. In addition, creditors, assignees, and servicers must provide an accurate payoff balance to a consumer no later than seven business days after receipt of a written request from the consumer for such information. 4. Force-placed insurance (2013 RESPA Servicing Final Rule). Servicers are prohibited from charging a borrower for force-placed insurance coverage unless the servicer has a reasonable basis to believe the borrower has failed to maintain hazard insurance, as required by the loan agreement, and has provided required notices. An initial notice must be sent to the borrower at least 45 days before charging the borrower for force-placed insurance coverage, and a second reminder notice must be sent no earlier than 30 days after the first notice. The rule contains model forms that servicers may use. If a borrower provides proof of hazard insurance coverage, the servicer must cancel any force-placed insurance policy and refund any premiums paid for overlapping periods in which the borrower's coverage was in place. The rule also provides that charges related to force-placed insurance (other than those subject to State regulation as the business of insurance or authorized by Federal law for flood insurance) must be for a service that was actually performed and must bear a reasonable relationship to the servicer's cost of providing the service. Where the borrower has an escrow account for the payment of hazard insurance premiums, the servicer is prohibited from obtaining force-place insurance where the servicer can continue the borrower's homeowner insurance, even if the servicer needs to advance funds to the borrower's escrow account to do so. The rule against obtaining force-placed insurance in cases in which hazard insurance may be maintained through an escrow account exempts small servicers, as discussed below, so long as any force-placed insurance purchased by the small servicer is less expensive to a borrower than the amount of any disbursement the servicer would have made to maintain hazard insurance coverage. 5. Error resolution and information requests (2013 RESPA Servicing Final Rule). Servicers are required to meet certain procedural requirements for responding to written information requests or complaints of errors. The rule requires servicers to comply with the error resolution procedures for certain listed errors as well as any error relating to the servicing of a mortgage loan. Servicers may designate a specific address for borrowers to use. Servicers generally are required to acknowledge the request or notice of error within five days. Servicers also generally are required to correct the error asserted by the borrower and provide the borrower written notification of the correction, or to conduct an investigation and provide the borrower written notification that no error occurred, within 30 to 45 days. Further, within a similar amount of time, servicers generally are required to acknowledge borrower written requests for information and either provide the information or explain why the information is not available. 6. General servicing policies, procedures, and requirements (2013 RESPA Servicing Final Rule). Servicers are required to establish policies and procedures reasonably designed to achieve objectives specified in the rule. The reasonableness of a servicer's policies and procedures takes into account the size, scope, and nature of the servicer's operations. Examples of the specified objectives include accessing and providing accurate and timely information to borrowers, investors, and courts; properly evaluating loss mitigation applications in accordance with the eligibility rules established by investors; facilitating oversight of, and compliance by, service providers; facilitating transfer of information during servicing transfers; and informing borrowers of the availability of written error resolution and information request procedures. In addition, servicers are required to retain records relating to each mortgage loan until one year after the mortgage loan is discharged or servicing is transferred, and to maintain certain documents and information for each mortgage loan in a manner that enables the servicers to compile it into a servicing file within five days. This section includes an exemption for small servicers as discussed below. The Bureau and prudential regulators will be able to supervise servicers within their jurisdiction to assure compliance with these requirements but there will not be a private right of action to enforce these provisions. 7. Early intervention with delinquent borrowers (2013 RESPA Servicing Final Rule). Servicers must establish or make good faith efforts to establish live contact with borrowers by the 36th day of their delinquency and promptly inform such borrowers, where appropriate, that loss mitigation options may be available. In addition, a servicer must provide a borrower a written notice with information about loss mitigation options by the 45th day of a borrower's delinquency. The rule contains model language servicers may use for the written notice. This section includes an exemption for small servicers as discussed below. 8. Continuity of contact with delinquent borrowers (2013 RESPA Servicing Final Rule). Servicers are required to maintain reasonable policies and procedures with respect to providing delinquent borrowers with access to personnel to assist them with loss mitigation options where applicable. The policies and procedures must be reasonably designed to ensure that a servicer assigns personnel to a delinquent borrower by the time a servicer provides such borrower with the written notice required by the early intervention requirements, but in any event, by the 45th day of a borrower's delinquency. These personnel should be accessible to the borrower by phone to assist the borrower in pursuing loss mitigation options, including advising the borrower on the status of any loss mitigation application and applicable timelines. The personnel should be able to access all of the information provided by the borrower to the servicer and provide that information, when appropriate, to those responsible for evaluating the borrower for loss mitigation options. This section includes an exemption for small servicers as discussed below. The Bureau and the prudential regulators will be able to supervise servicers within their jurisdiction to assure compliance with these requirements but there will not be a private right of action to enforce these provisions. 9. Loss Mitigation Procedures (2013 RESPA Servicing Final Rule). Servicers are required to follow specified loss mitigation procedures for a mortgage loan secured by a borrower's principal residence. If a borrower submits an application for a loss mitigation option, the servicer is generally required to acknowledge the receipt of the application in writing within five days and inform the borrower whether the application is complete and, if not, what information is needed to complete the application. The servicer is required to exercise reasonable diligence in obtaining documents and information to complete the application. For a complete loss mitigation application received more than 37 days before a foreclosure sale, the servicer is required to evaluate the borrower, within 30 days, for all loss mitigation options for which the borrower may be eligible in accordance with the investor's eligibility rules, including both options that enable the borrower to retain the home (such as a loan modification) and non-retention options (such as a short sale). Servicers are free to follow “waterfalls” established by an investor to determine eligibility for particular loss mitigation options. The servicer must provide the borrower with a written decision, including an explanation of the reasons for denying the borrower for any loan modification option offered by an owner or assignee of a mortgage loan with any inputs used to make a net present value calculation to the extent such inputs were the basis for the denial. A borrower may appeal a denial of a loan modification program so long as the borrower's complete loss mitigation application is received 90 days or more before a scheduled foreclosure sale. The rule restricts “dual tracking,” where a servicer is simultaneously evaluating a consumer for loan modifications or other alternatives at the same time that it prepares to foreclose on the property. Specifically, the rule prohibits a servicer from making the first notice or filing required for a foreclosure process until a mortgage loan account is more than 120 days delinquent. Even if a borrower is more than 120 days delinquent, if a borrower submits a complete application for a loss mitigation option before a servicer has made the first notice or filing required for a foreclosure process, a servicer may not start the foreclosure process unless (1) the servicer informs the borrower that the borrower is not eligible for any loss mitigation option (and any appeal has been exhausted), (2) a borrower rejects all loss mitigation offers, or (3) a borrower fails to comply with the terms of a loss mitigation option such as a trial modification. If a borrower submits a complete application for a loss mitigation option after the foreclosure process has commenced but more than 37 days before a foreclosure sale, a servicer may not move for a foreclosure judgment or order of sale, or conduct a foreclosure sale, until one of the same three conditions has been satisfied. In all of these situations, the servicer is responsible for promptly instructing foreclosure counsel retained by the servicer not to proceed with filing for foreclosure judgment or order of sale, or to conduct a foreclosure sale, as applicable. This section includes an exemption for small servicers as defined above. However, a small servicer is required to comply with two requirements: (1) A small servicer may not make the first notice or filing required for a foreclosure process unless a borrower is more than 120 days delinquent, and (2) a small servicer may not proceed to foreclosure judgment or order of sale, or conduct a foreclosure sale, if a borrower is performing pursuant to the terms of a loss mitigation agreement. All of the provisions in the section relating to loss mitigation can be enforced by individuals. Additionally, the Bureau and the prudential regulators can also supervise servicers within their jurisdiction to assure compliance with these requirements. B. Scope of the Final Servicing Rules The Final Servicing Rules have somewhat different scopes, with respect to the types of mortgage loan transactions covered and the loans that are exempted. With respect to the 2013 TILA Servicing Final Rule, certain requirements, specifically the periodic statement and ARM disclosure requirements, only apply to closed-end mortgage loans, whereas other requirements, specifically the requirements for crediting of payments and providing payoff statements, apply to both open-end and closed-end mortgage loans. Reverse mortgage transactions and timeshare plans are exempt from the periodic statement requirement. ARMs with terms of one year or less are exempt from the ARM disclosure requirements. With respect to the 2013 RESPA Servicing Final Rule, certain requirements generally apply to federally related mortgage loans that are closed-end, with certain exemptions for loans on property of 25 acres or more, business-purpose loans, temporary financing, loans secured by vacant land, and certain loan assumptions or conversions. Open-end lines of credit (home equity plans) are generally exempt from the requirements in the 2013 RESPA Servicing Final Rule. The general servicing policies, procedure, and requirements, early intervention, continuity of contact, and loss mitigation procedures provisions are generally inapplicable to servicers of reverse mortgage transactions or to servicers of mortgage loans for which the servicers are also qualified lenders under the Farm Credit Act of 1971. In the 2013 TILA Servicing Final Rule, the Bureau is exercising its authority under TILA to provide an exemption from the periodic statement requirement for small servicers, defined as servicers that service 5,000 mortgage loans or less and only service mortgage loans the servicer or an affiliate owns or originated (small servicers). In the 2013 RESPA Servicing Final Rule, the Bureau has elected not to extend to these small servicers most provisions of the Final Rule that are not being promulgated to implement specific mandates in the Dodd-Frank Act but are, instead, being issued by the Bureau, in the exercise of its discretion, pursuant to its general rulemaking authority under RESPA, as amended by the Dodd-Frank Act. The exemptions from the discretionary rulemakings include those relating to general servicing policies, procedures, and requirements; early intervention with delinquent borrowers; continuity of contact; and most of the requirements for evaluating and responding to loss mitigation applications. Further, the Bureau is not restricting small servicers from purchasing force-placed insurance for borrowers with escrow accounts for the payment of hazard insurance, so long as the cost to the borrower of the force-placed insurance obtained by a small servicer is less than the amount the small servicer would be required to disburse from the borrower's escrow account to ensure that the borrower's hazard insurance premium charges were paid in a timely manner. Small servicers are required to comply with limited loss mitigation procedure requirements. These include (1) a prohibition on making the first notice or filing required for a foreclosure process unless a borrower is more than 120 days delinquent and (2) a prohibition on making the first notice or filing or moving for foreclosure judgment or order of sale, or conducting a foreclosure sale, when a borrower is performing pursuant to the terms of a loss mitigation agreement. The exemptions applicable to small servicers in the 2013 TILA Servicing Rule and the 2013 RESPA Servicing Rule are also being extended to Housing Finance Agencies, without regard to the number of mortgage loans serviced by any such agency, and these agencies are included within the definition of small servicer. II. Background A. Overview of the Mortgage Servicing Market and Market Failures The mortgage market is the single largest market for consumer financial products and services in the United States, with approximately $10.3 trillion in loans outstanding. 