The mortgage servicing enforcement announced by the CFPB is part of a broader campaign to combat junk fees in other areas subject to CFPB oversight. From February to August 2023, the CFPB’s examinations resulted in bank refunds of $140 million to consumers for bank account deposit, auto loan servicing, and international money transfer fees that the CFPB determined to be unlawful. On March 5, 2024, the CFPB also announced a proposed rule that the CFPB claims will reduce credit card late fees by more than $10 billion every year and another rule that will reduce overdraft fees by $3.5 billion every year. The CFPB is now increasing its presence in the mortgage servicing area.

Most recently, CFPB examiners found that some mortgage servicers engaged in unfair and deceptive acts, practices and regulatory violations while processing payments, issuing monthly statements, and making escrow disbursements. Some of the CFPB’s key findings included: (1) improperly charging and obscuring fees; (2) holding homeowners responsible for fees incurred during the COVID-19 pandemic; (3) missing deadlines to make property tax and home insurance payments; and (4) failing to properly evaluate homeowners for available repayment options.

Improper charges and fees

In its Supervisory Highlights, the CFPB highlighted several instances of improper charges and fees imposed on borrowers. The examiners found that the imposition of such fees constituted unfair, deceptive, and abusive acts or practice. These fees included property inspection fees on Fannie Mae loans when such inspections and fees were prohibited by applicable guidelines. In response to the CFPB’s findings, servicers corrected automation flaws that caused some of the improper charges and implemented safeguards to address others. Additionally, the servicers were ordered to identify and remediate borrowers who were charged improper fees in violation of investor guidelines.

The CFPB also found that servicers engaged in unfair acts by assessing unauthorized late fees that either exceeded the amount permitted by the loan agreement or were charged even though consumers entered loss mitigation agreements that should have prevented such fees. In response to these findings, servicers were ordered to refund the improper fees and improve internal processes and procedures.

Additionally, the CFPB found that servicers failed to provide adequate descriptions of fees in periodic statements. n particular, the CFPB discovered that servicers failed to provide a “brief description of the transaction” as mandated by Regulation Z. In response to the CFPB’s findings, servicers implemented changes to provide more specific descriptions of each service fee.

Fees incurred during the COVID-19 pandemic

The CFPB examiners found that mortgage servicers offering streamlined COVID-19 loan modifications to consumers violated Regulation X by failing to waive existing late charges, penalties, stop payment fees, and similar charges incurred after the pandemic and after borrowers accepted loan modifications. In response to the CFPB’s findings, servicers have since made efforts to remediate consumers for these errors.

Timely escrow disbursements

The CFPB found that mortgage servicers made untimely disbursements from escrow accounts. The CFPB discovered that, even though servicers attempted to make timely escrow payments, the escrow disbursements often did not reach the payees in time, and servicers did not resend the payments until months later. Because the second payments were late, those payments were considered untimely and, therefore, in violation of Regulation X. As a result, servicers were directed to adhere to Regulation X and remediate any borrowers affected by untimely escrow disbursements.

Loss mitigation violations

The CFPB found numerous regulatory violations dealing with loss mitigation efforts. These included mortgage servicers failing to make good faith efforts to establish live contact with delinquent borrowers in violation of Regulation X or otherwise sending improper notices to borrowers regarding available loss mitigation options (e.g., sending premature notices to borrowers regarding approval for streamlined loss mitigation options where the servicer had not yet determined eligibility, and ultimately denying those streamlined options for certain borrowers, or sending notices regarding missed payments where borrowers were current on their payments, in a trial modification plan, or had an inactive loan). To remedy these erroneous notices, servicers reviewed affected borrowers by considering them for appropriate loss mitigation options and implementing additional safeguards to ensure the accuracy of notices.

Lastly, the CFPB found that mortgage servicers violated Regulation X by sending deficient acknowledgment notices to borrowers. Specifically, these notices failed to stipulate whether the borrowers’ applications were complete or incomplete. The CFPB further discovered that servicers did not follow investor guidelines for evaluating applications by automatically denying certain consumers a payment deferral option. As a result, mortgage servicers updated policies and procedures, refunded or otherwise waived late charges, and corrected negative credit reporting for impacted consumers.

Next steps for mortgage servicers

The CFPB is likely to continue its efforts to combat junk fees and now has mortgage servicers in its sight. Mortgage servicers and lenders should be cognizant of the CFPB’s most recent Supervisory Highlights to ensure compliance with regulations and investor guidelines, and to ensure accuracy with respect to charges and fees on accounts and routine communications with borrowers and consumers. In short, the CFPB’s latest release foreshadows stricter enforcement of existing regulations applicable to mortgage servicers.

In response to the CFPB’s findings, many mortgage servicers have taken extensive corrective action, including changes to policies and procedures, as well as remediating and refunding affected borrowers. However, to avoid future regulatory issues and costs, servicers should be diligent and take proactive steps to ensure compliance with the CFPB’s regulatory framework by continuing to: (1) include more detailed descriptions of fees in notices to borrowers; (2) improve internal mechanisms to avoid charging junk fees; (3) ensure that charges on accounts comply with applicable investor guidelines; and (4) disburse escrow payments promptly.

Client Alert 2024-108