CFPB ; RIN 3170-AA49

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1 Krista J. Shonk Vice President, Mortgage Finance & Senior Regulatory Counsel Ms. Monica Jackson Office of the Executive Secretary 1700 G Street N.W. Washington, D.C Re: Docket No. CFPB ; RIN 3170-AA49 Amendments to the 2013 Mortgage Rules Under the Real Estate Settlement Procedure Act (Regulation X) and the Truth in Lending Act (Regulation Z) The American Bankers Association ( ABA ) 1 is pleased to comment on the Consumer Financial Protection Bureau s ( the Bureau or CFPB ) proposed amendments 2 to the mortgage servicing rules contained in Regulation X and Regulation Z (the Servicing Rules or the Rules ). The Bureau issued the Rules in January 2013 and created a highly detailed regulatory framework for mortgage servicing. As banks worked to implement the new requirements, they identified numerous questions regarding how to interpret and apply the Rules. To address these concerns, the Bureau issued multiple clarifying amendments. 3 We appreciate that the Bureau is continuing to address ambiguities and other challenges posed by the Servicing Rules. However, ABA is concerned that some aspects of the proposal would incorporate additional regulatory requirements into an already extensive and complex regulatory framework. Mortgage servicers should service loans in a manner that is accurate, transparent, timely, and responsive to borrowers. To achieve this objective, Federal regulation and oversight should promote high-quality servicing across all servicer types, sizes, and business models. However, the Bureau s Servicing Rules already exceed the requirements mandated in the Dodd-Frank Act and we are concerned that the continued layering of detailed regulatory requirements, combined with the unfavorable capital treatment of servicing assets adopted by the Federal banking agencies, will continue to decrease the value proposition of mortgage servicing for banks of all sizes. Consumers 1 The American Bankers Association is the voice of the nation s $15 trillion banking industry, which is composed of small, regional and large banks that together employ more than 2 million people, safeguard $11 trillion in deposits and extend more than $8 trillion in loans. Learn more at aba.com Fed. Reg (Dec. 15, 2014) FR (July 24, 2013), 78 FR (Oct. 1, 2013), 78 FR (Oct. 23, 2013), CFPB Bulletin , Implementation Guidance for Certain Mortgage Servicing Rules (Oct. 15, 2013), and 79 FR 65300, (Nov. 3, 2014).

2 Page 2 (particularly those in rural areas) will be hurt, not helped, if rulemakings result in further consolidation in the servicing industry. Our concern regarding the viability of mortgage servicing for insured depository institutions is not merely academic. Our members tell us that they are reevaluating their business models, assessing the costs and risks of new servicing and capital regulations, and are recalculating the minimum number of loans that they need to service in order for servicing to remain a viable business proposition. The ability to recruit and retain highly skilled staff in certain geographic locations is also an important consideration as banks reassess their servicing strategy. We also believe that some aspects of the proposed amendments are off-balance. The cumulative technological costs and legal risk associated with implementing the proposed changes relating to successors in interest, customers in bankruptcy, and customers who have filed cease communication notices is out of proportion relative to the limited number of consumers who might derive a meaningful benefit from the proposal. For example, some of our members have a very small number of mortgage borrowers who are in bankruptcy. However, these institutions would be required to incur all of the systems costs associated with complying with the proposed amendments. The expense per loan of complying with these regulatory requirements applicable to such a narrow group of borrowers is an excessive burden, particularly for community banks. Borrowers would not benefit if high-quality servicers exit the business due to expensive regulatory demands that do not benefit the majority of their customers. With the foregoing in mind, ABA submits the following recommendations regarding the proposed amendments. In addition, we note the highly detailed nature of the proposed amendments and the accompanying preamble material, and we anticipate that banks will identify additional concerns associated with the proposed changes after the comment period closes. We also foresee that banks will have many interpretive questions regarding any final rule, particularly if the Bureau adopts the amendments largely as proposed. ABA requests that the Bureau provide timely responses to these inquiries in a form that is widely available to all servicers. Below are the highlights of ABA s position on key aspects of the proposal: Successors in Interest. ABA requests that the Bureau limit the successor in interest provisions to situations involving the death of an obligor. In the event that the Bureau elects to adopt the rule as proposed, we recommend that servicers be protected from RESPA liability as to non-obligor successors. Lender-Placed Insurance. We support the Bureau s effort to improve the rules applicable to lender-placed insurance notices. Definition of Delinquency. We generally support the Bureau s proposed definition of delinquency. However, we are troubled that banks that choose to credit payments to the

