Clayton has performed more than 500,000 loan reviews of servicers and sub-servicers over the years. One of the most widespread issues and/or fails in the testing environment is the handling and posting of payments during bankruptcy. Managing bankruptcies is a complicated process with multiple nuances, and many servicing systems are not equipped to meet the specific compliance requirements surrounding pre-and post-petition payment application and treatment, both inside and outside of the bankruptcy plan. So, by default, servicers and sub-servicers have created manual workflow workarounds, which can lead to a multitude of errors.
The amended Consumer Financial Protection Bureau (CFPB) Mortgage Servicing Rules regarding Regulation Z, which take effect April 2018, will likely spur more issues with bankruptcy billing statements, which under the new rules will now be required for all accounts in bankruptcy. Most servicers will require new fields within their tracking systems to produce accurate billing statements and additional monitoring and oversight will be required. This is a significant change for most servicers and will require a tremendous effort for compliance.
In addition to bankruptcy challenges, servicers face other issues. For example:
- Payment application: Issues arise when payments are applied after the required timeframe (later than six business days after receipt). Payment application issues also often arise following court-filed payment change notices.
- Past billing statements: Issues include the inability to reconcile sums reflected in the servicer’s system of record with contract terms or with amounts received. In addition, foreclosure information (where applicable) is often missing from the billing statement in instances where the servicer has commenced legal action.
- IRS Form 1098 & 1099-C: Interest calculations are often not correct when payments are reversed or in “unapplied” status during the prior cycle. Also, the amount of debt discharged can be incorrect—especially when there was a bankruptcy “cram down.”
- Escrow Statements: Annual escrow statements sometimes reflect the incorrect amount and payment, especially when these loans are in default.
- Servicing Transfers: As servicing transfers have increased, so have errors. This is especially true when loans are transferred to servicers who use different systems where some of the required data points are not captured.
These are just a few of the many challenges that have plagued mortgage servicers. These challenges are not insurmountable, but should be taken into consideration when internally reviewing or externally hiring a trusted compliance/risk management partner. With ever-evolving CFPB rules and guidance, servicers and sub-servicers should understand the degree to which their processes are in compliance and should to be prepared with their internal processes and systems to face these challenges head-on.