7 Mortgage servicers play a vital role within the broader market by undertaking the day-to-day management of mortgage loans on behalf of lenders who hold the loans in their portfolios or (where a loan has been securitized) investors who are entitled to the loan proceeds. 8 Over 60 percent of mortgage loans are serviced by mortgage servicers for investors. 7 Inside Mortg. Fin., Outstanding 1-4 Family Mortgage Securities, in 2 The 2012 Mortgage Market Statistical Annual 7 (2012). For general background on the market and the recent crisis, see the 2012 TILA-RESPA Proposal available at http://www.consumerfinance.gov/knowbeforeyouowe/ (last accessed Jan. 10, 2013). 8 As of June 2012, approximately 36% of outstanding mortgage loans were held in portfolio; 54% of mortgage loans were owned through mortgage-backed securities issued by Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), together referred to as the government-sponsored enterprises (GSEs), as well as securities issued by the Government National Mortgage Association (Ginnie Mae); and 10% of loans were owned through private label mortgage-backed securities. Strengthening the Housing Market and Minimizing Losses to Taxpayers, Hearing Before the S. Comm. on Banking, Housing and Urban Affairs (2012)(Testimony of Laurie Goodman, Amherst Securities), available at http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Testimony&Hearing_ID=53bda60f-64c1-43d8-9adf-a693c31eb56b&Witness_ID=b06f2fb1-59dd-4881-86cb-1082464d3119. A securitization results in the economic separation of the legal title to the mortgage loan and a beneficial interest in the mortgage loan obligation. In a securitization transaction, a securitization trust is the owner or assignee of a mortgage loan. An investor is a creditor of the trust and is entitled to cash flows that are derived from the proceeds of the mortgage loans. In general, certain investors (or an insurer entitled to act on behalf of the investors) may direct the trust to take action as the owner or assignee of the mortgage loans for the benefit of the investors or insurers. See, e.g., Adam Levitin & Tara Twomey, Mortgage Servicing, 28 Yale J. on Reg. 1, 11 (2011) (Levitin & Twomey). Servicers' duties typically include billing borrowers for amounts due, collecting and allocating payments, maintaining and disbursing funds from escrow accounts, reporting to creditors or investors, and pursuing collection and loss mitigation activities (including foreclosures and loan modifications) with respect to delinquent borrowers. Indeed, without dedicated companies to perform these activities, it is questionable whether a secondary market for mortgage-backed securities would exist in this country. 9 Given the nature of their activities, servicers can have a direct and profound impact on borrowers. 9 See, e.g., Levitin & Twomey, at 11 (“All securitizations involved third-party servicers * * * [m]ortgage servicers provide the critical link between mortgage borrowers and the SPV and RMBS investors, and servicing arrangements are an indispensable part of securitization.”). Mortgage servicing is performed by banks, thrifts, credit unions, and non-banks under a variety of business models. In some cases, creditors service mortgage loans that they originate or purchase and hold in portfolio. Other creditors sell the ownership of the underlying mortgage loan, but retain the mortgage servicing rights in order to retain the relationship with the borrower, as well as the servicing fee and other ancillary income. In still other cases, servicers have no role at all in origination or loan ownership, but rather purchase mortgage servicing rights on securitized loans or are hired to service a portfolio lender's loans. 10 10 See, e.g., Diane E. Thompson, Foreclosing Modifications: How Servicer Incentives Discourage Loan Modifications, 86 Wash. L. Rev. 755, 763 (2011) (“Thompson”). These different servicing structures can create difficulties for borrowers if a servicer makes mistakes, fails to invest sufficient resources in its servicing operations, or avoids opportunities to work with borrowers for the mutual benefit of both borrowers and owners or assignees of mortgage loans. Although the mortgage servicing industry has numerous participants, the industry is highly concentrated, with the five largest servicers servicing approximately 53 percent of outstanding mortgage loans in this country. 11 Small servicers generally operate in discrete segments of the market, for example, by specializing in servicing delinquent loans, or by servicing loans that they originate. 12 11 See Top 100 Mortgage Servicers in 2012, Inside Mortg. Fin., Sept. 28, 2012, at 13 (As of the end of the fourth quarter of 2011, the top five largest servicers serviced $5.66 trillion of mortgage loans). 12 Fitch Ratings, U.S. Residential and Small Balance Commercial Mortgage Servicer Rating Criteria, at 14-15 (Jan. 31, 2011), available at http://www.fitchratings.com. (account required to access information). Contracts between the servicer and the mortgage loan owner specify the rights and responsibilities of each party. In the context of securitized loans, the contracts may require the servicer to balance the competing interests of different classes of investors when borrowers become delinquent. Certain provisions in servicing contracts may limit the servicer's ability to offer certain types of loan modifications to borrowers. Such contracts also may limit the circumstances under which owners or assignees of mortgage loans can transfer servicing rights to a different servicer. Further, servicer contracts govern servicer requirements to advance payments to owners of mortgage loans, and to recoup advances made by servicers, including from ultimate recoveries on liquidated properties. Compensation structures vary somewhat for loans held in portfolio and securitized loans, 13 but have tended to make pure mortgage servicing (where the servicer has no role in origination) a high-volume, low-margin business. Such compensation structures incentivize servicers to ensure that investment in operations closely tracks servicer expectations of delinquent accounts, and an increase in the number of delinquent accounts a servicer must service beyond that projected by the servicer strains available servicer resources. A servicer will expect to recoup its investment in purchasing mortgage servicing rights and earn a profit primarily through a net servicing fee (which is typically expressed as a constant rate assessed on unpaid mortgage balances), interest float on payment accounts between receipt and disbursement, and cross-marketing other products and services to borrowers. Under this business model, servicers act primarily as payment collectors and processors, and will have limited incentives to provide other customer service. Servicers greatly vary in the extent to which they invest in customer service infrastructure. For example, servicer staffing ratios have varied between approximately 100 loans per full-time employee to over 4,000 loans per full time employee. 14 Servicers are generally not subject to market discipline from consumers because consumers have little opportunity to switch servicers. Rather, servicers compete to obtain business from the owners of loans—investors, assignees, and creditors—and thus competitive pressures tend to drive servicers to lower the price of servicing and scale their investment in providing service to consumers accordingly. 13 At securitization, the cash flow that was part of interest income is bifurcated between the loan and the mortgage servicing right (MSR). The MSR represents the present value of all the cash flows, both positive and negative, related to servicing a mortgage. Prime MSRs are largely created by the GSE minimum servicing fee rate, which is calculated as 25 basis points (bps) per annum. The servicing fee rate is typically paid to the servicer monthly and the monthly amount owed is calculated by multiplying the pro rata portion of the servicing fee rate by the stated principal balance of the mortgage loan at the payment due date. Accounting rules require that a capitalized asset be created if the “compensation” for servicing (including float/ancillary) exceeds “adequate compensation.” For loans held in portfolio, there is no bifurcation of the interest income from the loan. The owner of the loan simply negotiates pricing, terms, and standards with the servicer, which, at larger institutions, is typically a separate affiliate or subsidiary of the owner of the loans. Keefe, Bruyette & Woods, Inc., PowerPoint Presentation, KBW Mortgage Matters: Mortgage Servicing Primer (Apr. 2012). 14 Richard O'Brien, High Time for High-Touch, Mortg. Banking, Feb. 1, 2009, at 39. Industry participants generally indicated to the Bureau that servicers targeted a loan to employee ratio of 1,000-1,200 mortgage loans per full time employee for mortgage loans that are current, and 125—150 mortgage loans per full time employee for mortgage loans that are delinquent. Between 1992 and 2000, as servicers sought to make their operations more efficient, loans serviced per full time employee increased from approximately 700 loans in 1992 to over 1,200 loans by 2000. Michael A. Stegman et al., Preventative Servicing is Good for Business and Affordable Homeownership Policy, 18 Housing Pol'y Debate 243, 274 (2007). As an example of current mortgage servicing staffing levels, Ocwen services 162 mortgage loans per servicing employee. See Morningstar Credit Ratings, LLC, Operational Risk Assessment—Ocwen Loan Servicing, LLC, at 7 (2012) available at http://www.ocwen.com/docs/Morningstar-Sept-2012.pdf. Servicers also earn revenue from fees assessed on borrowers, including fees on late payments, fees for obtaining force-placed insurance, and fees for services, such as responding to telephone inquiries, processing telephone payments, and providing payoff statements. 15 As a result, servicers have an incentive to look for opportunities to impose fees on borrowers to enhance revenues. 15 See, e.g., Bank of America, Mortgage Servicing Fees, available at https://www8.bankofamerica.com/home-loans/mortgage-servicing-fees.go (last accessed Jan. 11, 2013); Metro Credit Union, Mortgage Servicing Fee Schedule, available at http://www.metrocu.org/home/fiFiles/static/documents/Mortgage_Servicing_Fee_Schedule.pdf (last accessed Jan. 6, 2013); Acqura Loan Services, Mortgage Loan Servicing Fee Schedule, available at http://www.acqurals.com/feeschedule.html (last accessed Jan. 11, 2013); Sovereign Bank, FAQ— What are the Mortgage Loan Servicing Fees?, available at https://customerservice.sovereignbank.com/app/answers/detail/a_id/22/~/what-are-the-mortgage-loan-servicing-fees%3F (last accessed Jan. 11, 2013). These attributes of the servicing market created problems for certain borrowers even prior to the financial crisis. For example, borrowers experienced problems with mortgage servicers even during regional mortgage market downturns that preceded the financial crisis. 16 There is evidence that borrowers were subjected to improper fees that servicers had no reasonable basis to impose, improper force-placed insurance practices, and improper foreclosure and bankruptcy practices. 17 16 See Problems in Mortgage Servicing from Modification to Foreclosure: Hearings Before the S. Comm. on Banking, Hous., & Urban Affairs, 111th Cong. 53-54 (2010) (statement of Thomas J. Miller, Iowa Att'y Gen.) (“Miller Testimony”). See also, Kurt Eggert, Limiting Abuse and Opportunism by Mortgage Servicers, 15 Housing Pol'y Debate 753 (2004), available at http://ssrn.com/abstract=992095. 17 See Kurt Eggert, Limiting Abuse and Opportunism by Mortgage Servicers, 15 Housing Pol'y Debate 753 (2004), available at http://ssrn.com/abstract=992095 (collecting cases). When the financial crisis erupted, many servicers—and especially the larger servicers with their scale business models—were ill-equipped to handle the high volumes of delinquent mortgages, loan modification requests, and foreclosures they were required to process. Mortgage loan delinquency rates nearly doubled between 2007 and 2009 from 5.4 percent of first-lien mortgage loans to 9.4 percent of first-lien mortgage loans. 18 Many servicers lacked the infrastructure, trained staff, controls, and procedures needed to manage effectively the flood of delinquent mortgages they were forced to handle. 19 One study of complaints to the HOPE Hotline reported that over half of the complaints (27,000 out of 48,000) were from borrowers who could not reach their servicers and obtain information about the status of applications they had submitted for options to avoid foreclosure. 20 18 U.S. Census Bureau, Table 1194: Mortgage Originations and Delinquency and Foreclosure Rates: 1990 to 2010, in The 2012 Statistical Abstract of the United States, (2012), available at http://www.census.gov/compendia/statab/2012/tables/12s1194.pdf (last accessed Jan. 6, 2013). 