Regulation X: a New Direction for the Regulation of Mortgage Servicers

• Citation: Vol. 63 No. 1
• Publication year: 2013

Regulation X: A New Direction for the Regulation of Mortgage Servicers

Margaret R.T. Dewar

REGULATION X: A NEW DIRECTION FOR THE REGULATION OF MORTGAGE SERVICERS

ABSTRACT

Mortgage servicers are responsible for handling the day-to-day processing of mortgage loans. These responsibilities include processing borrower payments, transferring funds to trustees and investors, and answering borrower inquiries. Mortgage servicers are also responsible for handling delinquent loans when a borrower is late making payments. If a borrower does not cure the delinquency, mortgage servicers are responsible for choosing whether to pursue a foreclosure sale or to implement a loss mitigation option.

Foreclosures are detrimental to borrowers and the surrounding community. Forcing a borrower to leave her home creates a negative feedback loop, lowering property values in the surrounding area. Loss mitigation options are pursued as an alternative to avoid the harmful effects of foreclosures.

The financial crisis of 2007-2008 brought to light mortgage servicer behavior that pushed through an unnecessary number of foreclosures, even where borrowers had finalized loss mitigation negotiations with mortgage servicers. Reports attribute these foreclosures to miscommunication between servicers and borrowers and poor internal communication within servicers. The unprecedented number of foreclosures exacerbated the severity of the financial crisis.

The Consumer Financial Protection Bureau (the Bureau), created by the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, has finalized new regulations aimed at stopping the servicing behavior that contributed to such unnecessary foreclosures. The new regulations are amendments to Regulation X, the implementing regulation of the Real Estate Settlement Procedures Act. The amendments, proposed under the Bureau's broad rulemaking power, require servicers to make early contact with delinquent borrowers, implement continuity-of-contact procedures, and establish loss mitigation application review procedures. This Comment explores the Bureau's enforcement powers and the legality of the amendments as permissible expressions of the Bureau's rulemaking authority. This Comment concludes that the broad deference to federal agencies under step

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two of the Chevron doctrine includes the amendments within the scope of the Bureau's rulemaking power.

This Comment also addresses the immediate and potential effects of the amendments. The amendments' immediate effects are uniformity of industry standards and data creation. The Bureau is equipped with stronger supervisory and enforcement powers than any previous federal agency in this field. The amendments create an observable record of servicer behavior that will allow the Bureau to efficiently enforce federal consumer protection law, bringing greater accountability to the mortgage servicing industry. Despite this strong immediate effect, the amendments leave room for servicer discretion and manipulation, which would leave borrowers exposed to the prospect of unnecessary foreclosures.

INTRODUCTION.............................................................................................177

I. MORTGAGE SERVICERS: DECIDING TO IMPLEMENT A LOSS MITIGATION OPTION..............................................................................................180

A. Mortgage Servicers' Obligations and Responsibilities............ 181
B. Comparing Loss Mitigation Options and Foreclosure............. 184
C. Choosing Between Loss Mitigation Options and Foreclosure . 187
D. The Financial Crisis of 2007-2008.......................................... 189

II. THE REGULATION X AMENDMENTS..................................................191

A. The Consumer Financial Protection Bureau ............................ 191

1. Creating the Bureau ........................................................... 191
2. The Bureau's Powers ......................................................... 193

B. Amendments to Regulation X.................................................... 194

1. Recordkeeping Requirements ............................................. 196
2. Facilitating and Recording Servicer-Borrower Communication .................................................................. 196
3. Loss Mitigation Procedures ............................................... 199

III. AGENCY RULEMAKING UNDER THE CHEVRON DOCTRINE................201

A. Substantive Validity.................................................................. 203
B. Procedural validity .................................................................. 206

IV. EFFECTIVENESS OF AMENDMENTS....................................................210

A. Immediate Effects..................................................................... 211

1. Industry Unity..................................................................... 211
2. Data Creation ..................................................................... 212

