Articles
First Look: Impact of the CFPB’s Debt Collection Rule – January 2021
Compliance Challenge: ARM Rate Change Notices
Next Chapter in Mortgage Servicing – Successor in Interest – April 2018
Mortgage Servicing Updates – September 2017
The Changes Just Keep Coming, The 2016 Mortgage Servicing Rule – October 2016
FAQs
Error Resolution and Information Requests
ARM Loan Rate Change Notices
Question: We offer a 5/1 ARM product and therefore have not generated any “initial” rate change notices since the new ARM rules went into effect in January 2015. However, we have generated “on-going” rate change notices for loans that originated prior to Jan. 10, 2015. Because our loan contract for these loans has a look back period of less than 45 days to determine the index for the new payment at the adjusted level, what are our timing requirements for generating and providing the “on-going” rate change notice in the new format?
Answer: For loans originated prior to when the new ARM rules went into effect, the bank must use the old timing requirements found in 1026.20(c) of Regulation Z. For example, if the loan contract requires the adjusted interest rate and payment be calculated based on the index figure available as of a date that is less than 45 days prior to the adjustment date, then the disclosures must be provided to consumers as soon as possible but they cannot be provided less than 25 days before the first payment is due at the adjusted level. Keep in mind, although the timing of generating these notices must comply with the OLD rule, the content and formatting requirements must comply with the ARM rate change notice rules also found in 1026.20(c) of Regulation Z.
Error Resolution and Information Requests
Question: Do error notices and information requests from borrowers that are required to be “in writing” include notices and requests received via bank email?
Answer: RESPA requires servicers to comply with the requirements in section 1024.35 and 1024.36 for any written notice from the borrower that asserts an error or request for information if the content requirements are met. RESPA allows servicers to require a specific address for borrowers to send their error notices or request for information as long as the servicer provides a written notice to the borrower of that address and also lists that address on the servicer’s websites. They can also accept these requests online in addition to receiving them by mail. While not specifically mentioned in RESPA, notices sent to the bank’s general email inbox or that of a bank employee would likely trigger the requirements for response to the request. Keep in mind under the rule, the notice must include the borrower’s name, sufficient information to identify the loan and a description of the error or information the borrower is requesting in order to trigger the requirements.
Question: When you say exceptions to the error resolution and information request requirements include notices that are “untimely” because it’s been one year or more after transfer or discharge, does discharge mean the loan has been paid off?
Answer: Yes, it could mean the loan has been paid off, sold and transferred to another creditor, discharged through bankruptcy, or discharged through a foreclosure process or other legal proceeding.
Question: If we have a customer who has passed away and we have a Successor in Interest (SII) on that loan, do we leave the loan on our system in the original borrower’s name or does it need to be changed to the SII’s name?
Answer: The rules are clear that the creditor cannot require the SII to become obligated on a debt that is secured by the property for which they are the SII. Technically, when the owner of the property passes away, the debt on that property becomes a debt of their estate. Therefore, the estate is responsible for payment of the debt. Typically through the estate process, the property is sold and the debt is paid or the SII agrees to assume the debt of the estate, but the bank must let that process play out and has no right to require the SII to assume or refinance the debt.
Question: Does the IBA have a tool or checklist that outlines the error resolution and information request requirements?
Answer: Yes, the IBA recently created a new tool, the Error Resolution and Request for Information Requirements Guide, which compares the two requirements. This tool addresses coverage, timing requirements, notice content and more.
HOMEOWNERS COUNSELING NOTICE
Question: Is there any required format or model language for the Homeownership Counseling Notice provisions? May we combine this notice with other communication being sent the borrower, for example, the 30-day past due notice?
Answer: Any creditor servicing loans secured by one-family residential property must notify an eligible homeowner who fails to pay any amount by the due date of the availability of homeownership counseling. The notice must advise the homeowner of the availability of any homeownership counseling offered by the creditor and provide either: a list of the Housing and Urban Development (HUD)-approved nonprofit homeownership counseling organizations or the HUD toll-free telephone number (1-800-569-4287) through which the homeowner can obtain a list of HUD-approved nonprofit organizations serving the homeowner’s residential area.