19 See U.S. Dep't of the Treasury, Making Contact: The Path to Improving Mortgage Industry Communication with Homeowners, at 3 (2012), available at http://www.treasury.gov/initiatives/financial-stability/reports/Documents/SPOC%20Special%20Report_Final.pdf (last accessed Jan. 6, 2013). 20 See U.S. Gov't Accountability Office, GAO-10-634, Troubled Asset Relief Program: Further Actions Needed To Fully and Equitably Implement Foreclosure Mitigation Programs, at 15 (2010). Consumer harm has manifested in many different areas, and major servicers have entered into significant settlement agreements with Federal and State governmental authorities. For example, in April 2011, the Office of the Comptroller of the Currency (OCC) and the Board of Governors of the Federal Reserve System (Board), following on-site reviews of foreclosure processing at 14 federally regulated mortgage servicers, found significant deficiencies at each of the servicers reviewed. As a result, the OCC and the Board undertook formal enforcement actions against several major servicers for unsafe and unsound residential mortgage loan servicing practices. 21 These enforcement actions generally focused on practices relating to (1) filing of foreclosure documents without, for example, proper affidavits or notarizations; (2) failing to always ensure that loan documents were properly endorsed or assigned and, if necessary, in the possession of the appropriate party at the appropriate time; (3) failing to devote sufficient financial, staffing, and managerial resources to ensure proper administration of foreclosure processes; (4) failing to devote adequate oversight, internal controls, policies and procedures, compliance risk management, internal audit, third-party management, and training to foreclosure processes; and (5) failing to oversee sufficiently outside counsel and other third-party providers handling foreclosure-related services. 22 21 Press Release, Office of the Comptroller of the Currency, NR 2011-47, OCC Takes Enforcement Action Against Eight Servicers for Unsafe and Unsound Foreclosure Practices (Apr. 13, 2011), available at http://www.occ.gov/news-issuances/news-releases/2011/nr-occ-2011-47.html; Press Release, Fed. Reserve Bd., Federal Reserve Issues Enforcement Actions Related to Deficient Practices in Residential Mortgage Loan Servicing (April 13, 2011) (“Fed Press Release”), available at http://www.federalreserve.gov/newsevents/press/enforcement/20110413a.htm. In addition to enforcement actions against major servicers, Federal agencies have also undertaken formal enforcement actions against major service providers to mortgage servicers. 22 Press Release, Federal Reserve Bd., Federal Reserve Issues Enforcement Actions Related to Deficient Practices in Residential Mortgage Loan Servicing (April 13, 2011), available at http://www.federalreserve.gov/newsevents/press/enforcement/20110413a.htm. None of the servicers admitted or denied the OCC's or Federal Reserve Board's findings. Other investigations of servicers have found similar problems. For example, the Government Accountability Office (GAO) has found pervasive problems in broad segments of the mortgage servicing industry impacting delinquent borrowers, such as servicers who have misled, or failed to communicate with, borrowers, lost or mishandled borrower-provided documents supporting loan modification requests, and generally provided inadequate service to delinquent borrowers. It has been recognized in Inspector General reports, and the Bureau has learned from outreach with mortgage investors, that servicers may be acting to maximize their self-interests in the handling of delinquent borrowers, rather than the interests of owners or assignees of mortgage loans. 23 23 See, e.g., Jody Shenn, PIMCO: This is who's actually going to be punished by the mortgage fraud settlement, Bloomberg News, February 10, 2012; cf., Office of Inspector Gen., Fed. Hous. Fin. Agency, Evaluation of FHFA's Oversight of Fannie Mae's Transfer of Mortgage Servicing Rights from Bank of America to High Touch Servicers, at 12 (Sept. 18, 2012) (“FHA OIG MSR Report”). The Inspector General for FHFA observed that “Fannie Mae may have had (what one of its executives described as) a `misalignment of interests' with its servicers. As guarantor or loan holder, Fannie Mae could face significant losses from a default. However, a servicer earns only a fraction of a percent of the unpaid balance of a mortgage it services and, thus, the fees derived from any particular loan may not—at least for the servicer—provide adequate incentive to undertake anything more than the bare minimum of effort in order to prevent a default. This will typically include sending out delinquency notices to borrowers who have not made timely payments, telephoning delinquent borrowers, and, ultimately, initiating foreclosure proceedings.” The mortgage servicing industry, however, is not monolithic. Some servicers provide high levels of customer service. Some of these servicers are compensated by investors in a way that incentivizes them to provide this level of service in order to optimize investor outcomes. 24 Other servicers provide high levels of customer service because they are servicing loans of their own retail customers within their local community or (in the case of credit unions) membership base. These servicers seek to provide other products and services to consumers—and to others within the community or membership base—and thus have an interest in preserving their reputations and relationships with their consumers. For example, as discussed further below, small servicers that the Bureau consulted as part of a process required under the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) described their businesses as requiring a “high touch” model of customer service both to ensure loan performance and maintain a strong reputation in their local communities. 25 24 For example, Fannie Mae rewards servicers that provide high levels of customer service by compensating them through (1) base servicing fees, (2) incentive payments for mortgage modifications, and (3) a performance payment based on the servicer's success as contrasted with that of a benchmark portfolio. See FHA OIG MSR Report at 12. 25 See U.S. Consumer Fin. Prot. Bureau, Final Report of the Small Business Review Panel on CFPB's Proposals Under Consideration for Mortgage Servicing Rulemaking (Jun. 11, 2012) (“Small Business Review Panel Report”), available at http://www.regulations.gov/#!documentDetail;D=CFPB-2012-0033-0002. B. The National Mortgage Settlement and Other Regulatory Requirements In response to the unprecedented financial crisis and pervasive problems in mortgage servicing, including the systemic violation of State foreclosure laws by many of the largest servicers, State and Federal regulators have engaged in a number of individual servicing related enforcement and regulatory actions over the last few years and have begun discussions about comprehensive national standards. For example, the Federal government, joined by 49 State Attorneys General, 26 entered into settlements with the nation's five largest servicers in February 2012 (the National Mortgage Settlement). 27 Exhibit A to each of the settlements is a Settlement Term Sheet, which sets forth standards that each of the five largest servicers must follow to comply with the terms of the settlement. 28 The settlement standards contained in the Settlement Term Sheet are sub-divided into the following eight categories: (1) Foreclosure and bankruptcy information and documentation; (2) third-party provider oversight; (3) bankruptcy; (4) loss mitigation; (5) protections for military personnel; (6) restrictions on servicing fees; (7) force-placed insurance; and (8) general servicer duties and prohibitions. 26 Oklahoma elected not to participate in the National Mortgage Settlement and executed a separate settlement with the servicers that are parties to the National Mortgage Settlement. See State of Oklahoma, Oklahoma Mortgage Settlement Fact Sheet (Feb. 9, 2012), available at http://www.oag.ok.gov/oagweb.nsf/0/2737eec87426c427862579c10003c950/$FILE/Oklahoma%20Mortgage%20Settlement%20FAQs.pdf (last accessed Jan. 10, 2013). 27 The National Mortgage Settlement is available at: http://www.nationalmortgagesettlement.com/. The five servicers subject to the settlement are Bank of America, JP Morgan Chase, Wells Fargo, CitiMortgage, and Ally/GMAC. 28 See Attys. Gen., National Mortgage Settlement. Apart from the National Mortgage Settlement, Federal regulatory agencies have also issued guidance on mortgage servicing and loan modifications, 29 conducted coordinated reviews of the nation's largest servicers, 30 and taken enforcement actions against individual companies. 31 Further, the Bureau and other Federal agencies have been engaged since spring 2011 in informal discussions about the potential development of national mortgage servicing standards through interagency regulations and guidance. 29 See Press Release, Fed. Res. Bd., Federal Reserve Board releases action plans and engagement letter to correct deficiencies in residential mortgage loan servicing and foreclosure processing (May 24, 2012), available at http://www.federalreserve.gov/newsevents/press/enforcement/20120524a.htm; Press Release, Fed. Res. Bd., Federal Reserve Board releases action plans for supervised financial institutions to correct deficiencies in residential mortgage loan servicing and foreclosure processing (Feb. 27, 2012), available at http://www.federalreserve.gov/newsevents/press/enforcement/20120227a.htm; Press Release, Office of the Comptroller of the Currency, OCC Takes Enforcement Action Against Eight Servicers for Unsafe and Unsound Foreclosure Practices (Apr. 13, 2011), available at http://www.occ.treas.gov/news-issuances/news-releases/2011/nr-occ-2011-47.html. 30 See Fed. Res. Bd., Federal Reserve Board releases action plans and engagement letter to correct deficiencies in residential mortgage loan servicing and foreclosure processing (May 24, 2012), available at http://www.federalreserve.gov/newsevents/press/enforcement/20120524a.htm. 31 See Press Release, Fed. Res. Bd., Federal Reserve Board releases action plans and engagement letter to correct deficiencies in residential mortgage loan servicing and foreclosure processing (May 24, 2012), available at http://www.federalreserve.gov/newsevents/press/enforcement/20110413a.htm; Press Release, Fed. Res. Bd., Federal Reserve Board releases action plans for supervised financial institutions to correct deficiencies in residential mortgage loan servicing and foreclosure processing (Feb. 27, 2012), available at http://www.federalreserve.gov/newsevents/press/enforcement/20120227a.htm; Press Release, Office of the Comptroller of the Currency, OCC Takes Enforcement Action Against Eight Servicers for Unsafe and Unsound Foreclosure Practices (Apr. 13, 2011), available at http://www.occ.gov/news-issuances/news-releases/2011/nr-occ-2011-47.html. Servicers are currently required to navigate overlapping requirements governing their servicing responsibilities. Servicers must comply with requirements established by owners or assignees of mortgage loans. These include, as applicable, (1) servicing guidelines required by Fannie Mae, Freddie Mac, and Ginnie Mae; (2) government insured program guidelines issued by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and the Rural Housing Service; (3) contractual agreements with investors (such as pooling and servicing agreements and subservicing contracts); and (4) bank or institution policies. Servicers are also required to consider the impact of State and even local regulation on mortgage servicing. Significantly, New York, California, and Oregon have all adopted varying statutory or regulatory restrictions on mortgage servicers. For example, the Superintendent of Banks of the State of New York has repeatedly adopted short-term emergency regulations governing mortgage servicers on a continuous basis since July 2010. 32 These regulations impose obligations on servicers with respect to, among other things, consumer complaints and inquiries, statements of accounts, crediting of payments, payoff balances, and loss mitigation procedures. 33 The California Homeowner Bill of Rights, which was enacted in 2012, imposes requirements on servicers with respect to evaluations of borrowers for loss mitigation options before various foreclosure documents may be filed for California's non-judicial foreclosure process. 34 Further, Oregon implemented regulations on mortgage servicers not to engage in unfair or deceptive conduct by: assessing fees for payments made on or before a payment due date; assessing or collecting fees not authorized by a security instrument or mortgage, misrepresenting information relating to a loan modification or set forth in an affidavit, declaration, or other sworn statement detailing a borrower's default and the servicer's right to foreclose; failing to comply with certain provisions of RESPA; or failing to deal with a borrower in good faith. 35 Further, Massachusetts has recently proposed new regulations to protect consumers with respect to mortgage servicing practices, including with respect to loss mitigation procedures. 36 32 New York State Department of Financial Services, Explanatory All Institutions Letter (October 7, 2012), available at http://www.dfs.ny.gov/legal/regulations/emergency/banking/ar419lt.htm (last accessed Dec. 7, 2012). 33 3 N.Y.C.R.R. 419.1 et seq. 34 See Cal. Civ. Code § 2923.6. 