Article by: Ben Giumarra, Spillane Consulting Associates, Inc.
Some of the new servicing regulations don’t actually apply to certain loan types – identify them and take one small step towards minimizing your regulatory burden.
The federal mortgage servicing rules added over the past few years (some in 2014, again in 2017, and one more coming in 2018) can be tough. But in some cases, servicers are voluntarily over-complying with these already-rigorous requirements. For example, some “small servicer” aren’t taking advantage of exemptions available for small institutions.
Another example is the topic for today – following the same servicing rules for all loan types, even though certain rules only apply to loans secured by the borrower’s principal residence. Some of these include rules for early intervention, protections for successors-in-interest, continuity of contact, and loss mitigation.
So certainly identifying these loans at origination might be beneficial. But for institutions already looking into this, an interesting question arises …
What happens if, at origination, a mortgage loan is secured by the borrower’s principal residence, but some time afterwards, the loan is no longer secured by the principal residence? Do the protections in place for “principal residences” no longer apply?
Perhaps the borrower converts the home to a rental property or a second home? A really interesting scenario arises if the borrower vacates the property, such as when they can’t make payments and are facing foreclosure (interesting in both trying to determine if it’s nonetheless still the principal residence if the borrower is otherwise homeless, and also interesting because of the servicer’s interest in avoiding some of the rules limiting foreclosure actions that could be avoided).
No, if you determine that a loan becomes no longer secured by the borrower’s principal residence (despite being so at origination), then those rules protecting no longer apply. (But the trick in many cases might be correctly determining whether it is or not a “principal residence.”
Full Answer & Explanation
This has been an unanswered question that industry advocates have identified and requested an answer to from regulators. And good news! The regulators listened and responded with official commentary to clarify that is included in the last of the major servicing rule updates (taking effect April 19, 2018*). The preamble to the rule explains that:
[Certain RESPA servicing rules] only apply to a mortgage loan secured by a property that is a borrower’s principal residence. Consequently, a borrower’s protections under Regulation X depend on whether or not the property securing the loan is the borrower’s principal residence. The Bureau has previously explained that the determination of whether a property is the borrower’s principal residence is a fact specific inquiry, particularly when a property may appear to be vacant. Several servicers have indicated to the Bureau that they remain uncertain as to the applicability of [these rules in certain cases, such as] when a property is vacant. Accordingly, the Bureau is adopting [a new comment] which clarifies that, if a property ceases to be a borrower’s principal residence, [these rules] do not apply to a mortgage loan secured by that property. – See pages 98-99 of the preamble, rule, and commentary.
That new official comment will be found at RESPA 1024.30(c)(2)-1 and says, in full:
If a property ceases to be a borrower’s principal residence, the [rules applicable only to loans secured by the borrower’s principal residence] do not apply to a mortgage loan secured by that property. Determination of principal residence status will depend on the specific facts and circumstances regarding the property and applicable State law. For example, a vacant property may still be a borrower’s principal residence.
Helpful, but not perfectly clear, in my opinion. The preamble does go a little deeper:
The Bureau understands that a vacant property may still be the principal residence of a borrower in certain circumstances. For example, the Bureau understands that a property may still be the borrower’s principal residence where a servicemember relocates pursuant to permanent change of station orders, was occupying the property as his or her principal residence immediately prior to displacement, intends to return to the property at some point in the future, and does not own any other residential property. … Accordingly, a vacant property may still be [the borrower’s principal residence].
*I’m comfortable relying on this even though it’s not quite effective because (a) it’s a final rule that is just waiting to take effect, not something still being debated, and (b) it’s only a new comment – the actual rule remains the same as it’s always been. But we’ll keep our eyes open anyway – because we know anything can change.
Maybe it’s not practical to build this fine a distinction into your operations. That’s not my area of expertise – and keeping it simple and over-complying here might be the best decision for many organizations. But even if that turns out to be true for you – I still think the same information above will be helpful to remember if you ever have to defend yourself against an audit. If an audit identifies errors with these rules for loans secured by principal residence, check first to determine that the loans in question are secured by the borrower’s principal residence. It’s possible that you might get a little lucky with this.