3 Page 3 oldest outstanding payment would be precluded from ever foreclosing on a mortgage loan that is delinquent on a rolling basis. We request that the Bureau provide banks the flexibility to adopt policies and procedures that establish when a bank will commence foreclosure in rolling delinquency situations. Early Intervention Bankruptcy and FDCPA. ABA requests that the Bureau not adopt the proposed amendments to the early intervention requirements in bankruptcy and FDCPA situations. The proposal is overly complicated and would require banks to expend significant resources to provide early intervention communications that would provide questionable benefit to a narrow subset of borrowers. In addition, the proposal would potentially conflict with state law and the interpretations of individual bankruptcy courts. Loss Mitigation. Collection of Documents and Information. We request that the Bureau revise the proposed amendments to clarify that servicers may still include in their waterfall a determination of whether the borrower wishes to remain in the home. Reasonable Date to Submit Missing Information. We request that the Bureau establish a bright line test of 30 calendar days for a borrower to submit missing information. Short-term Repayment Plans. Requiring that a bank attempt to collect documents and information to evaluate a loss mitigation application for all loss mitigation options when a borrower specifically requests a short-term repayment plan is not consistent with or reflective of the needs or wants of borrowers and would lead to erroneous perceptions of inadequate customer service (i.e., the bank is not listening to me). Written Notice of Complete Application. We recommend that the foreclosure sale date be removed from the written notice of complete application. ABA also requests that the Bureau provide a model form to facilitate compliance with the written notice requirement. Information Not in a Borrower s Control. ABA finds this aspect of the proposal confusing and believes that it would be difficult to track and to demonstrate compliance. We are also concerned that the Bureau or examiners will later attempt to specify when a bank can make a loss mitigation determination without third-party information. Foreclosure Referral Subordinate Liens. ABA strongly supports permitting a servicer of a subordinate lien to join the foreclosure action of a senior lienholder even though the subordinate lien is not more than 120 days past due. Repeat Requests for Loss Mitigation. ABA does not oppose considering a borrower for loss mitigation multiple times. However, any requirement to do so should permit

4 Page 4 restrictions on the frequency and number of times that a servicer is required to comply with the loss mitigation requirements over the life of a loan. Servicing Transfers. We are concerned that requiring transferee servicers to comply with the loss mitigation timelines applicable to transferor servicers would require transferees to obtain detailed information on the loans being transferred prior to the transfer date, which may not be legally permissible under privacy laws and other restrictions on unrelated companies sharing loan information. We are also concerned about situations where a transferor servicer uses most of the time allotted under the Servicing Rules for reviewing loss mitigation applications and responding to borrower appeals. We recommend that transferee servicers be given a reasonable extension of time in these circumstances. Periodic Statements. Acceleration and Trial Modifications. We request that the Bureau also address situations where a bank accelerates a loan and the borrower subsequently enters a trial loan modification. In addition, banks should be able to provide a reinstatement amount that is good through a specified date and provide the borrower with contact information for obtaining an up-to-date reinstatement amount. ABA members would also find it helpful for the Bureau to develop additional model periodic statements to demonstrate various trial modification and acceleration scenarios. Customers in Bankruptcy. We request that the Bureau not adopt the proposed amendments requiring the provision of periodic statements to borrowers in bankruptcy. If the Bureau does require periodic statements in bankruptcy situations, we request clarification regarding the disclosure of pre-petition and post-petition payments and when the first modified statement should be filed after a customer files for bankruptcy under Chapter 12 or 13 of the Bankruptcy Code. Small Servicer Exemption. ABA supports the Bureau s effort to ensure that banks that offer collection contract services are not disqualified from the small servicer exemption. However, we believe that the proposed one loan per 12-month period for each seller-financer is overly restrictive. We also support grandfathering existing collection contracts from the regulatory limit. Charged-Off Loans. Loans that a bank charged off prior to the effective date of the proposed amendments should not be subject to the periodic statement requirement. Effective Date. ABA recommends an effective date of at least 18 months for the successor in interest, early intervention, and periodic statement amendments. We support an effective date of 280 days for the remaining aspects of the proposal.

5 Page 5 I. Successors in Interest A. Background. The Servicing Rules currently require that servicers maintain policies and procedures to ensure that, upon notification of the death of a borrower, the servicer can promptly identify and facilitate communication with the successor(s) in interest with respect to the deceased borrower s mortgage loan. 4 The Bureau is proposing to significantly expand regulatory requirements regarding successors in interest 5 and broaden the types of transfers of property interests that would be covered by the Servicing Rules. Specifically, the proposal would: Require servicers to communicate with potential successors in interest and to have policies and procedures for confirming the identity and ownership interest of such individuals; Specify reasonable and unreasonable documentation requirements for confirming a successor s ownership interest in a property; Expand the categories of the types of property interests covered by the successor in interest rules to include successors who acquire an ownership interest in property as a result of death, divorce, legal separation, transfers to a family trust, or a transfer to a spouse or child; Apply all of the Servicing Rules in Subpart C 6 to successors in interest who have acquired an ownership interest in the property regardless of whether the successor in interest is liable on the mortgage loan obligation; and Protect successors in interest from acceleration. The proposed rule is intended to help successors in interest avoid foreclosure. We support this objective and believe that servicers should engage in clear, timely, and responsive communications 4 12 C.F.R (b)(1)(vi). In October 2013, the Bureau issued Bulletin to provide implementation guidance regarding this requirement. 5 For the purposes of this proposal, the Bureau is referring to successors in interest who have been transferred a legal interest in a property securing a mortgage loan from a borrower on the mortgage loan; the successor in interest may not necessarily have assumed the mortgage loan obligation (i.e., legal liability for the mortgage debt) under State law, and the servicer may not necessarily have agreed to add the successor in interest as obligor on the mortgage loan. 79 FR Subpart C of the Servicing Rules addresses servicing transfers; escrow accounts; error resolution; information requests; lender-placed insurance; servicing policies, procedures, and requirements; early intervention; continuity of contact; and loss mitigation.