The Homeownership Counseling notice must be mailed or delivered within 45 days of the payment due date; however, notification is not required if the homeowner pays the overdue amount before the expiration of the 45-day period. There is no prescribed format, so any form you use that contains the required content would be acceptable. You may include the notice on your standard delinquency notice. If your bank does not provide homeownership counseling, you may use the following suggested language for the Homeownership Counseling Notice:
This notice is to inform you of your potential right to homeownership counseling with a nonprofit organization approved by the Department of Housing and Urban Development (HUD). This counseling is available to you if each of the following is true:
- You are in default, or anticipate being in default on a home mortgage loan secured by your principal dwelling.
- Your default has been or will be caused by the involuntary loss of, or reduction in your employment income or that of someone who contributes to your income.
Please call HUD toll-free at 800-569-4287 for a list of approved non-profit counseling agencies in your area.
SUCCESSOR IN INTEREST
Question: Do the Consumer Financial Protection Bureau’s (CFPB) mortgage servicing rules related to successor-in-interest requirements apply to subordinate lien mortgage loans?
Answer: The CFPB designed the successor in interest requirements to apply to the same extent that the Servicing Rules apply to “borrowers” and “consumers” under Regulation X and Regulation Z. For the most part, the successor-in-interest requirements apply without regard to lien position. However, there are exceptions to this rule. For example, provisions regarding escrow account cancellation notices (described in 12 CFR 1026.20(e)) are limited to closed-end consumer credit transactions secured by a first lien on real property or a dwelling.
Question: Also related to the CFPB’s mortgage servicing rules, how should a servicer determine which successors should receive notices and disclosures regarding the mortgage loan account in situations where there are multiple confirmed successors in interest?
Answer: In situations where there are multiple confirmed successors but no living obligors, the Servicing Rule does not specify which successors must receive servicing communications. So the servicer should have procedures in place to determine how it will handle these situations.
ESTABLISHING ESCROW ACCOUNTS
Question: Our bank is going to start offering mortgage loans that have low down payment options but will require the purchase of mortgage insurance (MI) as a condition of the credit extension in connection with these loans. We will then collect the MI payments monthly along with the monthly principal and interest payments. Must we escrow for the MI payments? The customer will make their monthly payment, and we will forward the funds immediately to the MI company, so we don’t really collect and hold the payment for future disbursement. If we must escrow for the monthly MI payment, should we collect a cushion at closing for the MI amount? We currently collect a two-month cushion for taxes and insurance.
Answer: Reg. X provides that lenders may establish an escrow account to collect an amount sufficient to pay the charges related to the mortgaged property, such as taxes, insurance and other amounts, which are attributable to the property for the period of time from the date such payment(s) were last paid until the next payment date. As a result, lenders may collect an amount each month that is sufficient to pay the next amount due on the appropriate date. The basic premise of an escrow account is that amounts are collected monthly and held until the next payment due date.
If MI payments are collected monthly from the borrower and then forwarded directly on to the MI company on a regular basis, an escrow account would not have to be established because the amounts are not held for future disbursement. Some lenders however, elect to deposit MI payments into the escrow account each month as a paper trail and/or due to timing of collection of the payment from the borrower and payment to the MI company. So, to answer your initial question, whether MI payments are deposited into an escrow account will depend upon bank procedures and when MI payments are due to the MI provider.
If you elect to deposit MI payments into an escrow account, you should NOT collect a cushion for the MI amount at closing. Reg. X defines cushion as “funds that a servicer may require a borrower to pay into an escrow account to cover unanticipated disbursements or disbursements made before the borrower’s payments are available in the account.” MI premiums disbursed on a consistent monthly schedule are not considered “unanticipated” and do not increase periodically like taxes and hazard insurance premiums; in fact, MI payments typically decrease over the life of the loan. Therefore, there would be no “unanticipated” disbursements and thus, no need to collect a cushion to cover unknown disbursements.
Question: When doing the initial escrow analysis, can we include thirteen months in our analysis if the borrower will not make their first principal and interest until more than 45 days after consummation?
Answer: No. Regulation X requires the creditor base the initial escrow analysis on the borrower’s escrow computation year. Regulation X defines escrow account computation year as “a 12-month period that a servicer establishes for the escrow account beginning with the borrower’s initial payment date>.” So the analysis can only include 12 months and begins with first payment date, not the consummation date.
Question: Can an escrow account be established after a loan has closed because the borrower has failed to pay taxes and /or insurance on their own?
