When the Consumer Financial Protection Bureau (CFPB) released its mortgage servicing rule in January, many in the industry heaved a collective sigh of relief that the small servicer exemption in the rule appeared to include the majority of credit unions.
The exemption applies to any credit union servicing 5,000 or fewer loans for which it’s the creditor or the assignee. However, as is so often the case, the devil is in the details.
Perspective gained from hours of reading the fine print of the servicing rule suggests that even credit unions that qualify for the exemption have several reasons to take a second look at the rule:
1. Even if a credit union qualifies for the small servicer exemption, it may retain liability for compliance with the rule if it is using a sub-servicer that does not qualify for the exemption.
Remember, the mortgage servicing rule is far-reaching and creates new expectations for the level of responsiveness and service that is required to be provided to delinquent borrowers. Few sub-servicers will be able to respond to all aspects of the changes without making significant alterations to policies, processes, and staffing.
If a credit union use a sub-servicer, NCUA’s regulations require the institution to conduct sufficient due diligence to determine that the third-party servicer is compliant with the new servicing rules.
The end result: Those using a sub-servicer will have to learn all aspects of the rule to make sure their sub-servicer has made adequate changes to remain compliant.
2. The exemption applies only to some aspects of the servicing rule. Significant portions apply to all mortgage servicers.
All credit unions servicing mortgages must adopt new standards for error resolution and information requests, comply with new restrictions on forced-placed hazard insurance, credit payments promptly, comply with new restrictions on starting foreclosure procedures, and provide new interest-rate change notices with adjustable-rate mortgages.
While the small servicer exemption relieves some of the direct regulatory burden on some credit unions, it does not provide a free pass to ignore the entire rule or fail to make changes to servicing programs.
3. Beware the inevitable regulatory creep that may require small servicers to adopt the entire mortgage servicing rule despite the exemption. Credit union regulators at the state and federal level will still examine the servicing policies and procedures for all credit unions servicing mortgages regardless of whether they qualify as small servicers.
While CFPB has exempted small servicers from requirements to create servicing policies and procedures and conduct early interventions with delinquent borrowers, credit unions of any size will still have to engage in these activities to provide quality mortgage servicing.
CFPB’s mortgage servicing rule now stands as the model standard for those activities. It will be hard for credit union regulators to resist comparing small servicer policies to those mandated by CFPB for all other servicers.
Even if small servicers do not have to follow the new regulations to the letter, each credit union will likely have to explain to the regulator why its policies and procedures differ from those mandated by CFPB.
NCUA and state regulators may end up requiring de facto compliance with all of the servicing rule provisions as the means for small servicers to demonstrate the safety and soundness of their mortgage servicing portfolios.
Credit unions will be well served to temper their initial optimism regarding the small servicer exemption and instead, start learning the rule.