6 Page 6 with successors in interest to achieve an orderly resolution of the situation. In fact, effective communication is in the best interest of the successor and the servicer. 7 However, as explained below, ABA believes that providing loan-related information to a successor in interest who is not liable on the note would violate the financial privacy of living obligors. We are also troubled by the expanded scope of property transfers covered by the proposal, the legal risk associated with identifying and confirming a successor s ownership interest in the property, and the provision of all borrower rights to non-obligors. Finally, the proposal s requirement to disclose account information could increase the risk for fraud and identity theft. Our detailed comments are set forth below. B. Privacy Concerns. The proposal would require that banks provide a variety of account-related disclosures to successors in interest, respond to information requests regarding the mortgage loan account, and provide periodic statements to such individuals. The disclosure of loan information involving living obligors is particularly worrisome. Providing this type of information to individuals who are not obligated on the mortgage loan is wholly inconsistent with customers expectation that banks keep financial information confidential. In addition, State privacy laws may preclude a servicer from providing loan-related information unless such information sharing pertains to the enforcement of the loan or is authorized by the existing borrower(s). 8 The proposed expansion of the type of property transfers covered by the proposal raises significant privacy concerns associated with providing loan information to non-obligors. For example: Divorce. The proposal would apply to transfers of property in situations involving divorce. Just because there is a divorce decree does not mean that it would be appropriate for a bank to disclose account-related information to a non-obligated, former spouse who has obtained 7 For example, portfolio lenders directly incur credit losses associated with non-performing loans and therefore have every incentive to provide quality servicing and to communicate with successors in interest who may be experiencing difficult circumstances in their lives. We also note that banks that service loans that they originated but sold into the secondary market face significant reputation risk and potential loss of other banking relationships with the customer if they are unresponsive to successor in interest situations. Banks that service loans for others generally must remit principal and interest payments to investors even when a loan becomes delinquent. Therefore, servicers in various types of servicing arrangements have a financial incentive to (1) communicate with successors in interest to increase the likelihood that the mortgage loan remains performing and (2) take steps to provide a new loan to the successor or to arrange a loss mitigation plan for successors who are obligors on the existing loan. 8 We also note that some state supreme courts have found a right to financial privacy under state law. See Charnes v. DiGiacomo, 612 P.2d 1117 (Colo. 1980), holding that an individual has an expectation of privacy in records of his financial transactions held by a bank in Colorado.

7 Page 7 title to the property. Doing so would require banks to disclose information that the obligated spouse may not want to be disclosed. 9 Estate Planning. The proposal would apply to transfers of property from parents to children and to transfers involving family trusts. If living parents transfer the mortgaged property for estate planning purposes and keep making scheduled loan payments, a bank would be required to provide servicing-related disclosures and loan account information to children who may be phishing for financial information about their parents. Electronic Statements. Privacy would also be a concern in situations where a living borrower has requested to receive periodic statements electronically. Commonly, online banking systems are set up such that when a customer logs onto the bank s online banking portal, s/he is taken to a dashboard containing links to detailed information regarding every account the customer has with that particular institution. Banks could not simply turn off a successor in interest s access to these other accounts. Other Financial Information. The Internal Revenue Service requires that lenders send borrowers a Form 1098 each year detailing the amount of mortgage interest that the borrower paid during the tax year. This form is a key piece of information because borrowers may deduct mortgage interest from their taxable income. Servicing platforms assume that all notices, disclosures, periodic statements, and other communications involving the mortgage loan should be provided to the borrower. Because these systems cannot distinguish between information that should be sent exclusively to the borrower and information that should be provided to the successor in interest, there is a high risk that a nonobligor successor in interest would receive the Form 1098 of a living borrower. This would be a significant breach of privacy. Summary. We fundamentally disagree with the CFPB s conclusion that a non-obligated successor with a mere, possibly unperfected, ownership interest in mortgaged property has a right to detailed information regarding the mortgage loan. While we appreciate the Bureau s objective of preventing unnecessary foreclosure in successor in interest situations, we believe that the privacy implications of the proposed rule for living obligors constitute significant overreach by the Bureau and are altogether inconsistent with a borrower s expectation of privacy and confidentiality. We recognize that there could potentially be situations where a non-obligated successor in interest is at risk of foreclosure because a living obligor is delinquent or stops making payments on the mortgage loan. In this situation, banks strongly object to being placed in the middle of a dispute 9 We are also concerned about the implications for domestic violence situations where the abusing spouse receives the home as part of a divorce or legal separation agreement. In this situation, the abuser could request and obtain loan account records and contact information for the fleeing spouse. Disclosing the information would put banks in a very difficult situation, particularly if the fleeing spouse were to be harmed following the disclosure of information. This situation is not routine, but it does happen.