Answer: Yes. The typical mortgage agreement includes language that gives the creditor the right to make a protective advance should the borrower fail pay taxes and /or maintain required insurances or gives the creditor the right to require the borrower to establish an escrow account. The lender should go through the same initial escrow analysis process as if the account was established at consummation to determine the initial deposit.
MAINTAINING ESCROW ACCOUNTS
Question: When doing our annual escrow analysis for mortgage loans, should we use the payment due date or anticipated disbursement date when doing the projections for the upcoming escrow computation year?
Answer: An article in the 2023 fourth issue of Consumer Compliance Outlook, a Federal Reserve publication, addressed frequently cited violations cited by Federal Reserve examiners during compliance exams. The article noted examiners repeatedly found bank staff inaccurately computed and disclosed the initial and annual escrow analyses. Incorrect system settings and payment amount issues typically caused these errors. Examiners found bank staff erroneously used the payment due date rather than the anticipated disbursement date as the disbursement date for escrow items on the initial and annual escrow analyses. Using the payment due date rather than the anticipated disbursement date resulted in computation and disclosure errors on the account analyses. Thus, the disbursement dates should be used when doing the projections for the upcoming annual computation year.
Question: A number of our mortgage loan customers are experiencing significant increases in both their property tax and hazard insurance premium amounts, which will result in significant shortages when we conduct their annual escrow analysis. If a customer’s annual computation year does not occur until mid-next year and we want to do a short year statement now to lessen their payment shock the next annual computation year, should the short year statement reflect a full 12-month history or should the history reflect the period of time from the start of the current annual computation year to the date of the short year statement? When doing the projection for the upcoming computation year, do we reflect a full 12-months starting from the date of the short year statement or should the projection reflect the period of time from the short year date until the end of the current computation year?
Answer: The short year statement history should reflect the activity in the escrow account occurring from the start of the borrower’s current annual computation year to the date of the short year statement; so it will be less than 12 months.
Regarding the projection for the upcoming year, Reg. X states a short year statement may be used to adjust escrow account production schedule (meaning the payment amount) or alter the escrow account computation year. If the bank wishes to maintain the same computation year, the projection would reflect the period of time starting with the short year statement date and concluding on the end date of the current computation year. If however, the bank wishes to adjust the escrow payment and the computation year, the projection would reflect a full 12 months, starting with the date the short year statement is produced.
To illustrate, assume the borrower’s current escrow computation year runs April 1, 2023 thru March 31, 2024. The bank does a short year statement in September and wishes to maintain the borrower’s current computation year but adjust the monthly escrow payment to avoid payment shock. The short year statement history will reflect deposits and disbursements from the escrow account from April 1, 2023 through Sept. 30, 2023 (anticipating any deposits or payments to be made in Sept.). The projection will reflect the remainder of the borrower’s current computation year – from October 1, 2023 thru March 31, 2024. Versus, if the bank wished to adjust the payment and reset the annual computation year, the history would remain the same, but the projection would reflect a new 12-month period beginning October 1, 2023 and ending September 30, 2024. All future annual analysis would then be based on an Oct. 1 to Sept. 30 annual computation year.
Question: As an Iowa state-chartered bank, are we required to pay interest on escrow accounts even if we are only the loan servicer? We originated the loan, sold it Freddie Mac and retained servicing rights?
Answer: Prior to July 1, 2022 the answer was yes, you must pay interest on escrow accounts you maintain, even if you have sold the loan and just maintain servicing rights. See Iowa Code 524.905(2). This law was changed July 1, 2022 to change the terms “shall pay interest” to “may pay interest”. Therefore, if you are a state-chartered bank, you can discontinue paying interest as of that date. The IBA recommends you review your escrow agreement and amend if needed to reflect this change. If you have no escrow agreement or the agreement is silent related to the payment of interest, the IBA recommends that you notify the borrower if/when you choose to discontinue this practice.