35 OAR 137-020-0805. Notably, Oregon's regulations initially implemented mortgage servicing requirements with respect to open-end lines of credit (home equity plans) and, further, required servicers to comply with GSE guidelines for loan modifications. Oregon suspended these requirements and reissued the rule as OAR 137-020-0805 on the basis that such suspension was necessary to facilitate compliance. See In the matter of: Suspension of OAR 137-020-0800 and Adoption of OAR 137-020-0805 (February 15, 2012), available at http://www.oregonmla.org/WebsiteAttachments/Misc%20Events%20Attachments/OAR%20137-020-0805%202%2015%2012%20AG%20Servicing%20Rules%20(00540177).pdf (last accessed Jan. 6, 2013). 36 See Press Release, Massachusetts Division of Banks Proposes New Standards for Mortgage Servicing (Nov. 8, 2012), available at http://www.mass.gov/ocabr/docs/dob/standards-for-mort-servicing2012.pdf (last accessed Jan. 6, 2013). C. TILA and Regulation Z In 1968, Congress enacted TILA, 15 U.S.C. 1601 et seq., based on findings that the informed use of credit resulting from consumers' awareness of the cost of credit would enhance economic stability and competition among consumer credit providers. One of the purposes of TILA is to promote the informed use of consumer credit by requiring disclosures about its costs and terms. TILA requires additional disclosures for loans secured by consumers' homes and permits consumers to rescind certain transactions secured by their principal dwellings when the required disclosures are not provided. Section 105(a) of TILA directs the Bureau (and formerly directed the Board) to prescribe regulations to carry out TILA's purposes and specifically authorizes the Bureau, among other things, to issue regulations that contain such additional requirements, classifications, differentiations, or other provisions, or that provide for such adjustments and exceptions for all or any class of transactions, that in the Bureau's judgment are necessary or proper to effectuate the purposes of TILA, facilitate compliance with TILA, or prevent circumvention or evasion thereof. See 15 U.S.C. 1604(a). General rulemaking authority for TILA transferred to the Bureau in July 2011, other than for certain motor vehicle dealers in accordance with Dodd-Frank Act section 1029, 12 U.S.C. 5519. Pursuant to the Dodd-Frank Act and TILA, as amended, the Bureau published for public comment an interim final rule establishing a new Regulation Z, 12 CFR part 1026, implementing TILA (except with respect to persons excluded from the Bureau's rulemaking authority by section 1029 of the Dodd-Frank Act). 76 FR 79768 (Dec. 22, 2011). This rule did not impose any new substantive obligations but did make technical and conforming changes to reflect the transfer of authority and certain other changes made by the Dodd-Frank Act. The Bureau's Regulation Z took effect on December 30, 2011. The Official Interpretation interprets the requirements of the regulation and provides guidance in applying the rules to specific transactions. See 12 CFR part 1026, Supp. I. Prior to the adoption of the Dodd-Frank Act, TILA set forth requirements on creditors that were implemented by servicers, including disclosures regarding interest rate adjustments on adjustable-rate mortgage loans. Regulation Z, which implements TILA, was amended by the Board to impose certain limited requirements directly on servicers, such as requirements to credit payments timely and provide payoff balances, as well as a prohibition on pyramiding of late fees. 37 37 See 12 CFR 1026.36(c). ARM rate adjustment disclosures. The Board adopted the rule that is current § 1026.20(c) in 1987, as part of a larger revision of Regulation Z. 38 In 2009, the Board proposed to revise regulations governing ARM disclosures as part of a larger revision of closed-end provisions in Regulation Z (2009 Closed-End Proposal). In that proposal, the Board said that, in 1987, it set the minimum time for providing notice of a rate adjustment at 25 days before the first payment at the new level is due to track the rules of the OCC and to provide creditors with flexibility in giving adjustment notices for a variety of ARMs. 39 It also noted that, as of 2009, neither the OCC nor any other Federal financial institution supervisory agency had any comprehensive disclosure requirements for ARMs. 40 38 52 FR 48665 (Dec. 24, 1987). 39 74 FR 43232, 43269 (Aug. 26, 2009) ( citing 52 FR 48665, 48668 (Dec. 24, 1987)). 40 74 FR 43232, 43272. Prompt crediting and payoff statements. In 2008 the Board published a final rule amending Regulation Z to establish new regulatory protections for consumers in the residential mortgage market from unfair, abusive, or deceptive lending and servicing practices. 41 Among other protections, this rule established 12 CFR 226.36(c), prohibiting certain practices of servicers of consumer credit transactions secured by a consumers principal dwelling. This rule provided that no servicer shall: (1) Fail to credit a consumer's periodic payment as of the date received; (2) impose a late fee or delinquency charge where the late fee or delinquency charge is due only to a consumer's failure to include in a current payment a late fee or delinquency charge imposed on earlier payments; or (3) fail to provide an accurate payoff statement within a reasonable time of request. 41 73 FR 44522 (July 30, 2008). D. The Dodd-Frank Act The Dodd-Frank Act imposes certain new requirements related to mortgage servicing. As set forth above, some of these new requirements are amendments to TILA addressed in this final rule and others are amendments to RESPA, addressed in the 2013 RESPA Servicing Final Rule. Sections 1418, 1420, and 1464 amend TILA to include protections with respect to mortgage servicing. There are three new mortgage servicing requirements under TILA. First, for closed-end credit transactions secured by a consumer's principal residence, section 1418 of the Dodd-Frank Act adds a new section 128A to TILA. 15 U.S.C. 1638a. TILA section 128A states that, for hybrid ARMs with a fixed interest rate for an introductory period that adjusts or resets to an adjustable interest rate at the end of such period, a notice must be provided six months prior to the initial adjustment of the interest rate for closed-end credit transactions secured by a consumer's principal residence. Section 1418 of the Dodd-Frank Act permits the Bureau to extend this requirement to ARMs that are not hybrid ARMs. Second, section 1420 of the Dodd-Frank Act, which adds section 128(f) to TILA, requires the creditor, assignee, or servicer of any residential mortgage loan to transmit to the consumer, for each billing cycle, a periodic statement that sets forth certain specified information in a conspicuous and prominent manner. 15 U.S.C. 1638(f). The statute also gives the Bureau the authority to require additional content to be included in the periodic statement. The statute provides an exemption to the periodic statement requirement for fixed-rate loans where the consumer is given a coupon book containing substantially the same information as the statement. Third, section 1464 of the Dodd-Frank Act adds sections 129F and 129G to TILA, which generally codifies existing Regulation Z requirements for the prompt crediting of mortgage payments received by servicers in connection with consumer credit transactions secured by a consumer's dwelling and requirements for a creditor or servicer to send accurate and timely responses to consumer requests for payoff amounts for home loans. 15 U.S.C. 1639f, 1639g. Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to prescribe rules “as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof[.]” 12 U.S.C. 5512(b)(1). TILA and title X of the Dodd-Frank Act are Federal consumer financial laws. Accordingly, the Bureau proposed to exercise its authority under section 1022(b) of the Dodd-Frank Act to prescribe rules to carry out the purposes of TILA and title X and prevent evasion of those laws. III. Summary of the Rulemaking Process A. Outreach and Consumer Testing The Bureau has conducted extensive outreach in developing the Final Servicing Rules. Prior to issuing the Proposed Servicing Rules on August 10, 2012, Bureau staff met with consumers, consumer advocates, mortgage servicers, force-placed insurance carriers, industry trade associations, other Federal regulatory agencies, and other interested parties to discuss various aspects of the statute, servicing industry operations, and consumer harm impacts. Outreach included meetings with numerous individual servicers to understand their operations and the potential benefits and burdens of the proposed mortgage servicing rules. As discussed above and in connection with section 1022 of the Dodd-Frank Act below, the Bureau has also consulted with relevant Federal regulators both regarding the Bureau's specific rules and the need for and potential contents of national mortgage servicing standards in general. Further, the Bureau solicited input from small servicers through a Small Business Review Panel (Small Business Review Panel) with the Chief Counsel for Advocacy of the Small Business Administration (Advocacy) and the Administrator of the Office of Information and Regulatory Affairs within the Office of Management and Budget (OMB). 42 The Small Business Review Panel's findings and recommendations are contained in the Small Business Review Panel Report. 43 The Bureau has adopted recommendations provided by the participants on the Small Business Review Panel and includes below a discussion of such recommendations in connection with the applicable requirement. 42 The Small Business Regulatory Enforcement Fairness Act of 1996 requires the Bureau to convene a Small Business Review Panel before proposing a rule that may have a significant economic impact on a substantial number of small entities. See Public Law 104-121, tit. II, 110 Stat. 847, 857 (1996) (as amended by Pub. L. 110-28, sec. 8302 (2007)). 43 See U.S. Consumer Fin. Prot. Bureau, Final Report of the Small Business Review Panel on CFPB's Proposals Under Consideration for Mortgage Servicing Rulemaking (June 11, 2012) (“Small Business Review Panel Final Report”), available at http://www.consumerfinance.gov. Further, prior to the issuing the Proposed Servicing Rules on August 10, 2012, the Bureau engaged ICF Macro (Macro), a research and consulting firm that specializes in designing disclosures and consumer testing, to conduct one-on-one cognitive interviews regarding disclosures connected with mortgage servicing. During the first quarter of 2012, the Bureau and Macro worked closely to develop and test disclosures that would satisfy the requirements of the Dodd-Frank Act and provide information to consumers in a manner that would be understandable and useful. These disclosures related the ARM interest rate adjustment notices and the periodic statement disclosure set forth in this rule as well as the forced-placed insurance notices set forth in the 2013 RESPA Servicing Final Rule. Macro conducted three rounds of one-on-one cognitive interviews with a total of 31 participants in the Baltimore, Maryland metro area (Towson, Maryland), Memphis, Tennessee, and Los Angeles, California. Participants were all consumers who held a mortgage loan and represented a range of ages and education levels. Efforts were made to recruit a significant number of participants who had trouble making mortgage payments in the last two years. During the interviews, participants were shown disclosure forms for periodic statements, ARM interest rate adjustment notices, and force-placed insurance notices. Participants were asked specific questions to test their understanding of the information presented in each of the disclosures, how easily they could find various pieces of information presented in each of the disclosures, and how they would use the information presented in each of the disclosures. The disclosures were revised after each round of testing. After the Bureau issued the Proposed Servicing Rules, Macro conducted a fourth round of one-on-one cognitive interviews with eight participants in Philadelphia, Pennsylvania. Again, participants were consumers who held a mortgage loan and represented a range of ages and education levels. During the interviews, participants were asked to review two different versions of a servicing transfer notice and early intervention model clauses, which relate to requirements the Bureau is implementing under RESPA. Participants were asked specific questions to test their reaction to and understanding of the content of the servicing transfer notice and the early intervention model clauses. This process was repeated for each of the five clauses being tested. Specific findings from the consumer testing are discussed in detail throughout where relevant. 