Date: October 5, 2017
To: All Scheer Law Group Clients and Affiliates:
Subject: Amendments to the TILA/RESPA Mortgage Servicing Rules. Effective October 19, 2017. Today’s Warning: Charged off Loan Requirements.
Background: Significant (and in some instances “mind numbing”) changes to the TILA/RESPA 2013 Mortgage Servicing Rules (“MSR”), go into effect on October 19, 2017. Other changes (most notably the bankruptcy periodic statement and loan successor provisions, go into effect on April 19, 2018). Many in the industry are not prepared and may regret it in the future, when they find their rights retroactively challenged under the new laws.
Note: The changes to the bankruptcy periodic statements will require extensive review and implementation of policies and procedures in order to comply and will necessitate the need to involve all aspects of your (or your servicer’s) operation, from IS to Legal to Servicing to be able to meet the requirements and force a system override on payment application. If you have not started now, I highly recommend that you do.
To illustrate the problem: I suggest you look at the requirements and proposed forms (See 12 C.F.R. § 1026.41(f)), and consider whether you will be able to provide an accurate Chapter 13 pre and post-bankruptcy accounting each month on a periodic statement. As now proposed, all such periodic statements must give credit and an accounting for payments received from the borrower and the trustee each month, while ensuring that impound amounts required are adjusted properly so that pre-petition impound delinquencies are paid though the plan, and post-petition outside the plan (in those jurisdictions allowing direct borrower payments). Think about it. Can you or your servicer do this? It should cause concern and will spawn more borrower litigation if payments are applied wrong, especially if you assert default rights.
Charged Off Loans (12 CFR 1026.41(e)) The rebound in real estate equity since the mortgage meltdown has made this a hot button topic. Many lenders charge off secured loans and file a 1099, only to find that the loan is “back in the money” when a borrower seeks to sell or refinance and the lender receives a request for a reconveyance of the charged off loan. The lender may refuse and request full or partial payoff and the borrower may claim that the charge off and/or the 1099 released the obligation.
Without extensive review of the subject, it is generally held that merely charging off or filing a 1099 is not a release of the loan obligation, in the absence of evidence of the specific intention of the lender to release the obligation by doing so.
The new Amendments to the MSR address this in two ways: First, by specifying when a covered servicer (Small Servicers are exempt 12 CFR 1026.41(e) (4)), can discontinue sending periodic payments statements after a loan is charged off, and; Second, by establishing objective standards to evidence if a lender has in fact charged off a loan while preserving its lien rights. To avoid the requirement to keep sending payments statements on a charged off loan, a specific notice must be provided of the charge off within 30 days of the date of the charge off, or the most recent periodic statement. The notice must provide that the lender will not charge any additional interest or fees on the account and that the lien remains in place and that the consumer remains obligated (See Section for full notice requirements).
The regulation further provides that a servicer fails to treat a loan that is charged off as required, by providing the notice, or which continues to charge interest and fees on the account, has to continue to provide payment notices. If a servicer does cease providing payment notices under the exemption, it cannot retroactively assess fees and interest on the account for charges during the exemption period.
This means that you may not be able to “have it both ways” on a charge off after the amendments take effect. Covered lender/servicers who do not comply may still be able to assert that the charge off does not release the loan obligation, but you will be required to keep sending periodic statements to the borrower on a charged off loan (without demanding accruing interest and fees), or face claims by the borrower that you breached the regulation by failing to send payment notices. It will also allow the borrower to challenge the accrual of interest and charges on the loan that are assessed during the charge off period (even if the loan comes back in the money, allowing payment of such charges). Finally, it may generally call into question the intention of the lender to have released the obligation by failing to send the required notice, while taking the charge off.
Act now. Be prepared
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