June 3, Ms. Monica Jackson Office of the Executive Secretary Consumer Financial Protection Bureau 1700 G Street N.W. Washington, D.C.

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1 Robert R. Davis Executive Vice President Mortgage Markets, Financial Management & Public Policy (202) Ms. Monica Jackson Office of the Executive Secretary Consumer Financial Protection Bureau 1700 G Street N.W. Washington, D.C Re: Docket No. CFPB ; RIN 3170-AA37 Amendments to the 2013 Mortgage Rules Under the Real Estate Settlement Procedure Act (Regulation X) and the Truth in Lending Act (Regulation Z) Dear Ms. Jackson: The American Bankers Association ( ABA ) is pleased to respond to the Consumer Financial Protection Bureau s ( CFPB ) request for comment on proposed amendments to the CFPB s mortgage servicing rules. These amendments clarify or correct provisions on (1) the relationship between State law and Regulation X s servicing provisions and (2) the small servicer exemption from certain servicing rules. 1 In the same proposal, CFPB also requested comment on certain aspects of the Qualified Mortgage rule, including (1) the use of government-sponsored enterprise and Federal agency purchase, guarantee or insurance eligibility for determining qualified mortgage status and (2) the determination of debt and income for purposes of originating qualified mortgages (Appendix Q). ABA s comments on the proposed revisions to the Qualified Mortgage rule are addressed in a separate comment letter. ABA s member banks have identified many questions regarding the CFPB s servicing rules, and the small servicer exemption in particular. We strongly support the CFPB s efforts to clarify the rules and the corresponding Official Bureau Interpretations. While the proposed revisions will provide improved certainty regarding eligibility for the small servicer exemption, our members have identified additional issues warranting further clarification with respect to the small servicer exemption, as well as the servicing rules in general. Our comments are organized as follows: I. Preemption II. Eligibility for Small Servicer Status A. Which Loans Count Toward the 5,000 Cap? 1. Loans Designated as Held for Sale 2. Charitably Serviced Loans B. Impact of Affiliates C. Requirement to Originate or Currently Own the Serviced Loans 1. Loans Sold Into the Secondary Market 2. Purchases of Loans and Servicing Rights 3. Owner Financing 1 78 Fed. Reg (May 2, 2013).

2 Page 2 D. Master Servicer/Subservicer Relationships III. Implementation Issues A. Banker Inquiries B. Implementation Timeframe IV. Conclusion I. Preemption * * * * * * * * * * * * The CFPB proposes to clarify that Regulation X does not create field preemption. CFPB also proposes to clarify that State laws that are in conflict with the requirements of RESPA or Regulation X may be preempted by RESPA or Regulation X. Finally, CFPB would add that State laws that give greater protection to consumers do not conflict with and are not preempted by RESPA or Regulation X. The preemption language of RESPA as well as the existing Regulation X preemption provisions utilize the term inconsistent. RESPA preempts state laws that are inconsistent with any provision of [RESPA], and then only to the extent of the inconsistency, and a State law that gives greater protection to the consumer is not inconsistent with RESPA. Current 12 C.F.R and proposed (c)(1) also use this terminology. By contrast, the CFPB s proposed revisions to the Official Bureau Interpretation would use the term conflict instead of inconsistent. 2 We do not believe that the CFPB intends to alter the preemption standard by using the word conflict instead of inconsistent. To avoid unnecessary confusion, we recommend that the CFPB s Official Bureau Interpretation utilize terminology that is the same as the statute and the regulation. II. Eligibility for Small Servicer Status The January 2013 servicing rules in Regulation Z and Regulation X provide certain limited exemptions for small servicers. Regulation Z defines a small servicer as a servicer that services 5,000 or fewer mortgages, for all of which the servicer (or an affiliate) is the creditor or assignee. This small servicer test is incorporated by reference in Regulation X. ABA appreciates the CFPB s recognition that community banks that are portfolio lenders or that sell loans into the secondary market as servicing retained already have very strong, built-in incentives to provide high levels of customer contact and high-quality servicing. We have received numerous inquiries from our members regarding the small servicer test, and we appreciate the CFPB s efforts to clarify common questions regarding this aspect of the servicing rules. Our specific comments regarding the clarifications to the small servicer test are discussed below. We also reiterate our view that a 10,000 loan threshold is a better measure of small servicer activity. A 10,000 loan limit takes into account closed-end second liens and provides some accommodation to community banks that would otherwise be ineligible for small servicer status because they must count toward the existing 5,000 cap the number of loans that are serviced by affiliates. 2 Proposed Official Bureau Interpretation (c)(1)-1 would state State laws that are in conflict with the requirements of RESPA or Regulation X may be preempted by RESPA or Regulation X. State laws that give greater protection to consumers do not conflict with and are not preempted by RESPA or Regulation X. In addition, nothing in RESPA or Regulation X should be construed to preempt the entire field of regulation of the practices covered by RESPA or Regulation X, including the regulations in Subpart C with respect to mortgage servicers or mortgage servicing.