8 Page 8 between the two parties (e.g., a divorce situation). There are other, more appropriate legal channels through which these problems should be addressed. We also note that most state laws require banks initiating foreclosure to conduct a title search and notify all lienholders and all parties with an ownership interest in the property. Prior to that, non-obligated parties with an ownership interest in a mortgaged property do not have a right to receive detailed loan account information. C. Periodic Statements and Coupon Books. In addition to the privacy concerns described above, we emphasize the need for banks to maintain a formalized approach to providing periodic statements regarding a borrower s loan account. Where an obligor is still living, periodic statements or coupon books should be sent to that individual, not someone who simply has an ownership interest in the property. When the obligor is deceased, this information should be sent to any remaining obligors or to the estate of John Doe (borrower). The estate is charged with settling the decedent s debts and making timely payments on the mortgage during the estate s administration. This approach would help to ensure that the administrator of the estate is aware that the mortgage loan obligation exists. D. Loss Mitigation. The proposal would grant successors in interest the same loss mitigation procedural rights and legal protections as borrowers who are responsible for repaying the mortgage loan. In other words, a successor in interest who is not liable on the note would be treated the same as a borrower for purposes of the loss mitigation rules. No Right to Modification or Assumption. We request that the Bureau clarify that a successor in interest is not entitled to receive an offer of loss mitigation, nor is s/he entitled to assume the mortgage loan obligation by virtue of being a successor in interest. If a successor is not an obligor on the existing loan, banks will commonly review the successor s financial information and conduct the requisite underwriting to determine whether the successor meets the bank s credit criteria for the origination of a new loan. Many banks do not permit the modification and simultaneous assumption of a mortgage loan by a non-obligated successor. Even if a bank permits assumption generally, a successor in interest does not have an automatic right to assume the loan obligation. As we noted at the outset of this letter, banks have multiple incentives to communicate with and provide basic information to successors in interest. 10 Banks want to make sure that the mortgage loans that they service are performing assets; foreclosure is the least economically beneficial option for all parties. However, not all successors in interest will have the financial means to repay the mortgage loan. 10 See page 6, footnote 7.

9 Page 9 Multiple Successors and Conflicting Interests. Applying the loss mitigation requirements in the existing Servicing Rule to situations involving multiple successors in interest would be particularly challenging. It is common for successors to have conflicting views as to what they want to do with the property securing the loan obligation. For example, one successor may want to work out a financing agreement with the bank, while another successor wants a disposition option. The proposal would require banks to treat successors in interest the same as borrowers, but there is no guidance on how banks should respond to conflicting instructions from these parties. It is inappropriate for banks to be in the middle of disputes between successors, particularly in situations where the mortgage loan is not performing. The foreclosure process can be an incentive for heirs to settle their disputes. However, we are concerned that a successor in interest could use the loss mitigation procedural protections as a delay tactic while the successors attempt to reach an agreement on how to handle the property. Banks should not incur the financial expense of holding a delinquent loan because non-obligor successors cannot agree on what they want to do with the property that they have inherited. We also note that the loss mitigation provisions of the current Servicing Rules apply only to mortgage loans that are secured by a borrower s principal dwelling. If the Bureau moves forward with this proposal, we request the CFPB to confirm that the scope of the existing loss mitigation rules will also apply to successors in interest. In cases where there are multiple successors in interest, we recommend that the Bureau clarify how the loss mitigation rules apply when one successor resides in the home but another successor does not. Similarly, we request guidance on how the loss mitigation rules would apply if one successor has a minority share and lives in the property and the remaining successors reside elsewhere. E. Legal Risk of Identifying Successors and Determining Ownership Interest. Identification of Successors in Interest. Upon being notified of the death of a borrower or of any transfer of the property securing a mortgage loan, servicers would be required to identify and facilitate communication with any potential successors in interest regarding the property (emphasis added). ABA is concerned that this requirement could be interpreted to imply that banks have a regulatory obligation to seek out potential successors in interest. The Servicing Rules should clarify that it is the obligation of a successor in interest to notify banks of their ownership interest in the property; banks should not be required to track down successors in interest. Any requirement to do so would be particularly problematic in situations where there are multiple successors in interest. There is a risk that a bank could conduct the requisite outreach, but that additional successors could surface at a later point in time. The requirement to identify any potential successor in interest could subject banks to civil liability or litigation where the servicer has not identified all successors in interest and the successors ultimately end up in a dispute as to the appropriate course of action regarding the property securing the mortgage loan.