524.905 LOANS ON REAL PROPERTY.
- Protective payments — escrow accounts. A bank may include in the loan documents signed by the borrower a provision requiring the borrower to pay the bank each month in addition to interest and principal under the note an amount equal to one-twelfth of the estimated annual real estate taxes, special assessments, hazard insurance premium, mortgage insurance premium, or any other payment agreed to by the borrower and the bank in order to better secure the loan. The bank shall be deemed to be acting in a fiduciary capacity with respect to these funds. A bank receiving funds in escrow pursuant to an escrow agreement executed in connection with a loan as defined in section 535.8, subsection 1, may pay interest to the borrower on those funds. A bank which maintains an escrow account in connection with any loan authorized by this section, whether or not the mortgage has been assigned to a third person, shall each year deliver to the mortgagor a written annual accounting of all transactions made with respect to the loan and escrow account.
Question: If a mortgage borrower is past due by more than 30 days are we still required to pay for taxes and/or insurance from their escrow account if the loan is an HPML?
Answer: Regulation X’s escrow requirements are the same for HPML and non-HPML loans. When it comes to past due loans, Regulation X states the servicer must make timely payments as long as the borrower is not more than 30 days past due. So, you technically don’t have to “overdraw” the escrow account to make the tax or insurance payment when the loan is past due more than 30 days.
However, from a safety and soundness perspective, you may want to continue making those payments so your collateral remains protected and current on taxes. If you do make the payments when the borrower is past due, Regulation X allows a servicer to recover any deficiency from the customer according to the terms of the loan contract.
Question: I have a question regarding the timing of the annual escrow statements. If a loan closes on May 1, 2022, does this mean that their first reanalysis must be done no later than June 1, 2023?
Answer: Reg. X tells us the annual analysis must be done within the 30 days of the end the “escrow computation year.” The escrow computation year begins on the first payment date, not the note date. So if the loan closes on May 1, 2022 and the first payment is due June 1, 2022, the escrow computation year would run from June 1, 2022 to May 31, 2023. As a result the analysis must be done no later than June 30, 2023. Also, keep in mind Reg. X permits the creditor to anticipate the payments into the escrow account the last two months of the escrow computation year, so the analysis could be done anytime from April 1 to June 30, 2023.
Question: Should we manually reanalyzing escrow accounts at a borrower’s request, after they have a big change in their escrow account such as a much lower insurance premium, even if it is less than 12 months since their last escrow analysis was done?
Answer: The bank is not required to reanalyze an escrow account upon the request of a borrower. You are only required to perform the analysis once per year at the end of the escrow computation year. In addition, the bank must do a short year statement if the servicing is transferred or the loan pays offs. You are not required to complete an analysis upon the borrower’s request.
Question: When there is an escrow surplus, are we able to deposit it back into their escrow account at borrower request?
Answer: Yes, RESPA states after an initial or annual escrow analysis has been performed, the servicer and the borrower may enter into a voluntary agreement to deposit funds into the escrow account that exceed the normal two-month cushion limit established in RESPA. Therefore, the surplus can be applied to the escrow account upon the borrower’s request. The key is the bank needs to refund the surplus to the borrower and the borrower has to initiate the application of the surplus to the escrow account. Be sure to document the borrower’s request. Also, keep in mind that the voluntary agreement can only cover one escrow accounting year. The voluntary agreement may not alter how surpluses are treated when the next escrow analysis is performed.
Question: If we find out a customer’s flood insurance is dropping considerably from last year’s premium, can we adjust the new monthly payment manually and allow this to go through analysis as normal next year. This customer just went through analysis within the last 60 days.
Answer: No – to adjust the monthly escrow payment amount after the annual analysis has been done, the bank must do a short year analysis. You cannot make a “manual adjustment” if you have not reanalyzed the account.
CLOSING ESCROW ACCOUNTS
Question: We are refinancing a consumer real estate mortgage loan from another bank. The customer questioned how the bank being paid off (Bank A) handled the balance in their escrow account. As part of the payoff statement, Bank A subtracted the remaining funds in the escrow from the principal loan balance. My understanding is that the remaining escrow balance must be refunded to the customer. May the remaining escrow funds be applied to the loan balance at payoff?
Answer: Your understanding is partially correct. Regulation X does require the bank/servicer to return the remaining funds in an escrow account to the borrower when a mortgage loan is paid off. Section 1024.34(b)(1) of Regulation X states, in general, a servicer shall return to the borrower any amounts remaining in the escrow under the servicer’s control within a certain timeframe. However, there is a provision in the commentary to this section that states section 1024.34(b)(1) does not prohibit a servicer from netting any remaining funds in an escrow against the outstanding balance of the borrower’s loan. For example, if the loan payoff is $82,000 and the escrow has a balance of $2,000, the $2,000 can be subtracted from the loan balance, reducing the payoff to $80,000.