44 44 ICF Int'l, Inc., Summary of Findings: Design and Testing of Mortgage Servicing Disclosures (Aug. 2012) (“Macro Report”), available at http://www.regulations.gov/#!documentDetail;D=CFPB-2012-0033-0003. One commenter, identifying itself as a research organization, observed that the consumer testing the Bureau has conducted with respect to the mortgage servicing disclosures follows the path of evidence-based decision-making. This commenter asserted, however, that the Bureau should consider undertaking steps in evaluating the proposed forms, including possibly undertaking additional testing because other consumer financial disclosures, including the forms the Bureau proposed with the 2012 TILA-RESPA Proposal, have gone through more testing. At the same time, however, the commenter observed that the decreased level of testing might be justified on various grounds, such as, for example, the fact that studies have found that small numbers of individuals can identify the vast majority of usability problems, the fact that the testing was done with participants familiar with mortgages, and the fact that the Bureau is working on a tight schedule to finalize rules by January 21, 2013 when statutory provisions would go into effect. The Bureau believes that the testing it conducted is appropriate. The Bureau observes that the forms the Bureau proposed as part of the 2012 TILA- RESPA Proposal contained significantly more complicated financial information than the forms finalized as part of the current rulemakings. Additionally, the 2012 TILA-RESPA Proposal, when finalized, would substantially change consumers' mortgage shopping experience; by contrast, the Final Mortgage Servicing Rules are intended to improve, but not substantially alter, consumers' experience with their mortgage servicers. These differences, in terms of level of complication and degree of change from current practice, justify the different levels of resources the Bureau allocated to the two different testing projects. Lastly, Macro's findings show that there was notable consistency across the different rounds of testing in terms of participant comprehension that, in combination with the Bureau's expertise and knowledge of consumer understanding and behavior, gave the Bureau confidence to rely on the forms that were developed and refined through testing as a basis for the model forms included in the Final Servicing Rules. The Bureau further emphasizes that it is not relying solely on the consumer testing to determine that any particular disclosure will be effective. The Bureau is also relying on its knowledge of, and expertise in, consumer understanding and behavior, as well as principles of effective disclosure design. B. Small Business Regulatory Enforcement Fairness Act As required by SBREFA, the Bureau convened a Small Business Review Panel to assess the impact of the possible rules on small servicers and to help the Bureau determine to what extent it may be appropriate to consider adjusting these standards for small servicers, to the extent permitted by law. Thus, on April 9, 2012, the Bureau provided Advocacy with the formal notification and other information required under section 609(b)(1) of the Regulatory Flexibility Act (RFA) to convene the panel. In order to obtain feedback from small servicers, the Bureau, in consultation with Advocacy, identified five categories of small entities that may be subject to the proposed rule: Commercial banks/savings institutions, credit unions, non-depositories engaged primarily in lending funds with real estate as collateral, non-depositories primarily engaged in loan servicing, and certain non-profit organizations. The Bureau, in consultation with Advocacy, selected 16 representatives to participate in the Small Business Review Panel process from the categories of entities that may be subject to the Proposed Servicing Rules. The participants included representatives from each of the categories identified by the Bureau and comprised a diverse group of individuals with regard to geography and type of locality ( i.e., rural, urban, suburban, or metropolitan areas), as described in chapter 7 of the Small Business Review Panel Report. On April 10, 2012, the Bureau convened the Small Business Review Panel. In order to collect the advice and recommendations of Small Entity Representatives, the Panel held an outreach meeting/teleconference on April 24, 2012 (Panel Outreach Meeting). To help the Small Entity Representatives prepare for the Panel Outreach Meeting, the Panel circulated briefing materials that summarized the proposals under consideration at that time, posed discussion issues, and provided information about the SBREFA process generally. 45 All 16 small entities participated in the Panel Outreach Meeting either in person or by telephone. The Small Business Review Panel also provided the Small Entity Representatives with an opportunity to submit written feedback until May 1, 2012. In response, the Small Business Review Panel received written feedback from five of the representatives. 46 45 The Bureau posted these materials on its Web site and invited the public to email remarks on the materials. Press Release, U.S. Consumer Fin. Prot. Bureau, Consumer Financial Protection Bureau Outlines Borrower-Friendly Approach to Mortgage Servicing (Apr. 9, 2012), available at http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-outlines-borrower-friendly-approach-to-mortgage-servicing/ (last accessed Jan. 6, 2013). 46 This written feedback is attached as appendix A to the Small Business Review Panel Report. On June 11, 2012, the Small Business Review Panel submitted to the Director of the Bureau the written Small Business Review Panel Report, which includes the following: Background information on the proposals under consideration at the time; information on the types of small entities that would be subject to those proposals and on the participants who were selected to advise the Small Business Review Panel; a summary of the Panel's outreach to obtain the advice and recommendations of those participants; a discussion of the comments and recommendations of the participants; and a discussion of the Small Business Review Panel findings, focusing on the statutory elements required under section 603 of the RFA, 5 U.S.C. 609(b)(5). In connection with issuing the Proposed Servicing Rules, the Bureau carefully considered the feedback from the small entities and the findings and recommendations in the Small Business Review Panel Report. The section-by-section analyses for the Final Servicing Rules discuss this feedback and the specific findings and recommendations of the Small Business Review Panel, as applicable. The SBREFA process provided the Small Business Review Panel and the Bureau with an opportunity to identify and explore opportunities to mitigate the burden of the rule on small entities while achieving the rule's purposes. It is important to note, however, that the Small Business Review Panel prepared the Small Business Review Panel Report at a preliminary stage of the proposal's development and that the report—in particular, the findings and recommendations—should be considered in that light. Any options identified in the Small Business Review Panel Report for reducing the proposed rule's regulatory impact on small entities were expressly subject to further consideration, analysis, and data collection by the Bureau to ensure that the options identified were practicable, enforceable, and consistent with RESPA, TILA, the Dodd-Frank Act, and their statutory purposes. C. Summary of the Proposed Servicing Rule The 2012 TILA Servicing Proposal would have amended Regulation Z to implement requirements relating to interest rate adjustment disclosures, periodic mortgage statements, payoff statements, and prompt crediting of payments. The 2012 TILA Servicing Proposal would have amended current § 1026.20(c) to revise the timeframe for providing the ARM adjustment notice from the current requirement of between 25 and 120 days before the first payment at a new level is due to between 60 and 120 days. The proposed rule also would have grandfathered existing ARMs that contractually will not be able to comply with the new timing, i.e., those with look-back periods of less than 45 days. The proposed rule also would have required the disclosure required by current § 1026.20(c) to include additional information. Such additional information would have included: (1) A statement that the consumer's interest rate is scheduled to adjust, a statement that the adjustment may change the mortgage payment, the time period the current interest rate has been in effect, and the dates of the future rate adjustments, (2) the date when the new payment is due after the adjustment, (3) any interest rate or payment limits; any unapplied carryover interest and the earliest date it could be applied, (4) additional amortization information for negatively-amortizing and interest-only loans, and (5) the amount and expiration date of any prepayment penalty. The proposed rule would also have implemented section 1418 of the Dodd-Frank Act by requiring creditors, assignees, or servicers to provide a new one-time notice to consumers six to seven months prior to the first time the interest rate of their adjustable-rate mortgages adjusts. The initial interest rate adjustment notices proposed in § 1026.20(d) would have included much of the same information listed above for proposed § 1026.20(c). The proposed notice in § 1026.20(d) would have disclosed additional information, including a list of alternatives consumers may pursue, including refinancing, renegotiation of loan terms, payment forbearance, and pre-foreclosure sales; contact information for the appropriate State housing finance agency; and information on how to access a list of government-certified counseling agencies and programs. The proposed rule would have included model and sample forms for the requirements in § 1026.20(c) and (d). The 2012 TILA Servicing Proposal further would have required creditors, assignees, and servicers to provide consumers with a periodic statement. The proposed rule would have established requirements for the timing, form, content, and layout of the statement. The proposed rule also would have included sample forms. The proposed rule would have required that certain related pieces of information must be grouped together on the periodic statement. Moreover, the proposed rule would have clarified how periodic statements should be disclosed in particular situations. For example, the proposed rule would have clarified the disclosure of partial payments, funds held in a suspense or unapplied funds account, and payments for payment-option loans. Further, the proposed rule would have required that delinquent consumers receive important information in several places on the periodic statement, such as information regarding the overdue amount and any fees applied to the consumer's account. Finally, the proposed rules would have exempted certain products and servicers from the periodic statement requirement. Fixed-rate loans with coupon books that meet certain requirements, timeshares, and reverse mortgages would have been exempt from the periodic statement requirements. Further, small servicers as defined in the proposed rule (that is, servicers that service 1,000 mortgage loans or less and only service mortgage loans that the servicer or an affiliate owns or originated) would have been exempt from the periodic statement requirement. The 2012 TILA Servicing Proposal would have imposed requirements on servicers with respect to the handling of partial payments from consumers. The proposed rule would have limited the application of the current prompt crediting provision, existing § 1026.36(c)(1)(i), to full contractual payments (as opposed to all payments). The proposed rule would have added a new provision, § 1026.36(c)(1)(ii), to address the handing of partial payments (anything less than a full contractual payment). The proposed rule would have implemented requirements on servicers to provide payoff statements, with modifications relating to the scope and timing of the requirement, and a limitation to written requests for payoff statements. Further, the proposed rule would have reorganized the requirements in § 1026.36(c). D. Overview of the Comments Received The Bureau received approximately 300 comments on the Proposed Servicing Rules. The comments came from individual consumers, consumer advocates, community banks, large bank holding companies, secondary market participants, credit unions, non-bank servicers, State and national trade associations for financial institutions in the mortgage business, local and national community groups, Federal and State regulators, academics, and others. Commenters provided feedback on all aspects of the Proposed Servicing Rules. Most commenters tended to focus on specific aspects of the proposals. Accordingly, in general, the comments are discussed below in the section-by-section analysis. The majority of comments were submitted by mortgage servicers, industry groups representing servicers and businesses involved in the servicing industry. Large banks, community banks and credit unions, non-bank servicers, and industry trade associations submitted nearly all of these comments. The Small Business Administration Office of Advocacy submitted a comment and the remaining comments were submitted by vendors and attorney's representing industry interests. The Bureau also received a significant number of comments from consumer advocacy groups. The record also includes a 49-page comment by the Cornell e-Rulemaking Initiative synthesizing submissions of 144 registered participants to Cornell's Regulation Room project. Regulation Room is a pilot project designed to use different Web technologies and approaches to enhance public understanding and participation in Bureau rulemakings and to evaluate the advantages and disadvantages of these techniques. Finally, the Bureau also received comments from the Federal Housing Finance Agency, the GSEs, and from vendors and attorneys representing industry interests. Industry commenters and their trade associations also provided comments regarding the rulemaking process, and those comments are addressed here. 47 In that regard, community banks and their trade associations stated that the Bureau should consider cumulative burden when writing regulations, setting comment deadlines, and effective dates. These commenters believed that the combination of the Bureau's rules as well as the impact of Basel III requirements with respect to accounting for mortgage servicing rights in Tier I capital may cause disruptions across all mortgage market segments. A community bank trade association indicated that community banks are likely to feel the impact of the rules more acutely, as they cannot take advantage of economies of scale in mitigating the compliance burden. A community bank trade association stated that the Bureau should consider the wide diversity among servicer business models and adapt regulations to preserve diversity within the servicing industry. The commenter emphasized that community banks have strong reputation and performance incentives to ensure that consumers are provided a high level of service. 