3 Page 3 A. Which Loans Count Toward the 5,000 Cap? The CFPB proposes to clarify that a servicer determines whether it meets the 5,000 loan test by considering the number of loans that it services that are closed-end consumer credit transactions secured by a dwelling. CFPB would further specify that institutions should count coupon book loans toward the 5,000 limit but should not count reverse mortgage loans, transactions secured by consumers interests in timeshares, and charitably serviced loans. ABA welcomes the additional specificity that the proposed revisions would provide regarding the types of loans that banks should or should not count toward the 5,000 cap. 1. Loans Designated as Held for Sale We request that CFPB clarify an additional issue regarding the threshold. In determining whether a small servicer services 5,000 loans or less, the servicer must calculate the number of loans serviced by the servicer and its affiliates as of January 1 st for the remainder of the calendar year. 3 ABA requests CFPB to clarify that loans that are designated as Held for Sale at origination do not count toward the 5,000 loan limit. ABA understands that, on average, such loans are off a bank s books in days. 2. Charitably Serviced Loans CFPB proposes to exclude from the 5,000 loan cap mortgage loans that a bank voluntarily services for a creditor or assignee that is not an affiliate of the bank and for which the bank does not receive any compensation or fees. ABA strongly supports this proposed amendment. As a benefit to their communities, some ABA members service mortgage loans on behalf of non-profit organizations or municipalities. These arrangements commonly support loans made to first-time homebuyers or loans to facilitate community redevelopment. It would be ineffective public policy to force a community bank to choose between (1) continuing to support local governments and non-profit groups and (2) incurring significant regulatory burdens and costs as a result of losing the small servicer exemption by virtue of servicing such loans. We believe that the CFPB s proposed exemption for charitably serviced loans effectively addresses this issue and we request that CFPB work expeditiously to adopt this proposed amendment. In the event that CFPB does not incorporate this change, banks that choose to terminate these servicing relationships will need adequate time to inform their customers (the non-profits and municipalities). ABA understands that, by contract, some servicers must provide at least 90 days notice. B. Impact of Affiliates CFPB proposes to clarify that, for purposes of determining small servicer status, a servicer must calculate the mortgage loans serviced by the servicer together with any mortgage loans serviced by any affiliates. ABA believes that this clarification is consistent with the existing regulation. We also note that it is not uncommon for community banks to be ineligible for the regulatory relief provided in the small servicer exemption due to the requirement to aggregate number of mortgage loans serviced by the bank and its affiliates. In some cases, a bank and the affiliate do not have a business relationship other than being owned by the same holding company C.F.R (e)(4)(iii).

4 Page 4 C. Requirement to Originate or Currently Own the Serviced Loans CFPB proposes to clarify that the small servicer test is comprised of two parts: (1) that a servicer, together with its affiliates, services 5,000 or fewer mortgage loans and (2) the servicer must only service mortgage loans for which the servicer or an affiliate is the creditor or assignee. CFPB would further clarify that to be the creditor or assignee, the servicer or an affiliate must either own the mortgage loan or must have been the originator of the mortgage loan. 1. Loans Sold Into the Secondary Market Many bankers have contacted ABA inquiring whether selling loans into the secondary mortgage market as servicing retained impacts a bank s eligibility for small servicer status. ABA supports this revision. The CFPB s proposed clarification of creditor or assignee, described above, will clarify that institutions that sell loans but retain the servicing rights for those loans will be eligible for the small servicer exemption, provided that all other requirements are met. 2. Purchases of Loans and Servicing Rights Our members have also inquired about the impact that loan purchases will have on small servicer eligibility. Existing commentary to 41(e)(4)(ii)-1 states a servicer that owns mortgage servicing rights for mortgage loans that are not owned by the servicer or an affiliate, or for which the servicer or an affiliate was not the entity to whom the obligation was initially payable, is not a small servicer. Some bankers have interpreted the existing commentary to mean that a bank that meets the 5,000 loan test but that has also purchased individual loans (including servicing rights) is ineligible for small servicer status. We believe that the CFPB s proposed revisions to the commentary makes clear that a bank that purchases mortgage loans (and the servicing rights) and holds such loans in portfolio will be eligible for small servicer treatment as long as the bank does not exceed the 5,000 loan cap. This approach rightly acknowledges that a bank that holds purchased loans in portfolio retains the credit risk associated with those loans and has the proper incentives to ensure that the loans are serviced in a high-quality manner. 3. Owner Financing Some banks, particularly smaller institutions, collect mortgage payments for consumers who have sold real property using owner financing. Under this arrangement, a bank accepts the borrower s payments and deposits the funds into its customer s account (the creditor). Banks engaging in this activity commonly have an agreement with their customers specifying that the bank is responsible solely for collecting regularly scheduled payments and that it has no responsibilities if the loan becomes delinquent. We are concerned that banks providing this service as an accommodation to their customers could be disqualified from the small servicer exemption because the institution is collecting payments on loans for which it is not the creditor or assignee. We do not believe this is a desirable result. Excluding such institutions from the benefit of the small servicer exemption would not improve consumer protections and would not address the servicing lapses that the Dodd-Frank Act and its implementing regulations were intended to correct. Based on the information collected from our members, we do not believe that such arrangements meet the definitions of federally-related mortgage loans, servicer, or servicing as set forth in 12 C.F.R (b). Further guidance from CFPB on this issue would be beneficial to those institutions that need it most small institutions that do not have in-house legal counsel to analyze this business activity and conduct a detailed legal analysis. Moreover, the minimal monetary compensation that community banks

