More than a decade after the financial crisis, regulators are stepping up enforcement of key regulations, including those requiring lenders and their servicers to respond to borrower requests for information. Here’s what lenders, their senior executives and risk professionals can do to protect their interests and those of borrowers in line with regulators’ expectations.
The global financial crisis and subprime mortgage crisis created a shockwave of fines and penalties for many organizations that used lender-placed insurance (LPI). In the aftermath, Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act, which established the Consumer Financial Protection Bureau (CFPB).
Among other things, the CFPB was created to help protect consumers against false placements as they relate to force-placed hazard insurance and to prevent lenders and loan servicers from profiting from the crisis. At the time Dodd-Frank was passed, many lenders had their own insurance arms, which were forced by the CFPB to stop accepting commissions on insurance placements relating to LPI.
Today’s landscape is slightly different, but lenders face the same watchful eye. The CFPB’s continual focus is on ensuring the financial health of borrowers — including during times of economic hardship.
During economic downturns, employers often look for ways to reduce expenses, placing additional burden on those individuals responsible for oversight. For lenders — and the servicers to which many lenders have outsourced key loan tracking functions — such action can lead to inconsistency and a failure to protect borrowers’ interests.
Even with a potential recession looming, the CFPB expects lenders to maintain borrower-centric cultures. And the agency is stepping up its scrutiny of lenders and mortgage servicers to achieve this.
More aggressive enforcement
One issue that the CFPB has directed particular attention to is borrower requests for information.
For many years, lenders and loan servicing companies have been subject to the Real Estate Settlement Procedures Act (RESPA), which was passed by Congress and signed into law in 1974. Many lenders assume that under RESPA, they are only obligated to respond to certain qualified written requests from borrowers narrowly related to the servicing of their loans. In 2013, however, the CFPB issued new rules to amend Regulation X, the rule originally put forward by the Department of Housing and Urban Development to implement RESPA.
The CFPB’s position is that the new rules expand the obligations of lenders and mortgage servicers to respond to questions from borrowers. In 2022, the CFPB filed an amicus brief (opens a new window) in McCoy v. Wells Fargo, a class-action suit in which borrowers allege that Wells Fargo violated RESPA and Regulation X by failing to respond to valid inquiries about their loans.
Quoting from Regulation X, the CFPB asserted in its brief that the 2013 rules “broadened servicers’ obligations such that they must now respond to requests for information ‘with respect to the borrower’s mortgage loan,’” including requests not specifically related to “servicing.” Moreover, the rules require — with some specific exceptions — that lenders and servicers “respond to ‘any written request for information from a borrower that includes the name of the borrower, information [sufficient] to identify the borrower’s mortgage loan account, and states the information the borrower is requesting with respect to the borrower’s mortgage loan,’” the agency said.
Independent oversight and expertise is crucial to compliance
With the CFPB taking a close look at industry practices, lenders should strongly consider ways in which they can revamp their approach to compliance. This includes loan servicers that have outsourced loan tracking functions to vendors, as the agency will seek to hold lenders accountable for those vendors’ missteps.
Third-party oversight of servicers is key to identifying and addressing potential compliance failures. Among other actions, an independent, objective third party that understands CFPB guidelines can monitor service-level agreements (SLAs) and ensure that servicers have the right capacity and bandwidth — including adequate staffing — to address borrower inquiries and ensure compliance with Regulation X. It should also regularly audit customer call and response times, loan files, letter cycles and insurance placements while also monitoring and tracking customer complaints to identify potential trends.
A third party can also help lenders challenge their LPI provider to stay compliant with evolving guidelines. An objective third party that not only monitors SLAs but understands both CFPB guidelines and the intricacies of relevant insurance coverage, such as LPI, can also be useful here, as LPI providers will typically not indemnify lenders against allegations of failure to comply with CFPB regulations.
And just as how many organizations have outside counsel with specialized knowledge on retainer to address a variety of legal matters, every lender should strongly consider having on their side dedicated insurance experts who understand the loan servicing rules dictated by the CFPB. Adding a lender-placed insurance expert to a lender’s team can also be beneficial. An experienced, LPI expert that has a lender’s interests and those of its borrowers at heart can help secure more favorable policy terms, conditions and pricing to protect a lender and its borrowers from key losses.
For more information, contact your Lockton Lender Services advisor or email us at firstname.lastname@example.org.