B. Potential Gaps for Further Regulation .................................... 214

1. No Requirements for Choosing and Evaluating Loss Mitigation Options ............................................................................... 214

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2. No Legal Safe Haven for Servicer Decisions ..................... 217
3. Dual-Track and Preemption Concerns............................... 217

CONCLUSION.................................................................................................219

INTRODUCTION

Mortgage servicers are responsible for the day-to-day processing of mortgage loans. This includes processing payments, communicating with borrowers and investors, and handling escrow accounts.¹ Additionally, when a borrower defaults on her loan, servicers are responsible for proceeding with a foreclosure sale, which can be detrimental to the borrower and the surrounding community, or avoiding foreclosure by implementing various loss mitigation options.² Because the residential mortgage market is the single largest market for consumer financial products and services in the United States, servicers are charged with immense responsibility.³

Poor lending practices during the 1990s and early 2000s led to a wave of borrower delinquencies, causing the financial crisis of 2007-2008.⁴ Mortgage servicers, who faced very little government oversight and regulation, were unprepared to handle the wave of defaults. Borrowers, who in previous years might have had the opportunity to pursue a loss mitigation option, were pushed through hasty foreclosures.⁵ The increase in foreclosures increased the harm to borrowers and communities, creating a negative feedback loop.⁶

As one response to the financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).⁷ Title X of the Dodd-Frank Act created a new agency, the Consumer Financial

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Protection Bureau (the Bureau), charged exclusively with regulating the services and products in the consumer financial market.⁸ The Bureau's goals are to protect borrowers by creating transparency and accountability.⁹ Congress granted the Bureau broad rulemaking and enforcement powers to accomplish these goals.¹⁰

The Bureau used its rulemaking powers to promulgate a new rule with stricter requirements for mortgage servicers. The new rule amends nine areas of Regulation X, the implementing regulation of the Real Estate Settlement Procedures Act (RESPA).¹¹ Four of the amendments are promulgated under the Bureau's broad rulemaking power.¹² The first amendment requires servicers to implement general recordkeeping procedures.¹³ The second requires early contact with delinquent borrowers.¹⁴ The third requires servicers to maintain a point of contact with borrowers,¹⁵ and the fourth requires servicers to implement procedures for the review of loss mitigation applications.¹⁶ These regulations are generally aimed at monitoring servicer behavior and preventing borrowers from undergoing unnecessary foreclosures.¹⁷

The regulations trigger two questions that prompt further inquiry. The answers to these questions are addressed in this Comment. The first question is whether the Bureau has properly interpreted its grant of broad rulemaking power from Congress, which gave the Bureau the authority to issue any rules necessary to achieve the Dodd-Frank Act's consumer protection goals. An

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agency's interpretation of a federal statute is evaluated under the Chevron doctrine.¹⁸ This Comment advocates that under the second step of Chevron, the Bureau's amendments to Regulation X are proper interpretations of its rulemaking authority granted by the Dodd-Frank Act.

The second question is what the amendments achieve. The amendments' immediate effects are the creation of a uniform set of mortgage servicing standards and a large data record that is accessible to the Bureau and other federal agencies. The Bureau will be able to track servicer behavior and ensure compliance with federal laws through these data. If a servicer fails to comply with federal consumer protection laws, the Bureau can initiate a strong enforcement action.¹⁹

Yet despite the amendments' strong oversight effect, there are remaining regulatory gaps over mortgage servicers. Under the amendments, servicers are still able to exercise their discretion in loss mitigation decisions that will block borrower access to affordable loan modifications and keep borrowers exposed to unnecessary foreclosures.²⁰ This Comment contends that further regulation is required to fill in these gaps.

Although further regulation is needed, this Comment asserts that the Regulation X amendments are a move in the right direction to provide more transparency and accountability for consumers in mortgage servicing. Part I provides background on mortgage servicers' duties and the requirements to which they are subject, including pooling and servicing agreements and RESPA. It...