5 Page 5 receive for performing such services will unlikely be sufficient to cover the cost of consulting outside counsel. Absent further clarification from the CFPB, community banks that collect payments for ownerfinanced loans may elect to discontinue providing this service to their customers in order to have confidence in their ability to satisfy all of the criteria set forth in the small servicer test. D. Master Servicer/Subservicer Relationships CFPB is proposing to amend Official Bureau Interpretation 41(e)(4)(ii)-3 to clarify the impact that master servicer/subservicer relationships will have on eligibility for the small servicer exemption. In particular, Example #1 illustrates that it is possible for there to be bifurcated treatment of a bank s servicing portfolio. Under the fact pattern provided, a small servicer may retain small servicer status for loans that it services directly, while the subservicer will not receive small servicer treatment even though it is subservicing for a small servicer. 4 In addition, Example #3 clarifies when component servicers are not deemed to engage in servicing. 5 These clarifications will be helpful as community banks seek ways to improve the efficiency of their servicing operations, including engaging subservicers. III. Implementation Issues A. Banker Inquiries ABA member banks have identified numerous interpretive issues and practical questions as they have worked to understand and implement the CFPB s new servicing rules. ABA understands that the CFPB plans to issue additional clarifications and amendments to the servicing rules in June. We strongly support the CFPB s efforts to address the volume of inquiries associated with this rulemaking, especially those questions that have become common. Attached is a list of eight common issues and questions raised by ABA members. This is a limited list and does not include all of the inquiries ABA has received. We request that CFPB address these topics in future amendments and clarifications. B. Implementation Timeframe ABA members have begun their compliance preparations, but are very concerned that full compliance by the January 2014 effective date is unrealistic. For the reasons explained below, we request that CFPB provide for a limited delay in the implementation of the new servicing rules. 1. Sequential Approach Multiple aspects of the servicing rules will require banks to implement new software and computer systems; overhaul policies, procedures, and processes; train staff; and test these changes for quality 4 In Example #1, a credit union services 4,000 mortgage loans all of which it originated or owns. The credit union retains a credit union service organization to subservice 1,000 of the mortgage loans and the credit union services the remaining 3,000 mortgage loan itself. The credit union has no affiliation with the credit union service organization. In this case, the credit union is a small servicer, and thus, the small servicer exemption applies to the 3,000 loans the credit union services itself. The credit union service organization is not a small servicer because it did not originate the loans. 5 In Example #3, a nonbank servicer services 4,000 mortgage loans, all of which it originated or owns. The servicer retains a component servicer to assist with servicing functions. The component servicer does not engage in servicing (does not receive scheduled periodic payments, including escrow payments; does not make payments to the owner of the loan or other third parties) and is therefore not a subservicer. Therefore, the nonbank servicer is considered a small servicer.

6 Page 6 assurance. These steps require a sequential approach and demand months of focused labor by highlyspecialized staff. 2. Vendor Readiness Frequently, our members tell us that regulatory implementation will be complicated by the fact that their vendors will not provide the necessary updates to individual institutions until late summer or fall of Even after the vendors finally release their products, the programs must be adjusted to reflect a bank s specific products and services and must be customized to enable communication with existing computer systems. This is particularly true in the case of periodic statements and the new requirements for ARM notices. 3. Year-end Freeze The actual amount of time for financial institutions to comply is further shortened by the information technology freeze that many institutions have in place between November and early January in order to manage existing year-end tax and reporting requirements. It may not be possible to test or revise the new mortgage servicing compliance systems during this lock down period. The compliance deadline will effectively be November, Our members and other industry participants are continuing to work diligently toward complying with the servicing rules by January However, for the reasons described above, it is becoming increasingly apparent that many banks will have difficulty achieving full compliance by the deadline. Therefore, we reiterate our request that CFPB delay the effective date by 12 months. This approach would give banks and their service providers much needed time to ensure that they are fully compliant and will enable banks to make informed, strategic decisions regarding their servicing business that take into account the CFPB s ongoing rulemakings and clarifications to the servicing rules. IV. Conclusion ABA reiterates its appreciation of the CFPB s efforts to clarify Regulation Z and corresponding Official Bureau Interpretations pertaining to the small servicer exemption. Our members are also looking forward to the additional clarifications to the servicing rules that CFPB intends to publish for public notice and comment in June. Should you have any questions regarding ABA s comments, contact Krista Shonk at Sincerely, Robert R. Davis Attachment

