Pub. 5 2014 Issue 2

summer 2014 13 West Virginia Banker does not gain Small Servicer status by subservicing for a Small Servicer. Both master servicer and subservicer must meet the threshold qualifications. Further, a subservicer can be a Small Servicer only if the master servicer is a Small Servicer. Generally, the subservicer is not able to qualify as a Small Servicer unless it is an affiliate of the qualifying master servicer because the subservicer is not a creditor or assignee of the loans it services. Small Servicer determination is made each year, as of January 1. If the ser- vicer ceases to qualify as a Small Servicer after January 1, it will have the later of 6 months or until the following January 1 to comply with the mortgage servicing reg- ulations from which it was previously ex- empted. For example, let’s say a servicer qualifies as a Small Servicer on January 1, 2015, but increases the mortgage loans it services to more than 5,000 as of Febru- ary 1, 2015, and still services more than 5,000 mortgage loans as of January 1, 2016. The servicer loses its Small Servicer status as of January 1, 2016. If the same Small Servicer were, instead, to increase the loans it services to more than 5,000 as of October 1, 2015 and still services more than 5,000 loans as of January 1, 2016, the servicer would lose its Small Servicer status on April 1, 2016, 6 months after Oc- tober 1, 2015. If the same Small Servicer increased the loans it services to more than 5,000 as of February 1, 2015, but services less than 5,000 loans on January 1, 2016, it would still qualify as a Small Servicer on January 1, 2016. Last, the final rule added State Housing Finance Agencies to the definition of a Small Servicer, without regard for the number of loans serviced or status as creditor or assignee. The Bureau, based on comments received in response to the proposed rules, and taking into consid- eration the protections provided by such agencies’ lending practices and their mission to provide safe and affordable financing, determined that the exemption for Housing Finance Agencies was neces- sary and proper. Rules Exempted The mortgage servicing rules cover nine different mortgage servicing functions: • Periodic Statements (Reg. Z – § 1026.41) • Force-Placed Insurance (Reg. X – § 1024.37) • Servicing Policies and Procedures (Reg. X – § 1024.38) • Interest Rate Adjustment Notices (Reg. Z – § 1026.20(c) and (d) • Payment Crediting and Payoff State- ments (Reg. Z – § 1026.36) • Error Resolution and Information Requests (Reg. X – § 1024.35 and .36) • Early Intervention with Delinquent Borrowers (Reg. X – § 1024.39) • Continuity of Contact with De- linquent Borrowers (Reg. X – § 1024.40) • Loss Mitigation Procedures (Reg. X – § 1024.41) There are no exemptions to the regulations pertaining to payment crediting and error resolution. Adjustable rate mortgages with a term of less than 1 year are the only exemption to the interest rate adjustment notices regulation. Small Servicers, servicers of reverse mort- gages and servicers of loans secured by timeshares are exempt from the periodic statement regulation. Small Servicers, ser- vicers of reverse mortgages and servicers of mortgage loans where the servicer is a qualified lender under the Farm Credit Act of 1971 (“Farm Credit Loans”) are exempt from the regulations for servicing policies and procedures; early intervention; and continuity of contact. Small Servicers have a partial exemption to the force-placed insurance and loss mitigation procedures regulations. The force-placed insurance regulation, among other things, prohibits a servicer from obtaining force-placed insurance when the borrower has an escrow account for pay- ment of insurance premiums – even if the servicer would have to advance funds to the escrow account to pay the force-placed insurance premium. The Small Servicer is exempt from this provision so long as the force-placed insurance purchased is less expensive to the borrower than the amount the Small Servicer would have to advance to maintain insurance. The Small Servicer, servicers of reverse mortgages and servicers of Farm Credit Loans are exempt from the loss mitigation procedures regulation with two excep- tions: (i) the Small Servicer may not make the first foreclosure notice or filing until a borrower is more than 120 days delinquent and (ii) the Small Servicer may not foreclose if the borrower is performing under a loss mitigation agreement. Practical Considerations The consequences of relying on the Small Service exemption when the servicer does not qualify can be severe. A servicer that violates Reg. Z or Reg. X can be liable for actual damages, statutory damages, plus attorneys’ fees and costs. In addition, there are potential regulatory actions or fines. Consequently, it is imperative that the Small Servicer and its affiliate maintain accurate records of the number of loans serviced, the types of loans serviced, and its relationship to the loans it services, i.e., as creditor or assignee. The data must be available throughout the year (not just January 1) to monitor compliance. Last, it may be advisable for the Small Ser- vicer to comply with the regulations to the extent possible – even though not required – in the event the regulations become a “best practices” standard for mortgage servicing. n Last, the final rule added State Housing Finance Agencies to the definition of a Small Servicer, without regard for the number of loans serviced or status as creditor or assignee. The foregoing is not intended to be legal advice, but only a general overview of the Bureau’s mortgage servicing rules exemp- tions. The advice of counsel should be sought if there are questions regarding the regula- tions or the exemptions. Debra Hovatter’s primary areas of practice at Spilman Thomas & Battle, PLLC, are consumer finance litigation and bankruptcy. She is co-chair of the firm’s Con- sumer Finance Litigation Practice Group.