10 Page 10 We also note that the proposal uses the term potential successors in interest. By definition, a successor in interest is someone who has already acquired title to the property through the appropriate legal transfer process. The term potential is confusing and adds to the ambiguity regarding a bank s obligation to identify successors in interest. Confirmation of Successor s Ownership Interest. The proposal would also require that banks confirm a successor s ownership interest in a property. While banks can perform a certain level of due diligence regarding successors in interest, Federal regulation should not require banks to make a legal determination regarding ownership. When confirming a successor in interest, servicers should be able to request documents that evidence official, legal determinations of the potential successor in interest s claim. Confirming a party as a successor in interest is, at heart, a legal determination, which could conflict with unknown factual and legal circumstances, including competing legal claims from other parties. Because state property laws and court rulings may be inconsistent, or factual circumstances may not be fully disclosed to a bank, even significant research may not lead to the correct determination in every case. Servicers should at all times be able to request an official determination with regard to a successor in interest s claim, such as a binding court determination or a recorded transfer of interest. The significant expansion of the types of property interests covered by the proposed amendments would be particularly onerous for community banks. Commonly, small banks do not have in-house legal staff and therefore do not have sufficient personnel or expertise to confirm a successor in interest s ownership in the property. In addition to engaging expertise to evaluate a successor s ownership interest, banks would need to hire outside counsel to review and compare the Bureau s rules to state law requirements. Even banks with in-house counsel are not legal experts on a 50-state basis and may still incur legal expense by retaining counsel to provide local review. F. Potential for Abuse. Because the Bureau s proposal would significantly expand the successor in interest requirements to include successors who acquire an ownership interest in property as a result of divorce, legal separation, transfers to a family trust, or a transfer to a spouse or a child, ABA is concerned that the rules could be manipulated in order to disrupt and delay the foreclosure process. For example, in the loss mitigation context, a borrower who does not qualify for a loan modification could potentially circumvent the denial by transferring the property to his or her spouse and having that individual reapply for loss mitigation, thereby triggering the prohibition on acceleration, the loss mitigation procedural requirements, and appeal rights. If the spouse is denied or declines the loss mitigation that is offered, s/he could conceivably transfer the property to an adult child or family trust, which would start the process over again. Because the proposed amendments would allow unlimited loss

11 Page 11 mitigation applications over the life of a loan, this could conceivably occur. This outcome would be inconsistent with the Bureau s stated objective of preventing unnecessary foreclosures. G. Impact to Other Legal and Regulatory Requirements. ABA believes that treating a non-obligated third-party as a bank customer for purposes of the Servicing Rules would have implications for a wide variety of laws and regulations to which banks are subject. First, we are concerned that the proposal attempts to provide non-obligors with a private right of action under the Real Estate Settlement Procedures Act ( RESPA ). For example, the existing Servicing Rule enables a borrower to bring a private right of action or a class action lawsuit against a servicer who does not comply with the Bureau s loss mitigation procedures. We question the Bureau s authority to provide a private right of action to an individual who is not liable on the mortgage loan. Moreover, it is misdirected public policy to extend borrower rights, including a right of action, to a non-obligated third party. Second, the proposal could impact when a loan is charged off for accounting purposes. Banks generally charge off a loan when it is 180 days delinquent and they analyze a variety of factors to estimate what the charge off would eventually be. It would not be uncommon for impacted loans to exceed the 180-day delinquency mark if successors in interest were to receive the panoply of protections available to obligors under the Servicing Rules. It is possible that regulatory guidance may be needed on this issue. Third, the proposal may impact a variety of other banking laws and regulations. Discussions with our Servicing Working Group have triggered a variety of questions regarding what a bank s compliance obligations would be under the following requirements if the Bureau adopts the successor in interest provisions as proposed: OFAC Equal Credit Opportunity Act Bank Secrecy Act Fair Debt Collection Practices Act Gramm-Leach-Bliley Act State privacy and debt collection Servicemembers Civil Relief Act laws H. Application of the Ability-to-Repay Rule. One common question associated with successors in interest is how the Bureau s Ability-to- Repay/Qualified Mortgage Rule ( the ATR/QM Rule ) applies to successor in interest situations. On July 17, 2014, the Bureau issued an interpretive rule stating that the addition of a successor as an obligor on a mortgage loan does not trigger the ATR/QM Rule if the successor previously received