Another option is to use the escrow balance to fund an escrow for a new mortgage loan. Section 1024.34(b)(2) states, if the borrower agrees, either orally or in writing, the servicer may credit the escrow balance to an escrow account for a new mortgage loan. An example would be if the borrower refinances with the same creditor, the escrow balance from the loan being refinanced can be used to fund the escrow account for the new loan.
Question: Are we required to give an Escrow Closing Notice when a customer asks to close their escrow account or when the loan is paid off? Or, is this just an optional form?
Answer: The Escrow Closing Notice is a requirement, not optional, for “covered loans” per Regulation. Z 1026.20(e). A covered loan is a closed-end consumer credit transaction secured by a first lien on real property or a dwelling for which an escrow account was established and will be cancelled. This notice requirement has been in place since October 1, 2018 and is required when an escrow account is cancelled regardless of loan’s application or closing date.
The timing of the notice changes depending upon if the consumer requested the cancellation or the bank is canceling the escrow account. If the consumer has requested the escrow account closure, the notice must be received by the consumer at least three business days before closing the escrow account. If the bank is cancelling the escrow without the consumer’s request, the notice must be received by the consumer at least 30 business days before closing the escrow account. There is an exception to the notice requirement when the debt is terminated: a bank is not required to send the notice if the loan is paid off or refinanced.
PROMPT CREDITING OF PAYMENTS
Question: Can you explain the Reg. Z provision that requires creditors and servicers to credit payments as of “receipt date” for closed-end consumer credit transactions secured by a consumer’s principal dwelling, instead of according to current policy based on cutoff hours?
Answer: The prompt crediting of payment requirement is found in Reg. Z at §1026.36(c) which requires creditors and servicers to post payments as of the “receipt date” for closed-end loans secured by a borrower’s principal dwelling. Many banks apply payments to loans in the same way they credit deposits – according to business day cut-off hours and payments made on Saturday are credited as of Monday. Unfortunately, cut-off hours will have little effect on the provision for prompt crediting of payments under the new servicing provisions of Reg. Z…unless the bank specifies in writing that payments must be received before the bank’s business day cut-off hour. The requirement regarding prompt crediting of payment essentially provides that a creditor must CREDIT the payment as of the “date of receipt.” “Date of receipt” is defined in the official staff commentary as: “The ‘date of receipt’ is the date that the payment instrument or other means of payment reaches the mortgage servicer. For example, payment by check is received when the mortgage servicer receives it, not when the funds are collected. If the consumer elects to have payment made by a third-party payor such as a financial institution, through a preauthorized payment or telephone bill-payment arrangement, payment is received when the mortgage servicer receives the third-party payor’s check or other transfer medium, such as an electronic fund transfer.”
In the case where a creditor establishes a cut-off hour such as 2:00 p.m., if a customer hand-delivers a mortgage loan payment after 2:00 p.m., the creditor would still be required to credit that payment as of the calendar day received. The payment could be posted on the next business day, but it would have to be credited as of the actual calendar day on which it was received. See Reg. Z section 1026.36(c):
(c) Servicing practices.
(1) In connection with a closed-end consumer credit transaction secured by a consumer’s principal dwelling, no servicer shall—
(i) Fail to credit a payment to the consumer’s loan account as of the date of receipt, except when a delay in crediting does not result in any charge to the consumer or in the reporting of negative information to a consumer reporting agency, or except as provided in paragraph (c)(1)(iii) of this section (Note, a period payment is an amount sufficient to cover principal, interest and escrow (if applicable);
(2) In connection with a closed-end consumer credit transaction secured by a consumer’s principal dwelling, a servicer shall not impose:
(i) Such a fee or charge is attributable solely to failure of the consumer to pay a late fee or delinquency charge on an earlier payment; and
(ii) The payment is otherwise a periodic payment received on the due date, or within any applicable courtesy period.
or
(3) In connection with a consumer credit transaction secured by a consumer’s dwelling, a creditor, assignee or servicer, as applicable, must provide an accurate statement of the total outstanding balance that would be required to pay the consumer’s obligation in full as of a specified date. The statement shall be sent within a reasonable time, but in no case more than seven business days, after receiving a written request from the consumer or any person acting on behalf of the consumer. When a creditor, assignee, or servicer, as applicable, is not able to provide the statement within seven business days of such a request because a loan is in bankruptcy or foreclosure, because the loan is a reverse mortgage or shared appreciation mortgage, or because of natural disasters or other similar circumstances, the payoff statement must be provided within a reasonable time. A creditor or assignee that does not currently own the mortgage loan or the mortgage servicing rights is not subject to the requirement in this paragraph (c)(3) to provide a payoff statement.
