The Bureau of Consumer Financial Protection (CFPB) has moved forward on its plan to make mortgage servicing a priority by issuing written procedures for the agency’s examinations of mortgage servicers. Although part of the CFPB’s more comprehensive Supervision and Examination Manual, issued on the same day, the procedures were the subject of a separate announcement in which the CFPB reaffirmed its intention to closely police mortgage servicers.

The CFPB’s announcement said loans in default will be an initial focus, and that the agency’s examiners will be checking to see whether: (1) borrowers receive information about foreclosure alternatives, (2) records and documents are reviewed carefully and the existence of a default is confirmed as part of the process for referring loans to foreclosure, and (3) fees charged are duplicative or illegal.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB has exclusive authority to examine insured depository institutions and credit unions with more than $10 billion in assets and affiliates of such entities for compliance with federal consumer protection laws. The CFPB previously announced it would immediately launch its supervision program for large banks when it officially opened its doors for business on July 21, 2011. (We reported on the CFPB’s announcement in a prior legal alert.) While Dodd-Frank also gave the CFPB supervisory authority over non-bank mortgage servicers of all sizes, that authority cannot be exercised until a CFPB director is confirmed.

The recently announced procedures identify the types of documents and information CFPB examiners should review, as well as the specific laws as to which they should assess a servicer’s compliance. They also list “other risks to consumers” that examiners should consider for various segments of a servicer’s operations.

Those segments are divided into routine servicing, default servicing, and foreclosure. Routine servicing includes: (1) servicing, ownership, and escrow transfers, (2) payment processing and account maintenance (which covers optional products fees, periodic statements and other disclosures, payoff statements, treatment of credit balances, and treatment of private mortgage insurance), (3) consumer inquiries and complaints (which covers responses to “qualified written requests” under the Real Estate Settlement Procedures Act and billing errors on open-end mortgages), (4) maintenance of escrow accounts and insurance products, and (5) credit reporting (which covers Fair Credit Reporting Act furnisher requirements, Gramm-Leach-Bliley Act privacy notices, and information sharing with affiliates). Default servicing includes loss mitigation as well as the collection of accounts in default (which covers compliance with the Fair Debt Collection Practices Act, where applicable) and the servicing of accounts in bankruptcy.

One aspect of the procedures we find potentially troublesome is that they appear to encourage examiners to find “unfair, deceptive, or abusive acts or practices,” which the procedures refer to as a “UDAAP violation.” Examiners are instructed that, in addition to assessing compliance with specific consumer protection statutes, they must also assess whether there are other risks to consumers, such as potential UDAAP violations by servicers.

The procedures state that “collecting information about risks to consumers, whether or not there are specific legal guidelines addressing such risk, can help inform the bureau’s policymaking.” For the standard the CFPB will use in assessing whether an act or practice is “unfair, deceptive, or abusive,” the procedures track the corresponding language of the Dodd-Frank Act. Examiners are further instructed to “consult with headquarters to determine whether the applicable legal standards have been met before a violation of any federal consumer financial law could be cited, including a UDAAP violation.”

In the absence of a confirmed director, the CFPB does not have authority to issue rules prohibiting “unfair, deceptive or abusive” acts or practices. One possibility is that the CFPB intends for its examiners to collect information about potential servicing-related UDAAP violations only as a means of informing future rulemaking once a director is confirmed. However, the more troubling possibility is that the CFPB believes it already has the authority to begin taking action to prohibit conduct it deems “unfair, deceptive or abusive” — even without a confirmed director and even without engaging in any rulemaking.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). For more information, please contact group Chair Alan S. Kaplinsky, 215.864.8544 or; Vice Chair Jeremy T. Rosenblum, 215.864.8505 or; John L. Culhane, Jr., 215.864.8535 or; or Barbara S. Mishkin, 215.864.8528 or


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