The mortgage industry is watching for the “devil in the details” in the $25 billion settlement between five leading bank mortgage servicers and a coalition of state attorneys general and federal agencies announced on February 9, 2012. While the media focused on the 11-figure settlement sum, industry members must go beyond the dollars to digest the impact of the settlement on their servicing operations and best practices.

Although the final settlement is not expected to be publicly available for some time, information is becoming available on many aspects. Most importantly to other servicers, it includes certain reforms and mandated standards that all servicers need to focus on and implement. Specific new servicing standards set forth in the settlement include:

  • Information in foreclosure affidavits must be personally reviewed and based on competent evidence.
  • Holders of loans, and their legal standing to foreclose, must be documented and disclosed to borrowers.
  • Borrowers must be sent a pre-foreclosure notice that includes a summary of loss mitigation options offered, an account summary, description of facts supporting lender’s right to foreclose, and a notice that the borrower may request a copy of the loan note and the identity of the investor holding the loan.
  • Borrowers must be thoroughly evaluated for all available loss mitigation options before foreclosure referral, and banks must act on loss mitigation applications before referring loans to foreclosure; i.e., “dual tracking” will be restricted.
  • Denials of loss mitigation relief must be automatically reviewed, with a right to appeal for borrowers.
  • Banks must implement procedures to ensure accuracy of accounts and default fees, including regular audits, detailed monthly billing statements, and enhanced billing dispute rights for borrowers.
  • Banks are required to adopt procedures to oversee foreclosure firms, trustees, and other agents.
  • Banks will have specific loss mitigation obligations, including customer outreach and communications, time lines to respond to loss mitigation applications, and e-portals for borrowers to keep informed of loan modification status.
  • Banks are required to designate an employee as a continuing single point of contact to assist borrowers seeking loss mitigation assistance.
  • Military personnel covered by the Servicemembers Civil Relief Act (SCRA) will have enhanced protections.
  • Banks must maintain adequately trained staff to handle the demand for loss mitigation relief.
  • Application and qualification information for proprietary loan modifications must be publicly available.
  • Servicers are required to expedite and facilitate short sales of distressed properties.
  • Restrictions are imposed on default fees, late fees, third-party fees, and force-placed insurance.

These new servicing standards provide for strict oversight not only of mortgage servicers, but also their third-party vendors. Ballard Spahr’s Mortgage Banking Group will continue to monitor the settlement and provide insight on its impact on the servicing industry’s operations and best practices going forward. In a free webinar on March 6, the leaders of Ballard Spahr’s Mortgage Banking and Consumer Financial Services Groups will discuss the impact of the settlement. Click here to register for the webinar, which runs from 12 p.m. to 1 p.m. ET.


 The Consumer Financial Protection Bureau has issued an initial version of a prototype monthly mortgage statement to receive input directly from the public. The prototype, posted on CFPB’s website on February 13, 2012, has already been through one round of testing, and two more rounds are planned.

The Requirements
The Dodd-Frank Wall Street Reform and Consumer Protection Act includes a requirement for creditors, assignees or servicers of mortgage loans to provide the borrower with a periodic statement for each billing cycle that contains the following information, to the extent applicable:

  • The principal amount
  • The current interest rate
  • The next date on which the interest rate may adjust or reset
  • The amount of any prepayment fee
  • A description of any late payment fee
  • A telephone number and e-mail address that the borrower may use to obtain information about the mortgage loan
  • The names, addresses, telephone numbers, and Internet addresses of counseling agencies or programs reasonably available to the consumer that are certified or approved and made publicly available by HUD or a state housing finance agency
  • Such other information as may be prescribed by regulation

Dodd-Frank also directs the CFPB to develop and prescribe a standard form for the periodic statement, taking into account that statements may be transmitted in writing or electronically.

The mortgage industry had opposed the periodic statement requirement and was able to obtain an exception to the requirement for fixed-rate mortgage loans if the borrower is provided with a coupon book that contains substantially the same information.

The Form
The prototype form is a single-page document, with information appearing only on the front side of the page. However, the form reflects that the mailing address for the sender of the form and contact information for counseling programs would be printed on the reverse side. The CFPB does not address if other information must be, or could be, included on the reverse side.

The form is dated March 20, 2012, and provides information for the upcoming April 1, 2012, payment, the March payment, and aggregate payments made during 2012. The most prominent item on the form is the “Amount Due,” which includes the principal, interest, escrow payment, and fees. A late fee is included in the Amount Due, and the form discloses that the fee was charged on March 16, 2012, “because payment was received after 3/15/2012.” The form also shows that the prior payment was received on March 17, 2012.