Reg. Z also allows a creditor to specify “conforming payments” – where the creditor describes to the consumer how payment must be made in order to be credited as of the day of receipt. See official staff commentary to section 1026.36(c)(1)(iii):
- Payment requirements. The servicer may specify reasonable requirements for making payments in writing, such as requiring that payments be accompanied by the account number or payment coupon; setting a cut-off hour for payment to be received, or setting different hours for payment by mail and payments made in person; specifying that only checks or money orders should be sent by mail; specifying that payment is to be made in U.S. dollars; or specifying one particular address for receiving payments, such as a post office box. The servicer may be prohibited, however, from requiring payment solely by preauthorized electronic fund transfer. (See section 913 of the Electronic Fund Transfer Act, 15 U.S.C.1693k.)
For new loans, creditors can specify how conforming payments are to be made by including a new clause in the note describing the bank’s servicing practices or providing some other written notice to the borrower.
Question: Can our written notice of the requirements for conforming payments be a statement on a coupon book or billing statement? What about notice posted in the bank?
Answer: A Federal Reserve Board representative indicated a statement on a payment coupon or billing statement seemed “reasonable” as did an addendum to a promissory note, but a notice posted in the bank lobby was not acceptable. The notice should be provided in writing to the borrower in a form they can retain and refer to when making payments.
Question: If we do not currently have a conforming payment policy, and would like to establish one, what is the best way to go about it – especially with notifying borrowers with current mortgage loans?
Answer: Most banks include their conforming payments policy in the note terms, as an addenda to the note or as a separate disclosure. For loans that have already closed that do not include your conforming payment policy, the bank would need to send a change in terms notice to impacted customer that outlines the bank’s conforming payment policy.
Question: If we have a conforming payments policy in place that specifies cutoff times and that our business days are M-F, then payments received after cutoff and on Saturdays can be posted as of next business day, correct?
Answer: That is correct. In order to post payments received after your cutoff hour and on weekends or holidays as of the next business day, the bank must disclose in writing to the consumer its payment crediting practices. For mortgage loans, keep in mind, if the bank was closed or does not receive mail on the date the payment is due, the bank cannot treat the payment received the next business day as late for any purpose, such as imposing a late fee or reporting the payment as past due. This only applies to payments made by mail, not other payment methods such as electronic or telephone payments.
Miscellaneous Servicing
Question: The hazard insurance policy has lapsed for a commercial building that secures a business-purpose loan. Do we have to send notices in advance of force-placing hazard insurance to the borrower? When can we assess the premium to the borrower for a force-placed hazard insurance policy on a business-purpose loan?
Answer: There is no regulatory requirement to send a notice to the borrower prior to force-placing a hazard insurance policy for business-purpose loans. The notice requirements for force-placing hazard insurance only apply to consumer-purpose loans that are subject to RESPA.
The bank can determine through its procedures when to charge the force-placed insurance premium to the borrower – immediately upon purchase of the force-placed policy or at a later date. We do suggest you review your contract terms (promissory note) to ensure it does not designate at what point the premium will be charged to the borrower.
For flood insurance, business-purpose loans are subject to the same force-placement rules as consumer purpose loans. Under the flood rules, a notice of force placement is required to be provided to the borrower when the flood policy has expired, coverage is less than the amount required, or when the property is mapped into a special flood hazard area.
Question: We have a past due loan customer we are having trouble contacting. Collection letters sent via U.S.P.S. are returned undeliverable and the cell phone number provided at the time of application is no longer active. The customer has a Facebook page — can we direct message him via Facebook Messenger or another social media platform?