12 Page 12 an interest in the property securing the mortgage by operation of law, such as through inheritance or divorce. 11 Creditors may rely on the interpretive rule as a safe harbor under section 130(f) of the Truth in Lending Act ( TILA ). In the July 2014 interpretive rule, the Bureau said that it plans to incorporate this interpretation into the Regulation Z Commentary at a later date. We request that the Bureau also incorporate the interpretive rule into the Servicing Rules or the Commentary thereto. We believe that referencing the interpretive rule would help to increase servicer awareness of the Bureau s position on this issue. I. Recommendations. As we stated at the outset of this letter, ABA strongly believes that all borrowers should receive highquality mortgage servicing. We are supportive of the Bureau s efforts to refine and clarify the Servicing Rules; however, we strongly urge the Bureau not to adopt the proposed requirements regarding successors in interest. We also recommend that the Bureau consider the costs and risks that banks would incur relative to the limited number of successors likely to be impacted by the proposal and the actual benefits that they would receive. We are particularly concerned about the privacy and confidentiality risks for living obligors. For the foregoing reasons, ABA requests that the Bureau limit the successor in interest provisions to situations involving the death of an obligor. In the event that the Bureau elects to adopt the rule as proposed, we recommend that servicers be protected from RESPA liability as to non-obligor successors. II. Lender-Placed Insurance The existing Servicing Rules require servicers to provide an initial notice and a reminder notice before assessing a fee or a charge related to lender-placed insurance. These notices must include a statement that a borrower s hazard insurance has expired or is expiring, as applicable. The rules do not address what a notice must state if a borrower has insufficient coverage. This has been problematic because the rules also prohibit a servicer from including in the notices any information other than that expressly required by the Bureau; however, servicers may provide such an explanation on a separate piece of paper in the same transmittal as the lender-placed insurance notice. The Servicing Rules also currently prohibit servicers from including the mortgage loan account number on the notices. However, a servicer may provide the account number on a separate piece of paper in the same transmittal. The proposed amendments would remedy these issues by requiring that lender-placed insurance notices state that (1) the borrower s hazard insurance is expiring, has expired, or provides insufficient coverage, as applicable, and that (2) the servicer does not have evidence that the borrower has hazard FR (July 17, 2014).

13 Page 13 insurance coverage past the expiration date or evidence that the borrower has hazard insurance that provides sufficient coverage, as applicable. Servicers would also be permitted to include the borrower s mortgage loan account number in the lender-placed insurance notices. ABA and its insurance subsidiary, the American Bankers Insurance Association ( ABIA ) 12 appreciate that the Bureau is working to remedy the unintended consequences of the rules applicable to lender-placed insurance and we strongly support the proposal. III. Definition of Delinquency The Bureau has defined the term delinquency for some, but not all provisions of the Servicing Rules. For example, the 120 Day Rule prohibits a servicer from making the first notice or filing for foreclosure unless a borrower s mortgage loan obligation is more than 120 days delinquent. 13 However, the 120 Day Rule does not specify how banks should calculate whether a borrower is 120 days past due, particularly in rolling delinquency situations. 14 To address this uncertainty, the Bureau proposes to create a definition of delinquency that would apply to all provisions in Subpart C. Under the proposal, a borrower and a borrower s mortgage loan obligation would be delinquent beginning on the date a periodic payment sufficient to cover principal, interest, and escrow (if applicable) is due and unpaid. Importantly, the proposal would also mandate that if a servicer applies payments to the oldest outstanding periodic payment, a payment by a delinquent borrower would advance the date the borrower s delinquency began. 15 The preamble to the proposal states that the Bureau will monitor payment crediting practices to evaluate whether and to what extent servicers are choosing to foreclose on borrowers who are one or two payments behind, including whether such foreclosure practices raise consumer protection concerns that should be addressed through guidance or rulemaking. 12 The American Bankers Insurance Association is a subsidiary of the American Bankers Association and represents banks that are actively engaged in the business of insurance, principally as producers; insurance companies; and third party administrators that provide insurance products and services to banks C.F.R (f). 14 Rolling delinquencies occur when delinquent borrowers resume making payments on the loan without making up for past missed payments. In some cases, the borrower may start and stop making payments multiple times. Even though the borrower may resume making scheduled monthly payments, s/he never becomes fully current on the loan and is unresponsive to loss mitigation outreach efforts. As a result, rolling delinquencies involve borrowers who are continuously behind on their mortgage payments but never become more than 120 days delinquent (i.e., four missed payments). 15 The Bureau is not proposing that servicers be required to apply payments to the oldest outstanding periodic payment.

14 Page 14 A. Rolling Delinquencies. ABA members report that they generally calculate delinquency and apply payments in a manner that is consistent with the proposal. However, we are troubled that banks that choose to credit payments to the oldest outstanding payment would be precluded from ever foreclosing on a mortgage loan that is delinquent on a rolling basis. As we explained in our October 24, 2014 letter, it is not uncommon for some borrowers to be chronically delinquent without ever becoming 120 days past due. 16 Allowing rolling delinquencies to continue in perpetuity raises safety and soundness concerns, particularly for portfolio lenders. While banks strongly prefer to work with borrowers to resolve the delinquency or to modify the underlying mortgage loan, it is well documented that some borrowers simply are not responsive to outreach efforts. It is imperative that banks holding the credit risk for a loan have the ability to exercise some degree of business judgment in determining when it is appropriate to initiate foreclosure proceedings for mortgage loans that are delinquent on a rolling basis. Applying payments to the oldest outstanding periodic payment can be beneficial to consumers. However, establishing a bright line rule whereby banks applying this payment crediting methodology would be precluded from initiating foreclosure on a rolling delinquency would incentivize banks not to adopt this payment crediting approach. This would not benefit consumers, and we request that the Bureau provide banks the flexibility to adopt policies and procedures that establish when a bank will commence foreclosure in rolling delinquency situations. It is important that creditors be able to make a business decision as to when they will foreclose in these situations. B. Acceleration. In response to industry inquiries on how to treat rolling delinquencies, Bureau staff has informally suggested that a servicer could accelerate the mortgage loan if permitted under state law and the loan contract. Under this approach, a servicer could commence foreclosure after 120 days if the borrower does not pay the accelerated amount. ABA requests that the Bureau incorporate this unofficial, oral guidance into the Servicing Rule or its accompanying commentary. 16 ABA s August 2014 Rolling Delinquency Survey assessed the frequency with which rolling delinquencies occur and gathered information regarding how banks manage mortgage loans that are delinquent on a rolling basis. 27 percent of respondents reported that 20% - 40% of delinquent loans serviced for their own loan portfolios constitute rolling delinquencies. 79 percent of respondents said that less than 20 percent of delinquent loans serviced for investors constitute rolling delinquencies. 33 percent of respondents reported that 20% - 40% of rolling delinquencies are days past due.