7 Attachment: Key Servicing Issues and Questions As referenced in ABA s comment letter, the following list contains common questions and issues that ABA members have identified in conjunction with the mortgage servicing rules that CFPB issued in January The banking industry would greatly benefit from additional guidance and specificity from CFPB regarding the topics below. ARMs 1. Timing. The servicing rule requires servicers to provide certain adjustable rate reset notices ( days notice for initial rate resets and days for subsequent interest rate resets). How should banks handle loans with interest rate resets occurring in close proximity to the effective date? For example, assume that an interest rate resets for the first time in April It would be impossible for a bank to provide the requisite days notice to comply with the rule after it becomes effective. In this situation, what type of notice should banks provide and when should they provide it? Periodic Statements 2. Bankruptcy. During bankruptcy proceedings, courts impose an automatic stay and collection activity must cease. The preamble to the January 2013 final rule provides suggested disclaimer language that could be included on periodic statements sent to customers who are in bankruptcy (78 Fed Reg 10966). Despite the disclaimer, banks are concerned that the CFPB servicing rules on periodic statements appear to conflict with bankruptcy rules and court orders that prohibit such communications. Additionally, does CFPB have an expectation as to where the disclaimer statement should be placed on the periodic statement? Would placing it at the top of the statement interfere with the clear and conspicuous standard? Early Intervention 3. Multiple Borrower Contacts. The servicing rules require servicers to attempt to make live contact with the borrower by the 36th day of delinquency, followed by a written notice by the 45th day of delinquency. A servicer is not required to provide the 45-day written notice more than once during any 180-day period. Are servicers required to attempt to make live contact each month (the 36-day notice) if a borrower is behind on consecutive payments? Is written notice (the 45-day notice) required more than once in a 180-day period in situations where the borrower s delinquency is not continual? Loss Mitigation 4. Complete Loss Mitigation Package. The servicing rule requires the servicer to give a notice to the customer within 5 days of receiving a complete or incomplete loss mitigation application. To meet the 5-day requirement, servicers may only have time to review the application package for the required information and will not necessarily know whether the information provided is complete for underwriting purposes. In many cases, servicers may need to obtain more specific information (after the initial review of the package has determined that the application was complete) to properly underwrite the modification. The additional information needed to complete the underwriting of the modification may not be known until after the application is sent to the Underwriting Department. The regulation should make clear that during the 5-day

8 period, servicers must review a loss mitigation application to determine whether it is complete on its face and whether the servicer can begin the underwriting process. If a servicer discovers during underwriting that additional information is needed, the servicer should exercise reasonable due diligence to obtain that information. 5. Short Sales. The servicing rule requires servicers to evaluate the borrower for all loss mitigation options available within 30 days of receiving a completed application package. The rule says that short sales are part of loss mitigation and therefore servicers would need to decision the customer for all loss mitigation options, including short sale, at the time it receives a complete loss mitigation application. In contrast, Comment (c)(1)(ii) - (3) provides: Offer of a non-home retention option. A servicer s offer of a non-home retention option may be conditional upon receipt of further information not in the borrower s possession and necessary to establish the parameters of a servicer s offer. For example, a servicer complies with the requirement for evaluating the borrower for a short sale option if the servicer offers the borrower the opportunity to enter into a listing or marketing period agreement but indicates that specifics of an acceptable short sale transaction may be subject to further information obtained from an appraisal or title search. The rule and the corresponding Official Interpretation read together seem to indicate that a servicer could offer or deny a modification and could simultaneously state that other options, such as short sale, may be available if the customer provides additional information. May servicers comply with the rule by sending the customer a letter explaining that the customer is approved or denied for a modification and include in the letter a conditional non-home retention section explaining what additional information the servicer must receive from the borrower in order to fully evaluate a non-retention alternative? 6. Bankruptcy. If a customer files bankruptcy and surrenders the property, is a servicer required to wait 120 days before initiating foreclosure proceedings? 7. Abandonment. If a borrower notifies a servicer of property abandonment prior to becoming 120 days delinquent, may the servicer begin foreclosure proceedings prior to 120 days? 8. Deed-in-Lieu. Deeds-in-lieu are a form of loss mitigation and are an alternative to foreclosure. How does the 120-day rule impact deeds-in-lieu? 2