While the form is dated 12 days before the April 1, 2012, payment due date, the CFPB did not expressly address whether it will propose that the form be delivered a minimum number of days before the payment due date.

The form includes an “Important Message” section that sets forth the required counseling disclosure, and also a customer relations statement. The CFPB advises that there will be flexibility to tailor the model form for the needs of a company and its borrowers, and apparently the CFPB considers a customer relations statement to be an item that may be added to the form..

The form includes shading, which the industry regularly opposes because of legibility concerns when a form with shading is reproduced.

The Future
After the testing is completed, the CFPB plans to issue a proposed form along with a proposed rule this summer. The proposed rule will address the required contents of the form, and presumably delivery requirements.
- Richard J. Andreano, Jr .


The U.S. Supreme Court is set to hear oral arguments on February 21, 2012, in Freeman v. Quicken Loans, Inc. to determine whether the unearned fee prohibition in Section 8(b) of the Real Estate Settlement Procedures Act (RESPA) applies only when such fees are split between two or more parties.

The court below—the Court of Appeals for the Fifth Circuit—joined the Fourth, Seventh, and Eighth circuits, in ruling that a Section 8(b) violation can stand only if fees are divided between two or more parties.

At issue is a broad interpretation of Section 8(b) set forth in a 2001 statement of policy issued by the Department of Housing and Urban Development. HUD interprets Section 8(b) to prohibit not only the splitting of fees between two or more parties, but also a single party’s marking up the fee charged by another settlement service provider without providing additional servicers, and even a single party charging a fee that exceeds the value of services provided by the party.

Although under Dodd-Frank, RESPA was transferred to the Consumer Financial Protection Bureau, the CFPB has not taken any formal action with regard to HUD’s interpretation.

The Second Circuit, in a complex but result-oriented decision, ultimately deferred to the interpretation espoused by HUD. Two other courts of appeals, the Third and the Eleventh circuits, have established a middle ground, requiring two parties, but qualifying that the provider and recipient of the fee need not both be culpable. Whether this amounts to a 4-3 split among the circuits, as Freeman claims, or a 4-1 split, as argued by Quicken, the Supreme Court has decided to resolve the question.

One issue that is likely to concern the Court is whether HUD’s actions smack of agency overreaching. The HUD statement of policy that has led to widespread RESPA litigation was instituted in a fit of pique in reaction to an earlier Seventh Circuit decision with which HUD disagreed. Although it was published in the Federal Register, the statement of policy is simply an interpretation of HUD and not a rule that was subject to formal notice and comment rulemaking requirements.

HUD’s approach is hardly a considered analysis of the statute’s language or legislative history. Some of the HUD interpretations in the statement of policy appear out of whole-cloth. Further, the HUD interpretations are more HUD’s view of what Section 8(b) means than HUD’s exercise of agency expertise regarding settlement services. Thus, the Court may not consider itself constrained by legal principles under which deference is given to agency decision making.

We will continue to follow the case and provide updates as appropriate.


Multi-State Mortgage Committee Releases SAFE Act Examination Guidelines

On February 8, 2012, the Multi-State Mortgage Committee (MMC) issued SAFE Act Examination Guidelines for use by state non-depository mortgage regulators. The MMC is a 10-state representative committee of the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators. The primary purpose of these guidelines is to determine whether individuals engaged in licensable activity are properly licensed or registered as mortgage loan originators.
- Reid F. Herlihy

In-State Office Requirement for Hawaii Mortgage Servicers

Effective July 1, 2012, certain Hawaii Mortgage Servicer Licensees will be required to maintain an in-state office location, staffed by at least one agent or employee for the purpose of addressing consumer complaints or inquiries, and for accepting service of process. The in-state office requirement will apply only to servicers whose business constitutes at least a 20 percent share of “the portion of the mortgage loan service market in [Hawaii] that was serviced by mortgage servicers licensed under [the Mortgage Servicers Act] within the previous calendar year.” It appears the determination will be based on the loan volume report that will be required on a yearly basis for Mortgage Servicer Licensees. The provision also allows servicers to contract with a licensee that maintains an office in Hawaii for the purpose of satisfying the requirement.
- Reid F. Herlihy

Copyright © 2012 by Ballard Spahr LLP.
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.