15 Page 15 IV. Early Intervention Bankruptcy and FDCPA The Servicing Rules require servicers to make live contact with and provide written notices to delinquent borrowers (collectively, early intervention ). Currently, the rules provide a broad exemption from the live contact and written notice requirements when a borrower is in bankruptcy or has filed a cease communications notice under the Fair Debt Collection Practices Act ( the FDCPA ). The Bureau is proposing to significantly expand the live contact and written notice requirements in certain bankruptcy and FDCPA scenarios. ABA believes that the proposal is overly complicated and would require banks to expend significant resources to provide early intervention communications that would provide questionable benefit to a narrow subset of borrowers. In addition, the proposal would potentially conflict with state law and the interpretations of individual bankruptcy courts. For these reasons, we request that the Bureau not adopt the proposed amendments to the early intervention requirements in bankruptcy and FDCPA situations. A. Complexity and Cost-Benefit The proposed amendments to the early intervention requirements would add significant complexity to a regulatory construct that is already highly technical in nature. The proposal would have the practical effect of requiring that banks obtain and record information regarding the chapter of the bankruptcy code under which the borrower filed, classify the type of bankruptcy involved for regulatory compliance purposes, distinguish between the bankruptcy status of joint obligors, and track each bankruptcy court s local rules and orders for potential conflict with the Bureau s requirements in jurisdictions where the bank services mortgage loans. When the early intervention requirements conflict with other law, a bank would most likely need to document this fact and the rationale for its actions in order to defend against potential regulatory criticism and legal liability. We anticipate that banks would take similar steps to comply with the early intervention requirements in situations where a borrower issues a cease communications notice under the FDCPA. Practically speaking, the proposed amendments would require all bank servicers to incur significant costs to comply with complex regulatory requirements that would apply to a very limited universe of loans. Banks would need to develop new technological capabilities to facilitate compliance with the proposal. For example, we understand that some servicing platforms do not capture and track bankruptcy filings by chapter of the bankruptcy code, nor do they track the bankruptcy status of each obligor on the loan. In addition, some servicing systems are structured such that all servicing-related notices and other loan-related information are sent to a single address or such that all correspondence is sent to all obligors on the loan. As a result, significant reprogramming would be necessary to enable banks to comply with the proposed early intervention requirements in situations where an obligor in bankruptcy would not receive early intervention but a co-borrower who is not in bankruptcy must receive early intervention communications.

16 Page 16 While technology may provide some assistance in complying with the proposed rules, we are very concerned that the complex and fact-specific nature of the proposed early intervention amendments would significantly increase a bank s risk of non-compliance in bankruptcy and FDCPA situations. As proposed, the rules would have the practical effect of requiring that every bank have staff dedicated to handling loans subject to bankruptcy protections and who are skilled in applying the Bureau s early intervention requirements in these situations. This staff expertise would be required for every bank regardless of the number of borrowers at that institution who are going through bankruptcy. The proposed revisions are a good example of the continued layering of regulatory requirements, technological demands, and required staff expertise that are leading banks to reassess whether mortgage servicing continues to be consistent with the broader business strategy of their individual institutions. B. Bankruptcy Court Interpretations. The Bureau has concluded that requiring banks to send written notices to delinquent borrowers who have filed for bankruptcy is consistent with bankruptcy law. In reaching this conclusion, the Bureau reasoned that the written notice does not contain a demand for payment and therefore would not violate the Bankruptcy Code s automatic stay. 17 We question whether the Bureau has the authority to interpret whether its live contact and written notice requirements would violate the automatic stay. This interpretation is within the jurisdiction of individual bankruptcy courts, and we are concerned that the Bureau s proposal omits this fact. Even if the Bureau were to specify that banks would not be required to send a written notice if doing so would violate local bankruptcy rules or a court order, banks would still need to track the rules of each bankruptcy court, as well as court orders relating to a bank s borrowers, for potential conflict with the Bureau s requirements. If a bank were to determine not to send a written notice due to conflict with other law, it would most likely need to document this fact as well as the rationale for its decision in order to mitigate regulatory criticism. C. Written Notice/Availability of Loss Mitigation In addition to the complexity, tracking difficulties, and potential conflict with bankruptcy court interpretations, we question the practical value of providing written notices to borrowers in bankruptcy. The proposal would require that a bank send a written notice to a delinquent borrower in bankruptcy if the bank offers loss mitigation to financially troubled borrowers. The Bureau believes that borrowers who have filed for bankruptcy should have the opportunity to obtain information about available loss mitigation options. 17 The automatic stay requires that creditors immediately halt all collection efforts, lien enforcement, and judicial or extra-judicial actions against the borrower (11 U.S.C. 362).

