Our first column in this series provided an overview of the complex and significant changes to regulation of mortgage servicing that went into effect on Jan. 10, and the consequential litigation exposure the regulations present for servicers. In this month’s column, we take a look at the specific challenges related to notices of error under §1024.35 and requests for information under §1026.36.
As a reminder, both of these apply to “federally related mortgage loans” but do not apply to home-equity lines of credit, reverse mortgages, mortgages not attached to real property, and loans made by a creditor making five or fewer mortgages in a year.
Challenges specific to notices of error
The term “error,” for purposes of notice of error submissions, is broadly defined. The regulation lists 10 specific instances of what a borrower could consider a notice of error. In addition, an 11th “catch-all” category renders “[a]ny other error relating to the servicing of a borrower’s mortgage loan” as a covered notice of error. Fortunately, the regulation does carve out certain types of Notice of error that do not require a substantive response, including a duplicative notice of error, an overbroad notice of error, and an untimely notice of error.
The regulation requires servicers to notify a borrower in writing within five days of making the determination that any of the exceptions apply. This notice must also explain the reason the exception applies.
The CFPB’s Official Interpretations state that servicers need not comply with the notice of error requirements “with respect to the borrower's assertion of an error that is not defined as an error in §1024.35(b).” The Official Interpretations list several such non-covered errors, including those relating to the origination of a mortgage loan; the underwriting of a mortgage loan; a subsequent sale or securitization of a mortgage loan; and a determination to sell, assign, or transfer the servicing of a mortgage loan. The CFPB says, however, that “an error relating to the failure to transfer accurately and timely information relating to the servicing of a borrower’s mortgage loan account to a transferee servicer is an error for purposes of §1024.35.”
One tactic borrowers' counsel have traditionally employed is the use of a laundry list of requests for information that do not trigger a legal obligation, but which camouflage requests under TILA or RESPA buried within the correspondence. This maneuver increases the likelihood that the servicer will fail to respond appropriately and enhances the odds that the correspondence will elicit a technical violation of applicable law.
This tactic does not appear to be viable under §1024.35, which expressly excludes overbroad requests from its scope. A request is “overbroad” to the extent the “servicer cannot reasonably determine from the notice of error the specific error that the borrower asserts has occurred on a borrower’s account.” Thus, servicers need not respond to overly vague or convoluted notices of error.
The CFPB’s Official Interpretations define “overbroad” notices as those asserting errors regarding substantially all aspects of a mortgage loan, including those related to mortgage origination, mortgage servicing, and foreclosure, as well as errors related to the crediting of substantially every borrower payment and escrow account transaction. The Interpretation also defines “overbroad” notices as those in a form that are not reasonably understandable or are included with voluminous tangential discussion or requests for information, such that a servicer cannot reasonably identify from the notice of error any error requires a response.
Servicers must be careful to balance these examples with the regulation’s requirement that if a servicer can reasonably identify a valid assertion of an error in a notice of error that is otherwise overbroad, the servicer must comply with the regulation’s requirements.
In addition, the definition of “overbroad,” as well as other provisions in these regulations, turns on what is “reasonable” under the circumstances. That analysis involves a question of fact that is unique to each notice of error. As a result, in lawsuits where an “overbroad” notice is at issue, courts will have to analyze notices of error on a case-by-case basis to determine whether they were sufficiently overbroad to prevent the servicer from reasonably ascertaining the existence of a covered error. Complicated notices of error may also render it difficult for servicers to comply with the time limits imposed by the regulation.
Section 1024.35 provides that a servicer may notify the borrower of the servicer’s need for a 15-day extension if the servicer does so, in writing, before the expiration of the 30-day response deadline. The CFPB’s Official Interpretations of the regulation clarify that a “servicer may treat a notice of error that alleges multiple errors as separate notices of error and may extend the time period for responding to each asserted error for which an extension is permissible under §1024.35(e)(3)(ii).” Servicers should avail themselves of these extended deadlines whenever necessary to ensure timely compliance.
Finally, those servicers that respond to a notice of error without acknowledging the existence of an error may be subject to a follow up request for “copies of documents and information relied upon by the servicer in making its determination that no error occurred...” The servicer must respond to the borrower within 15 days of receiving the borrower's request for such documents. (This is a separate request from requests for information authorized by §1024.36.)
The Official Interpretations by the CFPB emphasize that “[a] servicer is required to provide only those documents actually relied upon by the servicer to determine that no error occurred.” Consequently, borrowers cannot request additional documentation upon which the servicer did not rely to determine whether an error occurred. Servicers are also free to withhold “confidential, proprietary or privileged information,” so long as the servicer notifies the borrower in writing within 15 days of receipt of the borrower's request that such information was withheld.
Challenges specific to requests for information
Section 1024.36 establishes few specific limitations on the type of information the borrower can request, as long as it is “with respect to the borrower’s mortgage loan.”
Upon acknowledging a request, the servicer must respond in one of two ways: The servicer may provide the information requested and the appropriate contact information for further assistance, or the servicer may conduct a reasonable search for the requested information and provide the borrower with written notification that the requested information is unavailable to the servicer, the basis for its unavailability, and contact information for further assistance.
The Official Interpretations of the CFPB define “unavailable information” as that which is not in the servicer’s “control or possession” or “cannot be retrieved in the ordinary course of business through reasonable efforts.”
The Official Interpretations also provide several relevant examples of information being both available and unavailable to the servicer. For example, where a borrower asks for a copy of telephonic communications with a servicer, if the servicer’s personnel have access to organized recordings or transcripts of borrower telephone calls in the ordinary course of business and can identify the communication(s) referred to by the borrower through reasonable efforts, the information is considered available to the servicer.
On the other hand, where a borrower requests information stored on electronic back-up media, and the information is not accessible by the servicer’s personnel in the ordinary course of business without undertaking extraordinary efforts to identify and restore the information from the electronic back-up media, the information is considered unavailable to the servicer.
Finally, where a “borrower requests information stored at an offsite document storage facility,” the Official Interpretations state that such information is “available” if “servicer personnel can access those documents through reasonable efforts in the ordinary course of business.”
These examples make it clear that a “documents not available” defense is a particularized issue of fact that will need to be decided on a case-by-case basis. The regulation carves out certain requests for information that are not covered, including those that require duplicative, confidential, proprietary, irrelevant information, or that are overly broad, unduly burdensome or untimely. The regulation goes on to define each of these descriptions in detail. A servicer must notify a borrower within five days of making the determination that one or more of these exceptions is applicable.
Finally, the CFPB declares that, if a borrower requests the servicer to identify the owner or assignee of the mortgage loan, the servicer satisfies the regulation by “identifying the person on whose behalf the servicer receives payments from the borrower.”
Thus, the CFPB has clarified that while Federal National Mortgage Association and others are exposed to some risk by virtue of investing or guaranteeing mortgage loans, they do not become the “owners” of such loans by virtue of their investment/guarantor rule.
Therefore, in a situation where a loan has been placed in a securitized loan trust, the servicer complies with the regulation merely by identifying the trust and providing contact information for the trustee, and need not identify the other players in the securitized transaction such as investors.
Our final column next month will address challenges specific to requests for payoff statements as well as the interface of the new loss mitigation and mortgage servicing regulations with the foreclosure process.