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48 | Th e M Rep o RT O r i g i nat i O n S e r v i c i n g a na ly t i c S S e c O n da r y m a r k e t SERVICING local edition morningstar SvP talks cFPB Servicing requirements RichaRd Koch visits "MoRtgage MaRKets today" to Review seRvicing changes. ILLINOIS // "Under the new CFPB [Consumer Financial Protection Bureau] rules, ser- vicers will have to provide very detailed and accurate information to borrowers about each aspect of their loans and/or any foreclo- sure procedures that may occur," according to Richard Koch, SVP at Morningstar Credit Ratings. Koch discussed his assessment of the new rules' impacts in a recent conversation with Louis Amaya, co-founder of iServe Companies, on Mortgage Markets Today, a Five Star Radio presenta- tion. "There will be a very strict interpretation of the guidelines with penalties to servicers if they fail to adhere to the new require- ments," Koch said. He explained that the prominent rule changes will impact nine mortgage servic- ing areas: • Periodic billing statements— detailed breakdown of the amounts that make up pay- ments • Adjustable-rate mortgage (ARM) interest rate change notices • Prompt crediting of payments and payoff payments • Force-placed insurance • Error resolution and informa- tion requests • Information management poli- cies and procedures • Early intervention with delin- quent borrowers • Continuity of contact with delinquent borrowers • Loss mitigation procedures Though regulators are expected to be stringent when it comes to enforcing the new servic- ing rules, Koch says there will be some exemptions for small servicers—those that service 5,000 or fewer mortgage loans. To qualify, these must be loans that the servicer or an affiliate originated or owns. This would exempt them from several rules, including sending periodic state- ments, but not from sending interest rate adjustment notices, timely crediting of payments, and resolution of errors within certain time frames. "In the past, there have been numerous litigated cases where proof of claims and payment statements presented to the court were not accurate," Koch said. "Some of the new rules were cre- ated to correct that." One prominent area of dispute in the past has been the issue of forced-placed insurance. If a borrower has not obtained insurance for the property, after a certain time period, the servicer can take out insurance on the property and charge the borrower for the premiums. "Force-placed insurance is often much more expensive than borrowers can get on their own," Koch explained. "CFPB rules require that the servicer must have a reasonable basis to believe a borrower has failed to maintain hazard insurance before actually being able to charge that person for the insurance, and this must be done within certain timelines." Other regulations dictate time- lines and standards for interact- ing with delinquent homeowners including early intervention, establishment of a single point of contact, easy access to records, and guidelines to efficiently man- age the loss mitigation process. The benefit to servicers is that these new rules create consis- tency in a lot of different areas of loan servicing. "Because this is an industry that really has not been highly regulated in the past, there is a lot of work for them to do to come up to standards in terms of policies and procedures, compliance, and technology," Koch said. "The new rules clear- ly let servicers know what they will be accountable for in the future regarding CFPB standards. The rules also establish clear expectations so that borrowers will know what to expect from their servicers." To prepare for all these chang- es, a lot of servicing companies have spent the better part of the last 12 to 18 months getting ready for the changeover. Koch says the downside of all this is the added expense for services that must be performed within the same profit margin as before the rules went into effect. "Ultimately, I think the cost of compliance will encourage or necessitate some servicers to exit the market," Koch said. "However, others with a long track record of compliance ex- pertise may be able to grow their businesses by providing servicing for other companies such as small lenders or credit unions unable to handle their own servicing." Koch believes the new regula- tions will provide opportunity for some but hardships for others because of the increased burden of time and expense necessary for compliance. Flagstar Sells $40.7B in Servicing rights the coMpany jettisons soMe of its MsRs to a Real estate investMent tRust. TEXAS // The holding company for Flagstar Bank announced the bank unloaded a large portion of its mortgage servicing rights (MSRs) to a real estate invest- ment trust (REIT) in a $500 million deal. Flagstar Bancorp, Inc., an- nounced a deal with Matrix Financial Services Corporation, a subsidiary of Two Harbors, an REIT. According to Flagstar's There will be a very strict interpretation of the guidelines with penalties to servicers if they fail to adhere to the new requirements