17 Page 17 While it is a laudable objective to educate borrowers about loss mitigation, the practical value of providing such information to borrowers may be limited. Borrowers who have filed for bankruptcy are likely to have already received written early intervention notices and other outreach, such as telephone calls, prior to filing for bankruptcy. In addition, there is a reduced likelihood that a borrower in bankruptcy would meet a bank s credit and underwriting criteria necessary to obtain a loan modification. D. State Debt Collection Requirements Servicers would continue to be exempt from the live contact requirement in situations where a borrower sends a cease communication notice pursuant to section 805(c) of the FDCPA. However, the Bureau proposes that if a servicer offers loss mitigation, the servicer must send a delinquent borrower a modified written notice, even if the borrower has submitted a cease communication request. Importantly, a servicer could only rely on the FDCPA exemption if the servicer is subject to the FDCPA with respect to a particular borrower. Therefore, if the servicer is not acting as a debt collector for purposes of the FDCPA, the servicer must continue to comply with all of the early intervention requirements even if a servicer receives a cease communication notice from the borrower. ABA understands that some states and localities have adopted FDCPA-like debt collection laws containing strict prescriptions on how creditors may communicate with borrowers. Therefore, providing a written notice required by the Bureau may be a prohibited communication under state debt collection law. Even if the Bureau were to take the position that banks would not be required to send a written notice if doing so would violate state or local law, banks would have to track the rules of each jurisdiction for potential conflict with the Bureau s requirements. As with bankruptcy situations, if a bank were to determine not to contact a borrower as required in the early intervention rules due to conflict with other law, the bank would likely need to document this fact and the rationale for its decision in order to mitigate regulatory criticism. IV. Loss Mitigation In promulgating the Servicing Rules, the Bureau exercised its discretionary rulemaking authority to (1) issue various timing and procedural requirements governing loss mitigation for distressed borrowers; (2) establish certain restrictions on the referral of a mortgage loan to foreclosure; and (3) provide new borrower rights. These loss mitigation rules are very technical, and unsurprisingly, servicers have identified many questions over the past two years with respect to this aspect of the Servicing Rule. We appreciate the Bureau s effort to provide certainty regarding the interpretation and application of the loss mitigation requirements.

18 Page 18 A. Collection of Documents and Information. The Servicing Rules require that servicers exercise reasonable diligence in obtaining documents and information necessary to complete a borrower s loss mitigation application. The Bureau is proposing to clarify that a servicer may stop collecting documents and information pertaining to a particular loss mitigation option after receiving information confirming that the borrower is ineligible for that loss mitigation alternative. The proposed commentary would further state that a servicer may not stop collecting documents and information for any loss mitigation option based solely upon the borrower s stated preference for a particular loss mitigation option. Shortly after the Bureau finalized the Servicing Rules, a common industry question was whether the requirement to evaluate a borrower for all loss mitigation options upon receipt of a complete loss mitigation application meant that a servicer must evaluate a borrower for all loss mitigation options if it is clear that the borrower is interested only in a non-home retention option. In response to this question, Bureau staff indicated that an owner or investor could incorporate into the initial steps of its waterfall an evaluation of whether the borrower desires to remain in the home. Under this approach, if the borrower is not interested in home retention options, the waterfall could permit the servicer to proceed directly to the evaluation of a short-sale or deed-in-lieu of foreclosure. In the denial letter, the servicer could explain that it is not offering a loan modification because the borrower indicated that s/he does not want to remain in the home. 18 We are concerned that the proposed commentary could be interpreted to require servicers to continue collecting documents and information for loss mitigation options that the borrower has specifically indicated that s/he does not want. Such a requirement could frustrate the borrower and negatively impact important communication between the two parties. Therefore, we request that the Bureau revise the proposed amendments to clarify that servicers may still include in their waterfall a determination of whether the borrower wishes to remain in the home. B. Reasonable Date to Submit Missing Information Under the current Servicing Rules, when a borrower submits an incomplete loss mitigation application at least 45 days before a scheduled foreclosure sale, the servicer must select a reasonable date by which the borrower should return documents and information to complete the application. The Bureau instructs servicers to consider four milestones: The date that information will be considered stale or invalid; 18 This approach was discussed at various industry conferences, including the Bureau s October 16, 2013 Servicing Teleconference.