47 Some commenters provided comments strictly with respect to the rulemaking process. One trade association commented that small servicers that participated in the Small Business Review Panel process did not have adequate time to prepare for the panel discussion and provide appropriate data, while another trade association commented that because the Bureau's proposed rules are lengthy and because some rules have overlapping comment periods, each of which has been limited to 60 days, the trade association has had difficulty dedicating staff to comment on the Bureau's proposals. As set forth in this section, the Bureau has conducted the rulemaking process, including the SBREFA process and the public comment period, in a manner that provided as much flexibility as possible to receive feedback from the SBREFA participants and public commenters in light of the deadlines required for the rulemaking. The Bureau assisted the SBA in calls and outreach with small entity participants to obtain any comments not set forth during the panel outreach with the small entity representatives. Further, with respect to public comments, the Bureau believes that the public had a meaningful opportunity to comment, which is evidenced by the significant number of comments received and their length. The Bureau offered 61 days from August 10, 2012 through October 9, 2012, for comment; and 22 days after the proposal was published in the Federal Register on September 17. A large bank and a number of trade association commenters stated that the Bureau should be cognizant of imposing requirements and standards potentially inconsistent with those required by settlement agreements, consent orders, and GSE or government insurance program requirements. One commenter stated that the Bureau should consider preempting State law mortgage servicing requirements to provide legal and regulatory certainty to industry participants that are evaluating the future desirability of maintaining servicing operations. A number of trade associations stated that the Bureau should not issue regulations that would impose requirements substantially similar to the National Mortgage Settlement on mortgage servicers that are not parties to the National Mortgage Settlement. The Bureau has considered each of these comments relating to the cumulative impact of mortgage regulation, including the mortgage servicing rules; the potential for inconsistent results with current servicing obligations, including State law and the National Mortgage Settlement; and comments regarding the diversity of servicing business models and servicer sizes. The Bureau's consideration of those comments is reflected below in the section-by-section analysis with respect to various determinations made in finalizing the 2012 TILA Servicing Proposal, including the determination to create clear requirements, the determination to maintain consistency with current servicing obligations, including those imposed by State law and the National Mortgage Settlement, and the consideration of exemptions for small servicers. With respect to preemption of state law, the Final Servicing Rules generally do not have the effect of prohibiting state law from affording borrowers broader consumer protections relating to mortgage servicing than those conferred under the Final Servicing Rules. However, in certain circumstances, the effect of specific requirements of the Final Servicing Rules is to preempt certain limited aspects of state law. Specifically, as set forth in the 2013 RESPA Servicing Final Rule, § 1024.41(f) bars a servicer from making the first notice or filing required for a foreclosure process unless a borrower is more than 120 days delinquent, notwithstanding that state law may permit any such filing. Further, § 1024.33(d) incorporates a pre-existing provision in Regulation X that implements RESPA with respect to preemption of certain state law disclosures relating to mortgage servicing transfers. In other circumstances, the Bureau explicitly took into account existing standards (both State and Federal) and either built in flexibility or designed its rules to coexist with those standards. For example, as discussed in the 2013 RESPA Servicing Final Rule, the Bureau took into account the loss mitigation timelines and “dual-tracking” provisions in the National Mortgage Settlement and the California Homeowner Bill of Rights and designed timelines that are consistent with those standards. Similarly, in designing its early intervention provision the Bureau included a statement that nothing in that provision shall require a servicer to make contact with a borrower in a manner that would be prohibited under applicable law. A number of commenters provided comments regarding language access and community blight. Two national consumer groups urged the Bureau to take action to remove barriers borrowers with limited English proficiency face with respect to understanding the terms of their mortgages because such barriers might make these borrowers more vulnerable to bad servicing practices. One national consumer group urged the Bureau to mandate translation of all notices, documents, and bills going to borrowers. Another national consumer group urged the Bureau to consider requiring servicers to provide disclosures and services in a borrower's preferred language, noting that it represents a population that speaks more than 100 different dialects. Finally, one commenter suggests that the Bureau should not only mandate disclosures in other languages but also should require servicers to provide language-capable staff to assist borrowers with limited English skills. With respect to neighborhood blight, a coalition of consumer advocacy groups and a consumer advocate that participated in outreach with the Bureau commented that the Bureau should consider implementing regulations to manage neighborhood blight by requiring servicers to maintain real estate owned (REO) property to decent, safe, and sanitary standards capable of purchase by borrowers with FHA financing. Although some of these specific requests exceed the scope of the rulemaking, the Bureau takes seriously the important considerations of avoiding neighborhood blight and language access. The Bureau recognizes the challenges borrowers with limited English proficiency face in understanding the terms of their mortgage. The Bureau believes that servicers should communicate with borrowers clearly, including in the borrower's native language, where possible, and especially when lenders advertise in the borrower's native language. The Bureau conducted Spanish testing to support proposed rules and forms combining the TILA mortgage loan disclosure with the Good Faith Estimate (GFE) and statement required under RESPA. See 77 FR 54843. That testing underscores both the value of disclosures in other languages but also the challenges in translating forms using English terms of art into other languages to assure that the foreign-language version of the form effectively communicates the required information to its readers. Although the Bureau has tested the disclosures it is adopting, it has not had the opportunity to test the disclosures in other languages. Accordingly, the Bureau is not imposing mandatory foreign language translation requirements or other language access requirements at this time with respect to the mortgage servicing disclosures and other requirements the Bureau is adopting. Although the Bureau declines at this time to implement requirements regarding language access, other than those currently in TILA, the Bureau will continue to consider language access generally in connection with developing disclosures and will consider further requirements on servicer communication with borrowers if appropriate. With respect to REO properties, the Bureau continues to consider whether regulations are appropriate to address the maintenance of properties owned by lenders and any potential resulting harm from community blight. E. Other Dodd-Frank Act Mortgage-Related Rulemakings In addition to the Final Servicing Rules, the Bureau is adopting several other final rules and issuing one proposal, all relating to mortgage credit, to implement requirements of title XIV of the Dodd-Frank Act. The Bureau is also issuing a final rule and planning to issue a proposal jointly with other Federal agencies to implement requirements for mortgage appraisals in title XIV. Each of the final rules follows a proposal issued in 2011 by the Board or in 2012 by the Bureau alone or jointly with other Federal agencies. Collectively, these proposed and final rules are referred to as the Title XIV Rulemakings. • Ability to Repay: The Bureau recently issued a rule, following a May 2011 proposal issued by the Board (the Board's 2011 ATR Proposal), 48 to implement provisions of the Dodd-Frank Act (1) requiring creditors to determine that a consumer has a reasonable ability to repay covered mortgage loans and establishing standards for compliance, such as by making a “qualified mortgage,” and (2) establishing certain limitations on prepayment penalties, pursuant to TILA section 129C as established by Dodd-Frank Act sections 1411, 1412, and 1414. 15 U.S.C. 1639c. The Bureau's final rule is referred to as the 2013 ATR Final Rule. Simultaneously with the 2013 ATR Final Rule, the Bureau issued a proposal to amend the final rule implementing the ability-to-repay requirements, including by the addition of exemptions for certain nonprofit creditors and certain homeownership stabilization programs and a definition of a “qualified mortgage” for certain loans made and held in portfolio by small creditors (the 2013 ATR Concurrent Proposal). The Bureau expects to act on the 2013 ATR Concurrent Proposal on an expedited basis, so that any exceptions or adjustments to the 2013 ATR Final Rule can take effect simultaneously with that rule. 48 76 FR 27390 (May 11, 2011). • Escrows: The Bureau recently issued a rule, following a March 2011 proposal issued by the Board (the Board's 2011 Escrows Proposal), 49 to implement certain provisions of the Dodd-Frank Act expanding on existing rules that require escrow accounts to be established for higher-priced mortgage loans and creating an exemption for certain loans held by creditors operating predominantly in rural or underserved areas, pursuant to TILA section 129D as established by Dodd-Frank Act sections 1461. 15 U.S.C. 1639d. The Bureau's final rule is referred to as the 2013 Escrows Final Rule. 49 76 FR 11598 (Mar. 2, 2011). • HOEPA: Following its July 2012 proposal (the 2012 HOEPA Proposal), 50 the Bureau recently issued a final rule to implement Dodd-Frank Act requirements expanding protections for “high-cost mortgages” under the Homeownership and Equity Protection Act (HOEPA), pursuant to TILA sections 103(bb) and 129, as amended by Dodd-Frank Act sections 1431 through 1433. 15 U.S.C. 1602(bb) and 1639. The Bureau also is finalizing rules to implement certain title XIV requirements concerning homeownership counseling, including a requirement that lenders provide lists of homeownership counselors to applicants for federally related mortgage loans, pursuant to RESPA section 5(c), as amended by Dodd-Frank Act section 1450. 12 U.S.C. 2604(c). The Bureau's final rule is referred to as the 2013 HOEPA Final Rule. 50 77 FR 49090 (Aug. 15, 2012). • Loan Originator Compensation: Following its August 2012 proposal (the 2012 Loan Originator Proposal), 51 the Bureau is issuing a final rule to implement provisions of the Dodd-Frank Act requiring certain creditors and loan originators to meet certain duties of care, including qualification requirements; requiring the establishment of certain compliance procedures by depository institutions; prohibiting loan originators, creditors, and the affiliates of both from receiving compensation in various forms (including based on the terms of the transaction) and from sources other than the consumer, with specified exceptions; and establishing restrictions on mandatory arbitration and financing of single premium credit insurance, pursuant to TILA sections 129B and 129C as established by Dodd-Frank Act sections 1402, 1403, and 1414(a). 15 U.S.C. 1639b, 1639c. The Bureau's final rule is referred to as the 2013 Loan Originator Final Rule. 51 77 FR 55272 (Sept. 7, 2012). • Appraisals: The Bureau, jointly with other Federal agencies, 52 is issuing a final rule implementing Dodd-Frank Act requirements concerning appraisals for higher-risk mortgages, pursuant to TILA section 129H as established by Dodd-Frank Act section 1471. 15 U.S.C. 1639h. This rule follows the agencies' August 2012 joint proposal (the 2012 Interagency Appraisals Proposal). 