Answer: The Consumer Financial Protection Bureau actually has guidance on this topic on its website. While the guidance is directed to consumers, it provides valuable information for banks in their collection efforts. The CFPB post indicates a debt collector (including a bank collecting its own debts) can only communicate with past due borrowers on social media platforms about a debt if the message is private. They cannot contact a past due borrower on social media about a debt if the message is viewable by the general public or viewable by friends, contacts, or followers of the borrower on the platform. If a private message or friend request is sent, the debt collector must identify themself as a debt collector and give the borrower a simple way to opt out of receiving further communications from them on that social media platform. Read the guidance.
Question: Do the same hazard insurance force-placement rules apply both to commercial-purpose, real estate secured credit and consumer-purpose credit secured by real estate? Do we have to provide advance notice and wait to charge the force-place premium to both commercial and consumer borrowers?
Answer: The force-placement of hazard insurance rules only apply to consumer-purpose, closed-end credit transactions subject to RESPA, so these rules do NOT apply to other types of credit such as commercial, ag, or business credit – even if secured by a dwelling. The bank can force-place the hazard policy and charge the borrower immediately upon the lapse or expiration of a grace period or at a later time per bank policy on commercial loans. No advance notice is required to the borrower. On the other hand, the rules for force-placement of flood insurance apply equally to both consumer and non-consumer purpose loans. To assist member banks, the IBA has created a guide on force-placed insurance that compares and contrast the force-placement rules related to hazard and flood insurance.
Question: Should PMI be cancelled at the midpoint, even if the borrower is delinquent, or when they become current after the midpoint is reached?
Answer: The Homeowners Protection Act says if PMI is not canceled on the cancellation date or terminated on the termination date due to one of the allowed exceptions, it must be terminated no later than the first of the month immediately following the date that is the “midpoint” of the loan’s amortization period – provided the borrower is current on payments as required per the loan terms. So if the borrower is not current on the midpoint date, you may wait to cancel the PMI until such time they become current.
Question: If our Loan Policy states PMI is required on loans at 85% LTV or greater, can a consumer request PMI to be dropped at an 85% LTV or do they have to keep their PMI until they reach an 80% LTV due to Homeowners Protection Act?
Answer: The Homeowners Protection Act requires creditors to consider cancellation requests received no later than when the loan reaches 80% LTV but does not require banks to maintain PMI until 80% LTV. Bank policy can permit consideration of cancellation requests before the loan reaches 80% LTV.
Question: Our bank uses the LIBOR rate as the index for our variable rate home equity line of credit product as well as our closed-end mortgage loans. I have read that the LIBOR rate will no longer be available after 2021. What does that mean for our bank?
Answer: It’s true the LIBOR rate will likely no longer be published after 2021. Therefore creditors that use the LIBOR rate as their index for variable rate credit products will need to transition to a different index rate. When planning for this transition, creditors should be mindful of regulatory requirements related to index transitions as well as their contractual agreement with the borrower.
- Reg. Z’s home equity line of credit rules allow creditors to change the index and margin they use to set annual percentage rates when an index rate is no longer available. Comment #1 to the Official Staff Commentary to Section 1026.40(f)(3)(ii) outlines Reg. Z’s rules related to selecting a substitute index when the original index detailed in the home equity line of credit plan is no longer available. It is important to note, when selecting a substitute value, Reg. Z requires historical fluctuations in the original and replacement indices be substantially similar and that the replacement index and margin produce a rate similar to the rate that was in effect at the time the original index became unavailable.
- Reg. Z’s closed-end mortgage loan rules do not specifically address index rate changes but most loan agreements contain some contingency language that becomes applicable if the index rate becomes unavailable. The language, however, may not be clear, may not cover the situation if the reference rate becomes permanently unavailable, or may allow a change in reference rate but not in the margin related to the reference rate. In such cases, institutions are advised to consult with legal counsel and their federal regulators, especially if the institution is considering changing both the index and margin outlined in the contractual agreement, before implementing a transition plan. In anticipation of the LIBOR transition, the CFPB has issued a FAQ document that addresses servicing requirements impacted by the LIBOR transition. The CFPB has also issued proposed changes to Regulation Z to assist institutions in the transition away from the LIBOR rate, however at this time the proposal has not been finalized.
Finally, the FDIC has developed LIBOR transition resource webpage dedicated to the topic. (February 2021)