Loan servicing is one of the most heavily regulated areas of a financial institution. Unlike mortgage origination, loan servicing is an ongoing, long-term responsibility for the financial services industry that requires a commitment to regulatory compliance, including accurate record-keeping and transparent customer communication. During the life cycle of servicing a loan, lenders can face many challenges, including change. Changes in systems, personnel, processes, borrower circumstances, etc., can create an elevated risk of errors. In addition, many of the requirements are governed by our systems and their parameters, which can lead to widespread issues if not properly monitored.
Small lending institutions, such as community banks, have additional challenges because they may not come across or see issues where regulatory requirements apply often. In particular, the mortgage servicing rules have varying requirements depending on whether or not an institution is considered a “small servicer.”
Mortgage Servicing Rule Exemptions for Small Loan Servicers
Small loan servicers are those institutions that, along with their affiliates, service less than 5,000 closed-end consumer transactions secured by a dwelling. The mortgage servicing rules exempt small servicers from some of the mortgage servicing requirements, including the following exemptions contained in the U.S. Code of Federal Regulations (CFRs):
- Mortgage periodic statements (12 CFR 1026.41) – Small servicers are exempt from providing mortgage periodic statements to borrowers on a monthly basis.
- Escrow –Force-placement (12 CFR 1024.17(k)(5)(iii)) – In general, institutions are prohibited from force-placing insurance for a customer when they are more than 30 days past due and an escrow account has been set up to manage escrow payments. However, small servicers are allowed to force-place insurance in these situations if the premium for the force-placed policy is less than the amount that would be disbursed to pay the standard insurance premiums maintained for the borrower.
- Early intervention, continuity of contact, and loss mitigation (12 CFR 1024.39-.41) – Small servicers are exempt from the early intervention, continuity of contact, and loss mitigation requirements outlined in the Real Estate Settlement Procedures Act (RESPA), except the foreclosure prohibitions. Small servicers may not make the first notice of filing for foreclosure processed until a borrower is more than 120 days past due, there is a due-on-sale clause, or another lienholder is foreclosing on the property.
- General servicing policies, procedures, and requirements (12 CFR 1024.38) – Small servicers are exempt from the requirements to maintain policies and procedures outlining the mortgage servicing requirements and how the institution remains in compliance with those requirements. However, it is recommended that small servicers continue to maintain policies and procedures addressing these requirements.
Small servicers must not only establish procedures and processes to handle the following servicing requirements, but they must also make sure they and specific staff are able to identify when these requirements apply:
- Error Resolution Procedures (12 CFR 1024.35)
- Requests for Information (12 CFR 1024.36)
- Successors in Interest (12 CFR 1024.32(c))
- Open-End (Both Dwelling & Non-Dwelling Secured) Periodic Statements (12 CFR 1026.7)
- Flood Disaster Protection (12 CFR 22 (Office of the Comptroller of the Currency), 12 CFR 208 (Federal Reserve Board), 12 CFR 339 (FDIC), 12 CFR 614 (Farm Credit Administration), 12 CFR 760 (National Credit Union Administration))
- Fair Credit Reporting Act, Data Integrity, & Dispute Handling (12 CFR 1022)
- Escrow Account Handling (12 CFR 1024.17)
- Force-Placed Insurance (Hazard) (12 CFR 1024.37)
- Billing Error Resolution (12 CFR 1026.13)
- Prompt Payment Crediting (12 CFR 1026.36(c)(1) & 1026.10)
- Interest Rate Adjustment Notices (12 CFR 1026.20(c) & (d))
- Homeowners Protection Act (Private Mortgage Insurance) (12 U.S. Code (USC) 49)
- Servicemembers Civil Relief Act (50 USC 50)
- Military Lending Act (10 USC 987)
In order to address the plethora of requirements that impact loan servicers, it is crucial to maintain a solid compliance management system encompassing them.
Compliance Management System Components
- Management Information Systems (MIS) (Board & Management Oversight)
- Policies & Procedures
- Internal Controls
- Monitoring & Audit
- Training
- Customer Complaint Resolution Management
Now is the time to reflect and do a compliance program pulse check to review the components of your loan servicing compliance management.
How Forvis Mazars Can Help
Have loan servicing questions? Connect with experienced compliance and lending professionals who can answer your compliance questions, look over documents, help you stay current on regulatory updates, and more. Learn more about ProBank Advisor® and how it can empower your compliance team today. If you have any questions or need assistance, please reach out to a professional at Forvis Mazars.