53 The agencies' joint final rule is referred to as the 2013 Interagency Appraisals Final Rule. As discussed in that final rule, the agencies plan to issue a supplemental proposal addressing potential additional exemptions to the appraisal requirements. In addition, following its August 2012 proposal (the 2012 ECOA Appraisals Proposal), 54 the Bureau is issuing a final rule to implement provisions of the Dodd-Frank Act requiring that creditors provide applicants with a free copy of written appraisals and valuations developed in connection with applications for loans secured by a first lien on a dwelling, pursuant to section 701(e) of the Equal Credit Opportunity Act (ECOA) as amended by Dodd-Frank Act section 1474. 15 U.S.C. 1691(e). The Bureau's final rule is referred to as the 2013 ECOA Appraisals Final Rule. 52 Specifically, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Federal Housing Finance Agency. 53 77 FR 54722 (Sept. 5, 2012). 54 77 FR 50390 (Aug. 21, 2012). The Bureau is not at this time finalizing proposals concerning various disclosure requirements that were added by title XIV of the Dodd-Frank Act, integration of mortgage disclosures under TILA and RESPA, or a simpler, more inclusive definition of the finance charge for purposes of disclosures for closed-end mortgage transactions under Regulation Z. The Bureau expects to finalize these proposals and to consider whether to adjust regulatory thresholds under the Title XIV Rulemakings in connection with any change in the calculation of the finance charge later in 2013, after it has completed quantitative testing, and any additional qualitative testing deemed appropriate, of the forms that it proposed in July 2012 to combine TILA mortgage disclosures with the good faith estimate (RESPA GFE) and settlement statement (RESPA settlement statement) required under the Real Estate Settlement Procedures Act, pursuant to Dodd-Frank Act section 1032(f) and sections 4(a) of RESPA and 105(b) of TILA, as amended by Dodd-Frank Act sections 1098 and 1100A, respectively (the 2012 TILA-RESPA Proposal). 55 Accordingly, the Bureau already has issued a final rule delaying implementation of various affected title XIV disclosure provisions. 56 55 77 FR 51116 (Aug. 23, 2012). 56 77 FR 70105 (Nov. 23, 2012). Coordinated Implementation of Title XIV Rulemakings As noted in all of its foregoing proposals, the Bureau regards each of the Title XIV Rulemakings as affecting aspects of the mortgage industry and its regulations. Accordingly, as noted in its proposals, the Bureau is coordinating carefully the Title XIV Rulemakings, particularly with respect to their effective dates. The Dodd-Frank Act requirements to be implemented by the Title XIV Rulemakings generally will take effect on January 21, 2013, unless final rules implementing those requirements are issued on or before that date and provide for a different effective date. See Dodd-Frank Act section 1400(c), 15 U.S.C. 1601 note. In addition, some of the Title XIV Rulemakings are required by the Dodd-Frank Act to take effect no later than one year after they are issued. Id. The comments on the appropriate effective date for this final rule are discussed in detail below in part VI of this notice. In general, however, consumer advocates requested that the Bureau put the protections in the Title XIV Rulemakings into effect as soon as practicable. In contrast, the Bureau received some industry comments indicating that implementing so many new requirements at the same time would create a significant cumulative burden for creditors. In addition, many commenters also acknowledged the advantages of implementing multiple revisions to the regulations in a coordinated fashion. 57 Thus, a tension exists between coordinating the adoption of the Title XIV Rulemakings and facilitating industry's implementation of such a large set of new requirements. Some have suggested that the Bureau resolve this tension by adopting a sequenced implementation, while others have requested that the Bureau simply provide a longer implementation period for all of the final rules. 57 Of the several final rules being adopted under the Title XIV Rulemakings, six entail amendments to Regulation Z, with the only exceptions being the 2013 RESPA Servicing Final Rule (Regulation X) and the 2013 ECOA Appraisals Final Rule (Regulation B); the 2013 HOEPA Final Rule also amends Regulation X, in addition to Regulation Z. The six Regulation Z final rules involve numerous instances of intersecting provisions, either by cross-references to each other's provisions or by adopting parallel provisions. Thus, adopting some of those amendments without also adopting certain other, closely related provisions would create significant technical issues, e.g., new provisions containing cross-references to other provisions that do not yet exist, which could undermine the ability of creditors and other parties subject to the rules to understand their obligations and implement appropriate systems changes in an integrated and efficient manner. The Bureau recognizes that many of the new provisions will require creditors to make changes to automated systems and, further, that most administrators of large systems are reluctant to make too many changes to their systems at once. At the same time, however, the Bureau notes that the Dodd-Frank Act established virtually all of these changes to institutions' compliance responsibilities, and contemplated that they be implemented in a relatively short period of time. And, as already noted, the extent of interaction among many of the Title XIV Rulemakings necessitates that many of their provisions take effect together. Finally, notwithstanding commenters' expressed concerns for cumulative burden, the Bureau expects that creditors actually may realize some efficiencies from adapting their systems for compliance with multiple new, closely related requirements at once, especially if given sufficient overall time to do so. Accordingly, the Bureau is requiring that, as a general matter, creditors and other affected persons begin complying with the final rules on January 10, 2014. As noted above, section 1400(c) of the Dodd-Frank Act requires that some provisions of the Title XIV Rulemakings take effect no later than one year after the Bureau issues them. Accordingly, the Bureau is establishing January 10, 2014, one year after issuance of the Bureau's 2013 ATR, Escrows, and HOEPA Final Rules ( i.e., the earliest of the Title XIV Rulemakings), as the baseline effective date for most of the Title XIV Rulemakings. The Bureau believes that, on balance, this approach will facilitate the implementation of the rules' overlapping provisions, while also affording creditors sufficient time to implement the more complex or resource-intensive new requirements. The Bureau has identified certain rulemakings or selected aspects thereof, however, that do not present significant implementation burdens for industry. Accordingly, the Bureau is setting earlier effective dates for those final rules or certain aspects thereof, as applicable. Those effective dates are set forth and explained in the Federal Register notices for those final rules. IV. Legal Authority The final rule was issued on January 17, 2013, in accordance with 12 CFR 1074.1. The Bureau is issuing this final rule pursuant to its authority under TILA and the Dodd-Frank Act. Section 1061 of the Dodd-Frank Act transferred to the Bureau the “consumer financial protection functions” previously vested in certain other Federal agencies, including the Board. The term “consumer financial protection function” is defined to include “all authority to prescribe rules or issue orders or guidelines pursuant to any Federal consumer financial law, including performing appropriate functions to promulgate and review such rules, orders, and guidelines.” 58 TILA is a Federal consumer financial law. 59 Accordingly, the Bureau has authority to issue regulations pursuant to TILA, including implementing the additions and amendments to TILA's mortgage servicing requirements made by title XIV of the Dodd-Frank Act. 58 12 U.S.C. 5581(a)(1). 59 Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14) (defining “Federal consumer financial law” to include the “enumerated consumer laws” and the provisions of title X of the Dodd-Frank Act); Dodd-Frank Act section 1002(12), 12 U.S.C. 5481(12) (defining “enumerated consumer laws” to include RESPA), Dodd-Frank section 1400(b), 15 U.S.C. 1601 note (defining “enumerated consumer laws” to include certain subtitles and provisions of title XIV). Sections 1418, 1420 and 1464 of the Dodd-Frank Act create new requirements under TILA in new sections 128A, 128(f), and 129F and 129G, respectively. Section 1418 of the Dodd-Frank Act amends Regulation Z to require that certain disclosures be provided to consumers with hybrid adjustable-rate mortgages secured by the consumer's principal residence the first time the interest rate resets or adjusts. Additionally, the savings clause in TILA section 128A(c) allows the Bureau, among other things, to require this notice for adjustable-rate mortgage loans that are not hybrid adjustable-rate loans. Dodd-Frank Act section 1420 requires that a periodic statement be provided to consumers for each billing cycle of a consumer's closed-end mortgage secured by a dwelling, except for fixed-rate loans with coupon books containing substantially the same information. The statute contains a list of specific information that must be included in the periodic statement. Additionally, pursuant to TILA section 128(f)(1)(H), the periodic statement must include such other information as the Bureau may prescribe in regulations. Dodd-Frank Act section 1464 generally requires the prompt crediting of mortgage payments in connection with consumer credit transactions secured by a consumer's principal dwelling and an accurate timely response to requests for payoff amounts for home loans. The final rule, in addition to implementing these TILA provisions of the Dodd-Frank Act, amends the interest rate adjustment disclosures currently required by § 1026.20(c). The final rule also relies on the rulemaking and exception authorities specifically granted to the Bureau by TILA and the Dodd-Frank Act, including the authorities discussed below. The Truth in Lending Act TILA section 105(a). As amended by the Dodd-Frank Act, TILA section 105(a), 15 U.S.C. 1604(a), directs the Bureau to prescribe regulations to carry out the purposes of TILA, and provides that such regulations may contain additional requirements, classifications, differentiations, or other provisions, and may provide for such adjustments and exceptions for all or any class of transactions that the Bureau judges are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance therewith. The purposes of TILA are “to assure a meaningful disclosure of credit terms so that the consumers will be able to compare more readily the various credit terms available and avoid the uninformed use of credit” and to protect consumers against inaccurate and unfair credit billing practices. TILA section 102(a); 15 U.S.C. 1601(a). Historically, TILA section 105(a) has served as a broad source of authority for rules that promote the informed use of credit and the avoidance of unfair credit billing practices through required disclosures and substantive regulation of certain practices. Dodd-Frank Act section 1100A additionally clarifies the Bureau's TILA section 105(a) authority by amending that section to provide express authority to prescribe regulations that contain “additional requirements” that the Bureau finds are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance therewith. This amendment clarified that the Bureau has the authority to exercise TILA section 105(a) to prescribe requirements beyond those specifically listed in the statute that meet the standards outlined in section 105(a). The Dodd-Frank Act also clarified the Bureau's rulemaking authority over certain high-cost mortgages pursuant to section 105(a). As amended by the Dodd-Frank Act, TILA section 105(a) authority to make adjustments and exceptions to the requirements of TILA applies to all transactions subject to TILA, except with respect to the provisions of TILA section 129 60 that apply to the high-cost mortgages referred to in TILA section 103(bb), 15 U.S.C. 1602(bb). 