Bonus: Sample Policy or Procedure Statement
I know everyone’s busy. If you have limited time to do much with this, the following might be something you could include directly into a current policy or procedure to protect you down the road. Perfect it later if you have time.
Loans Secured by the Borrower’s Principal Residence
Certain RESPA servicing requirements only apply to loans secured by the borrower’s principal residence. This includes rules for early intervention, protections for successors-in-interest, continuity of contact, and loss mitigation. RESPA 1024.30(c)(2). While the Institution would prefer to voluntarily over-comply with these requirements if there is any uncertainty over whether the loan is secured by the borrower’s principal residence, the institution need not comply with these requirements if able to make this determination with a high degree of certainty.
The determination of whether a property is the borrower’s principal residence will depend on the specific facts and circumstances regarding the property and applicable state law. In making this determination, remember:
The important point is whether the loan is secured by the borrower’s principal residence now – this can be different than from how it was at the time of origination.
It is possible for even a vacant property to still be a borrower’s principal residence in certain cases. For example, the Bureau understands that a property may still be the borrower’s principal residence where a servicemember relocates pursuant to permanent change of station orders, was occupying the property as his or her principal residence immediately prior to displacement, intends to return to the property at some point in the future, and does not own any other residential property.
In considering all of the specific facts and circumstances, the following factors, at minimum, should be documented before relying on this exemption:
The borrower’s statement of whether it is his principal residence. Whether the borrower owns another residential property, and if so where the borrower spends the majority of his time
If borrower is currently living in the property.
If the borrower is not living in the property, whether the borrower is earning rental income from someone else’s residence there.
If the property is vacant, and if so the reason for the vacancy, whether the borrower was occupying the property as a principal residence immediately beforehand, and whether the borrower intends to return. A property will still be the borrower’s principal resident if vacant due only to mandatory military assignment or similar temporary interruption.
In Other News
17 state Attorney Generals (inc. MA, NY, VA, CA, DC) sent a letter to President Trump objecting to Mr. Mulvaney being put in charge of the CFPB. ABA article here. Can’t say some of their language comes as much of a surprise, such as:
“If incoming CFPB leadership prevents the agency’s professional staff from aggressively pursuing consumer abuse and financial misconduct, we will redouble our efforts at the state level to root out such misconduct and hold those responsible to account[.] …. As you know, state attorneys general have express statutory authority to enforce federal consumer protection laws, as well as the consumer protection laws of our respective states.”
Keeping with the theme of today – check out the $1.1 million finedished out by California for mortgage servicing violation
Massachusetts man in trouble for scheme to purchase foreclosed homes, rent them out, and then let them fall into foreclosure without making an attempt to improve them.
On My Mind …
Reading about what made Apple so successful, I ran across some basic principles that they adopted early on.
“The Apple Marketing Philosophy” had three major points:
Empathy for customers. “We will truly understand their needs better than any other company.”
Focus. “In order to do a god job of those things that we decide to do, we must eliminate all of the unimportant opportunities.”
Impute. Customers judge a product by its packaging and presentation. “We may have the best product, the highest quality, the most useful software, etc.; if we present them in a slipshod manner, they will be perceived as slipshod; if we present them in a creative, professional manner, we will impute the desired qualities.”
“We’re here to put a dent in the universe.”
– Steve Jobs
Thanks so much for reading our weekly newsletters. We’re not always going to be perfect, but because we always do our best and try not to overpromise, we hope that we’re always going to be trustworthy. Your calls and e-mails are very helpful – please keep contributing.
**These are our opinions. We’re not authorized, or willing, to express those of others.**
Thank you to Ben Giumarra, Spillane Consulting Associates, Inc., a member of our Education Committee, who with the support of other experts at SCA have put together this newsletter.