Question: As part of our company’s efforts to build up the servicing side of our business, and as a hedge against the loss of income from a drop in refinance originations, we just acquired a servicing portfolio from another lender. I am confused about what our reporting obligations are under the Fair Credit Reporting Act (FCRA) with respect to borrower payments that may (or may not) have been made to the previous servicer during the servicing transfer process. Can you give us any guidance on this issue?
Under FCRA, a “furnisher” of information to credit reporting agencies (1) shall not furnish any information relating to a consumer if the person “knows or has reasonable cause to believe that the information is inaccurate” and (2) has an affirmative duty to “correct” and “update” information it has previously furnished that is “not complete or accurate.” [15 U.S.C. §1681s-2(a)(1) and (2)]
This can create significant challenges for subservicers or companies acquiring mortgage servicing rights (MSRs) from other lenders or servicers because the transfer of detailed borrower account information from one servicer to another typically does not occur instantaneously on the date that the servicing transfer becomes “effective.” Moreover, borrowers’ payments may be in transit during the transfer process or sent to the former servicer because the borrower has simply failed to process the new servicer’s instructions.
This issue is addressed in Regulation X of RESPA [12 CFR 1024.21(d)(5)] which provides that, during the 60-day period beginning on the effective date of transfer of the servicing of any mortgage servicing loan, if the transferor servicer (rather than the transferee servicer that should properly receive payment on the loan) receives payment on or before the applicable due date (including any grace period allowed under the loan documents), a late fee may not be imposed on the borrower with respect to that payment and the payment may not be treated as late “for any other purposes.” (Emphasis added.)
This creates an FCRA reporting issue for the new servicer or subservicer because, during the first 60 days after the servicing transfer becomes effective, the new servicer cannot automatically assume that a loan is delinquent just because the new servicer itself has not received payment. It is not uncommon for servicers to suspend credit reporting during that 60 day period to wait for payments from the former servicer. But what happens after that?
The new servicer’s affirmative duty to “correct” and “update” information it has previously furnished that is “not complete or accurate” [supra] now requires that any previous credit reporting be revised and updated to show any payments actually received (or not received) by the previous servicer during the 60 day period. This is not something the servicer can just ignore. If the “furnisher” (servicer) becomes aware that payments were in fact received during that period by the previous servicer, the furnisher now “knows” or “has reason to believe” that information previously reported (i.e., absence of payment history because reporting was suspended during the servicing transfer) is inaccurate or incomplete because it now has evidence in its files that payments were in fact received. That information must be reported.
In that regard, even though there is no Federal private right of action for violation of these provisions, there can be civil liability to regulatory enforcement authorities for both willful and negligent non-compliance with these requirements. [See 15 U.S.C. §1681n and o, not to mention possible violation of the “Unfair, Deceptive, Abusive Acts or Practices” (UDAAP) provisions of the Dodd-Frank Act [12 U.S.C. §§ 5481, 5531 & 5536(a)].
Moreover, the examination guidelines of the Consumer Financial Protection Bureau (CFPB) now include reviews for compliance with the new Mortgage Servicing Rule (Rule) that went into effect on January 10, 2014 imposing additional obligations on servicers. The provisions of that Rule, and related commentary pertaining to mortgage servicing transfers, can be found at 12 CFR 1024.33, 12 CFR 1024.38, and 12 CFR 1024.41.2 and are summarized in CFPB Compliance Bulletin 2014-01, issued on August 14, 2014 to help servicers with these issues. A copy of this Bulletin and the applicable regulations can be found on the CFPB Web site (ConsumerFinance.gov
Among other things, the Rule requires servicers to maintain policies and procedures that are “reasonably designed” to achieve the objectives of facilitating the transfer of information during mortgage servicing and of properly evaluating loss mitigation applications. [12 CFR 1024.38(a), (b)(4)]
As you can see, this is a highly technical area. So do not hesitate to call us or your attorney if you need help.