60 15 U.S.C. 1639. TILA section 129 contains requirements for certain high-cost mortgages, established by the Home Ownership and Equity Protection Act (HOEPA), which are commonly called HOEPA loans. For the reasons discussed in this notice, the Bureau is adopting regulations to carry out TILA's purposes and such additional requirements, adjustments, and exceptions as, in the Bureau's judgment, are necessary and proper to carry out the purposes of TILA, prevent circumvention or evasion thereof, or to facilitate compliance therewith. In developing these aspects of the rule pursuant to its authority under TILA section 105(a), the Bureau has considered the purposes of TILA, including ensuring meaningful disclosures, helping consumers avoid the uninformed use of credit, and protecting consumers against inaccurate and unfair credit billing practices. See TILA section 102(a); 15 U.S.C. 1601(a). TILA section 105(f). Section 105(f) of TILA, 15 U.S.C. 1604(f), authorizes the Bureau to exempt from all or part of TILA any class of transactions if the Bureau determines that TILA coverage does not provide a meaningful benefit to consumers in the form of useful information or protection. In exercising this authority, the Bureau must consider the factors identified in section 105(f) of TILA and publish its rationale at the time it proposes an exemption for public comment. Specifically, the Bureau must consider: (a) The amount of the loan and whether the disclosures, right of rescission, and other provisions provide a benefit to the consumers who are parties to such transactions, as determined by the Bureau; (b) The extent to which the requirements of this subchapter complicate, hinder, or make more expensive the credit process for the class of transactions; (c) The status of the consumer, including—(1) Any related financial arrangements of the consumer, as determined by the Bureau; (2) The financial sophistication of the consumer relative to the type of transaction; and (3) The importance to the consumer of the credit, related supporting property, and coverage under this subchapter, as determined by the Bureau; (d) Whether the loan is secured by the principal residence of the consumer; and (e) Whether the goal of consumer protection would be undermined by such an exemption. For the reasons discussed in this notice, the Bureau is exempting certain transactions from the requirements of TILA pursuant to its authority under TILA section 105(f). In developing this final rule under TILA section 105(f), the Bureau has considered the relevant factors and determined that the proposed exemptions may be appropriate. TILA section 122. Section 122 of TILA, 15 U.S.C. 1632, authorizes the Bureau to regulate, among other things, the form and content of disclosures for credit transactions made pursuant to Chapter 2 of TILA. Specifically, 122(a) requires that information required by this title must be disclosed clearly and conspicuously. For the reasons discussed in this notice, the Bureau is requiring the provision of disclosures to consumers in certain forms and with certain content pursuant to its authority under TILA section 122. In developing this final rule under TILA section 122, the Bureau has considered the relevant factors and determined that the form and content requirements are appropriate. Title X of the Dodd-Frank Act Dodd-Frank Act section 1022(b). Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to prescribe rules “as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof[.]” 12 U.S.C. 5512(b)(1). TILA and title X of the Dodd-Frank Act are Federal consumer financial laws. Accordingly, in adopting this final rule, the Bureau is exercising its authority under Dodd-Frank Act section 1022(b) to prescribe rules to carry out the purposes of TILA and title X and prevent evasion of those laws. Dodd-Frank Act section 1032. Section 1032(a) of the Dodd-Frank Act provides that the Bureau “may prescribe rules to ensure that the features of any consumer financial product or service, both initially and over the term of the product or service, are fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks associated with the product or service, in light of the facts and circumstances.” 12 U.S.C. 5532(a). The authority granted to the Bureau in Dodd-Frank Act section 1032(a) is broad, and empowers the Bureau to prescribe rules regarding the disclosure of the “features” of consumer financial products and services generally. Accordingly, the Bureau may prescribe rules containing disclosure requirements even if other Federal consumer financial laws do not specifically require disclosure of such features. Dodd-Frank Act section 1032(c) provides that, in prescribing rules pursuant to Dodd-Frank Act section 1032, the Bureau “shall consider available evidence about consumer awareness, understanding of, and responses to disclosures or communications about the risks, costs, and benefits of consumer financial products or services.” 12 U.S.C. 5532(c). Accordingly, in developing the final rule under Dodd-Frank Act section 1032(a), the Bureau has considered available studies, reports, and other evidence about consumer awareness, understanding of, and responses to disclosures or communications about the risks, costs, and benefits of consumer financial products or services. For the reasons discussed in this notice, the Bureau is issuing portions of this rule pursuant to its authority under Dodd-Frank Act section 1032(a). In addition, Dodd-Frank Act section 1032(b)(1) provides that “any final rule prescribed by the Bureau under this [section 1032] requiring disclosures may include a model form that may be used at the option of the covered person for provision of the required disclosures.” 12 U.S.C. 5532(b)(1). Any model form issued pursuant to that authority shall contain a clear and conspicuous disclosure that, at a minimum, uses plain language that is comprehensible to consumers, uses a clear format and design, such as readable type font, and succinctly explains the information that must be communicated to the consumer. Dodd-Frank Act section 1032(b)(2); 12 U.S.C. 5532(b)(2). As discussed in the section-by-section analysis of §§ 1026.20(c) and (d) and 1026.41, the Bureau is issuing model and sample forms for ARM interest rate adjustment notices and sample forms for periodic statements. As discussed in this notice, the Bureau is adopting these model forms pursuant to its authority under Dodd-Frank Act section 1032(b)(1). As required under Dodd-Frank Act section 1032(b)(3), the Bureau has validated model forms issued under Dodd-Frank Act section 1032(b) through consumer testing. Dodd-Frank Act section 1405(b). Section 1405(b) of the Dodd-Frank Act provides that, “[n]otwithstanding any other provision of [title 14 of the Dodd-Frank Act], in order to improve consumer awareness and understanding of transactions involving residential mortgage loans through the use of disclosures, the Bureau may, by rule, exempt from or modify disclosure requirements, in whole or in part, for any class of residential mortgage loans if the Bureau determines that such exemption or modification is in the interest of consumers and in the public interest.” 15 U.S.C. 1601 note. Section 1401 of the Dodd-Frank Act, which amends TILA section 103(cc), 15 U.S.C. 1602(cc), generally defines residential mortgage loan as any consumer credit transaction that is secured by a mortgage on a dwelling or on residential real property that includes a dwelling other than an open-end credit plan or an extension of credit secured by a consumer's interest in a timeshare plan. Notably, section 1405(b) confers authority to “modify or exempt from disclosure requirements,” in whole or in part, applies to any class of residential mortgage loans if the Bureau determines that such exemption or modification is in the interest of consumers and in the public interest, and is not limited to a specific statute or statutes. Accordingly, Dodd-Frank Act section 1405(b) is a broad source of authority to modify or exempt the disclosure requirements of TILA. In developing rules for residential mortgage loans under Dodd-Frank Act section 1405(b), the Bureau has considered the purposes of improving consumer awareness and understanding of transactions involving residential mortgage loans through the use of disclosures, and the interests of consumers and the public. For the reasons discussed in this notice, the Bureau is issuing portions of this rule pursuant to its authority under Dodd-Frank Act section 1405(b). See the section-by-section analysis of each section of this final rule for further elaboration on legal authority. V. Section-by-Section Analysis A. Regulation Z Section 1026.17 General Disclosure Requirements 17(a) Form of Disclosures 17(a)(1) Section 1026.17(a)(1) contains form requirements that govern many of the disclosures under subpart C of Regulation Z, including current ARM disclosures. The Bureau proposed revising the rule with regard to both the § 1026.20(c) ARM interest rate adjustment payment change notices and the § 1026.20(d) initial ARM interest rate adjustment notices. Section 1026.17(a)(1) requires, among other things, that certain disclosures contain only information directly related to that disclosure. Section 1026.20(c) is not included in the list of rules governed by this general segregation requirement and commentary to § 1026.17(a)(1) confirms that § 1026.20(c) is not subject to this requirement. The Bureau proposed revising § 1026.17(a)(1) and comment 17(a)(1)-2.ii to add § 1026.20(c) to the list of disclosures required to contain only information directly related to the disclosure and to include § 1026.20(c) among the subpart C disclosures required to be grouped together and segregated from other information. The Bureau stated that the purpose of the § 1026.20(c) payment change notices is to inform consumers of upcoming changes to their interest rate and mortgage payments and to give them time to explore alternatives. The Bureau stated that it believed that the current form requirements to which the § 1026.20(c) notices are subject were insufficient to highlight and emphasize important information consumers needed to make decisions about their adjustable-rate mortgages. The Bureau said that the revisions to § 1026.17(a)(1) and comment 17(a)(1)-2.ii would enhance consumers' awareness of this important information. The proposal also clarified that providers of § 1026.20(c) notices would have remained subject to the other § 1026.17(a)(1) form requirements, including that the disclosures be clear and conspicuous and in writing and that the disclosures could be provided electronically subject to compliance with Electronic Signatures in Global and National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.). Although the Bureau received comments opposed to the revision of § 1026.20(c) in general, which are discussed below, the Bureau did not receive specific comments regarding its proposed changes to § 1026.17(a)(1). One bank did suggest that E-Sign Act not apply to the ARM disclosures such that they could be provided to consumers without their demonstrated consent, which the bank said was difficult to obtain. The Bureau notes that E-Sign Act requirements apply to current § 1026.20(c) as well as to the other disclosures required under subpart C. Further, TILA section 128A specifically requires the ARM initial interest rate notices to be provided to consumers in written form. The Bureau believes these requirements can ensure that consumers receive the required disclosures and therefore declines to scale back this consumer protection. For the reasons discussed above, the Bureau is adopting as proposed revised § 1026.17(a)(1) and comment 17(a)(1)-2.ii. Thus, the disclosures required by § 1026.20(c) must comply with the form requirements of § 1026.17(a)(1) as revised. As with § 1026.20(c) above, the proposal clarified that providers of the § 1026.20(d) notices would have been subject to the same § 1026.17(a)(1) form requirements, including that the disclosures be clear and conspicuous, in writing, and that they be permitted to be provided electronically subject to compliance with the E-Sign Act. However, the final rule revises § 1026.17(a)(1) with respect to the delivery of the notices required by § 1026.20(d). TILA section 128A, as added by Dodd-Frank Act section 1418 and implemented in § 1026.20(d), requires that initial ARM interest rate adjustment notices be “separate and distinct from all other correspondence to the consumer.” Accordingly, the Bureau proposed that the § 1026.20(d) ARM initial interest rate adjustment notices must be provided to consumers separate and distinct from all other correspondence and, thus, that they would not be subject to the general segregation requirements of § 1026.17(a)(1). Proposed comment 20(d)(1)-2 interpreted the “separate and distinct” requirement as requiring the § 1026.20(d) notices to be provided to consumers in a separate envelope or as its own separate email apart from other servicer correspondence. For the reasons discussed in the section-by-section analysis of § 1026.20(d) below, the Bureau is adopting comment 20(d)-3, which interprets the new TILA statutory language to require that § 1026.20(d) notices be provided to consumers as a separate document, but permits it to be mailed in the same envelope or as a separate attachment in an email with other servicer correspondence. Accordingly, the final rule revises § 1026.17(a)(1) to require that § 1026.20(d) ARM notices be provided to consumers as a separate document, but not necessarily in a separate envelope or email. As a result of this change, both § 1026.20(c) and (d) are subject to revised § 1026.17(a)(1) and comment 17(a)(1)-2.i. Legal Authority The application of § 1026.17(a)(1), as modified, to § 1026.20(c) and (d) is authorized, in part, under TILA section 122, which requires that disclosures under TILA be clear and conspicuous, in accordance with regulations of the Bureau. The requirements are further authorized under TILA section 105(a) because the Bureau believes that the final rule's form requirements are necessary and proper to effectuate the purposes of TILA to assure a meaningful disclosure of credit terms, avoid the uninformed use of credit, and protect consumers against inaccurate and unfair credit billing practices by ensuring that consumers understand the content of the ARM notices. TILA section 128A(b), as established by Dodd-Frank Act section 1418, specifically provides that the disclosures shall be in writing, separate and distinct from all other correspondence, which the Bureau interprets as consistent with the Regulation Z form requirements of § 1026.17(a)(1), as amended. In addition, the Bureau believes, consistent with Dodd-Frank Act section 1032(a), that the application of § 1026.17(a)(1) to § 1026.20(d) will ensure that the features of ARM loans are effectively disclosed to consumers in a manner that allows consumers to understand the information disclosed. 17(b) Time of Disclosures Section 1026.17(b) generally establishes timing requirements for certain Regulation Z disclosures, among them rules with special timing requirements. The Bureau proposed revising § 1026.17(b) t [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2013-01241. Public record. Not legal advice.