By Craig Nazzaro, Baker Donelson
As compliance costs continue to rise for mortgage servicing so does the popularity of private label servicing. As a product, private label servicing is not complicated. A subservicer will service your institutions portfolio with your bank's branding throughout the entire loan life cycle, with the borrower unaware of the identity of the subservicer. This ideally affords the originating lender the benefit of customer retention through consistent brand recognition while at the same time providing the institution a lowered cost of compliance, as the act of servicing, and therefore the compliance cost associated with said servicing, is shifted to your private label servicer.
Private label arrangements range from simple co-branding of billing statements including your institution name and logo all the way through private borrower facing loan level websites, ACH drafts, credit reporting, collection activity all done in your institutions name by said sub servicer. At the most comprehensive offerings of private label servicing the borrower would never know the subservicer existed. The wide spectrum of how this product may be offered begs for regulatory guidance.
Earlier this year the US Government Accountability Office (GAO) issued a report to "Congressional Requesters" Elizabeth Warren and Elijah E Cummings entitled the “Nonbank Mortgage Servicers "Existing Regulatory Oversight Could Be Strengthened"“. The GAO emphasized the fact that the share of mortgages serviced by nonbanks increased from 6.8 percent in 2012 to 24.2 percent in 2015. They found that it is important for CFPB to take steps to identify non-bank entities and collect more comprehensive data to further ensure that all nonbank servicers comply with federal laws governing mortgage lending and consumer protection."
The increase in popularity of private label servicing mixed with the rise of market share held by nonbank servicers leads me to believe that the practice is ripe to be reviewed by the CFPB under their "risk based" approach to supervision and enforcement. In anticipation of this the CFPB should issue guidance on the practice. Ideally they would formally approve the practice and provide a set of best practices to follow when performing private label servicing.
Nowhere in any official CFPB guidance or regulation does the Bureau bless the practice of private label servicing. The practice relies on the argument that a subservicer providing private label servicing is acting as a "service provider" or vendor of the servicer who retains the Mortgage Servicing Rights (MSRs). As a "service provider" or "vendor" they are not acting as a traditional sub servicer. The argument, while formally untested, is a valid one. There are service providers who perform activities for servicers every day that do the work in the name of servicer. However the reverse argument is also valid. There is an argument to be made that outsourcing the entire servicing business escalates you from a service provider to a subservicer.
Reg X Section 1024.31 defines Master Servicer as "the owner of the right to perform servicing. A master servicer may perform the servicing itself or do so through a subservicer." The regulation goes on to define "subservicer" as "a servicer that does not own the right to perform servicing, but that performs servicing on behalf of the master servicer". "Servicer provider" is generally defined in section 1002(26) of the Dodd-Frank Act as "Any person that provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service".
With this uncertainty comes a plethora of regulatory questions, including:
- Are you required to issue a Notice of Transfer of servicing rights when loan boards with a private label servicer?
- Can the private label servicer furnishing credit reporting in the name of the holder of the MSRs without violating the Fair Credit Reporting Act (FCRA).
- Who's name will appear on Debt validation notices or mini Miranda warnings when acting a collector on defaulted loans. Will this give rise to a claim under the Fair Debt Collections and Practices Act (FDCPA)
- If a borrower enters a branch or calls an institution directly for support with loss mitigation or to make a payment, what will employees tell them about their mortgage, will the institutions systems of record even identify them as a mortgage customer, if not and they are told they are not a borrower, does this give rise to a UDAAP violation?
- Who issues a privacy notice under the GLBA, and what name is the notice placed in.
As the market share of Non-Bank Servicers continues to grow along with the popularity of private label servicing, so will the CFPB supervision and enforcement focus on these issues as well. As an industry we should demand more guidance before we wind up in another situation similar to RESPA Section 8 compliance, where good actors in the space believe they are conducting business in compliance with all regulations only to find out through enforcement actions that the CFPB does not agree. It's particularly a concern here, because the Bureau would not have to redefine their view of any existing regulation as the activities of private label servicers have not directly been addressed by any current federal regulation or regulator.
It's also important to note that the CFPB is very clear about vendor liability, they have issued guidance on the topic in CFPB Bulletin 2012-03; if your institution is currently utilizing a subservicer for private label servicing this does not absolve your institution of the compliance and/or regulatory risk. Prior to engagement your institution should have a complete audit of policies, procedures and controls your private label servicer has in place including loan boarding, payment application, servicing transfer, loss mitigation, escrow analysis, complaint handling and escalation procedures , LPI processes, collection and so on. These full 360 reviews should also be completed and updated on a regular and ongoing basis. These oversight procedures and controls will limit regulatory exposure but not eradicate it. If you are a subservicer offering private label servicing you should be asking assessing if you have sufficient controls in place to best guard against any regulatory inquiries. You should also take the time to re-review the regulatory risks associated with the details of your private label offerings.
Eventually the mortgage industry will see guidance and regulations which address the issues raised in private label servicing at the state level and/or the federal level, until then the industry should be very attentive to the risks associated with the practice.