November 2016 Legal Briefs

• More on the OK Garnishment Fee
• Next up, the MLA inspection
• Mortgage servicing rules update

More on the OK Garnishment Fee

By Pauli D. Loeffler

New forms

Last month, I indicated I was working with the Oklahoma Administrative Office of the Courts (the “AOC”) to alert creditors/creditors’ attorneys to the requirement of remitting the $25 garnishment fee with the summons. The Oklahoma statutes require that garnishment forms be promulgated by the AOC as the forms required to be used by the creditor/creditors attorney, the garnishee and the judgment debtor. In order to facilitate notice of the requirement that the $25 fee must be remitted with the general garnishment summons when the garnishee is a federally insured financial institution, the forms have been revised!

The revised Prejudgment and Postjudgment General Garnishment Summons forms contain a new statement located directly below the Creditor Name, Attorney Name section:

Pursuant to 12 O.S. § 1190 a judgment creditor must remit a Twenty-five Dollar ($25.00) fee for costs to any federally insured depository institution garnishee. Fee must be delivered with the garnishment summons.

The revised forms are available online to download from this webpage: http://www.oscn.net/static/forms/aoc_forms/garnishment.asp

Expected issues and solutions

The majority of attorneys keep templates of the forms on their computers. With the 2011 revision, there were a lot of creditors and creditors’ attorneys that were oblivious to the federal rule. Some attorneys still haven’t updated their forms more than five years later based on examples the OBA Compliance Team has received from OBA members.

The majority of garnishments filed by pro se creditors (creditors representing themselves rather than through an attorney) also used the old forms for several months after the 2011 revisions. Part of the problem was that not all Court Clerks were aware of the changes, and some clerks were frugal. Most clerks maintain packets of garnishment forms used mostly by pro se creditors. Either to save money, time and labor,  or to avoid killing trees, some clerks didn’t print the new forms until they ran out of the old ones, and court clerks appear to be a primary forms source for pro se creditors.

There is nothing to prohibit filing the outdated form. Clerks will file it if it is properly captioned, and the form is effective even if outdated. The clerk also is under no duty to ensure a check accompanies the summons or even to say anything to the filer about the requirement to remit the fee.

Unlike the revisions to the forms in 2011, I know most collection attorneys are aware of the requirement to remit the $25 check. I anticipate the majority of collection firm attorneys WILL remit the check with the summons.

Even so, for the first several months, banks can expect a number of garnishments will be served without remitting the $25 fee. As stated in the prior article, the bank is not required to process the garnishment when the fee isn’t remitted. The bank could institute a procedure to call the attorney or creditor, tell her about the statutory change and that the bank will not process the garnishment unless a check is hand-delivered (or the fee is paid by wire) by a specific, uniform time on the day the summons is served. While the bank may be tempted to allow attorneys it knows and trusts a longer period, I do not recommend allowing exceptions. I would also suggest following this same procedure if told that the check must still be at the Court Clerk’s, lost in transit or whatever. A stop payment can be placed on the missing check (other than a cashier’s check which is NOT required by the statute). Even if it was a cashier’s check, paying $25 now and waiting 90 days to get it reissued is not a huge hardship. Additionally, if the creditor/attorney pays the $25 fee and is provided the date, number and name and routing number of the bank issuing the cashier’s check, the bank having received the fee would act in bad faith if it presented the cashier’s check for payment.

Since there is a minimal risk the check remitted may be returned unpaid, I recommend the bank wait until the check has paid before filing its Answer and remitting any funds. The bank has ten business days after service of the summons, which should be more than sufficient time for the check to be paid or returned. If it’s returned, I suggest calling the attorney or creditor, and giving the same terms as when no check is remitted with the summons.

Next up, the MLA inspection

By Andy Zavoina

In July 2015 the Department of Defense (DoD) published the final rules amending the Military Lending Act (MLA) regulations. That was followed in August 2016 by the interpretive rule – the guidance that answered many questions, raised others, and left us scratching our heads about questions still on the table. Regardless of the open issued, the rule became effective on October 3. Does that mean you have to be 100 percent compliant with the new rules? Don’t bother to answer. A better question is, how would you know?

The CFPB issued its updated MLA exam procedures on September 30. The Federal Reserve released its on October 3, the OCC on October 7, and the FDIC on October 18 (in FIL-65-2016). . I recommend you save the version issued by your prudential regulator. In this article, we’ll explore briefly how you can learn from these documents and some common questions we have been hearing pertaining to the MLA rules. If there is some part of the MLA rules that you missed, you don’t know your practice may be questionable. That is one reason networking with peers and immersing yourself in good resource materials is important. If there is a problem, it is much better to fix it now while you have relatively few accounts in this group, rather than months from now when the risks and liability will be much greater.

Typically, exam procedures begin with introductory information pertaining to the rules to be audited. The FDIC’s procedures, for example, start with the background of the MLA and the regulation. It contains key dates so that pre-new MLA loans are not confused or examined with these newly issued workpapers, because the old and new rules are very different and the new regulation applies only to those loans closed (not applied for) on or after October 3. You must use the older exam workpapers on loans closed before October 3. This background helps explain the history of the rules and its spirit and intent which are helpful when having to make some operational decisions on your own processes to follow the MLA. There is also valuable information you can use from this and other sections of the exam procedures to create your own training documents for lenders and loan staff, as well as management and the board. After the background, the definitions are explained, along with the types of fees included in the Military Annual Percentage Rate (MAPR) calculation, how to compute the MAPR for open and closed end credit, how to identify covered borrowers, disclosure rules and more.

After the detailed introductory information, exam objectives are defined. You need to know what your examiners want to get from their examination of your bank, and what you want to learn from an internal exam. Each has a decision tree diagram that lending staff can use to determine the applicability of the MLA rules to any loan request. Using the exceptions to the MLA rules now in effect helps staff understand how many more accounts the new rules will impact.

The examination questions then go into your compliance management function. This includes what your bank is doing and how it is doing it. This helps reveal any systemic problems that can be caused by a poor understanding of the regulatory requirements. This is a very important area right now as your compliance system influences your policy and procedures. It should be reviewed immediately in an effort to know if your change management procedures were effective.

As you review the workpapers you’ll find questions that help verify your understanding and execution of requirements for MAPR calculations and disclosures, as well as disclosures that must be made to applicable loans. While you are not disclosing a numerical MAPR, you must know what it is and you must be able to verify it just as you do APRs on these and other loans subject to Reg Z.

Finally, there are the actual checklist-type workpapers. I would recommend reviewing these and customizing them to your needs. Add to, do not delete from these questions. You do not want to delete an item on the chance the bank will offer a new product or service later that the removed question will apply to. Just mark “NA” next to it and when your examiners review your work, they’ll know you considered the question. If you do want to customize these questionnaires, I do recommend reviewing the other agencies’ procedures as well. You may find an easier to edit format of the same information that saves you time.

Common MLA Questions:

1. If we use the credit bureau feature to determine who a covered borrower is, must we also look at the MLA database?

– No. The source used by credit bureaus is the MLA database. To acquire a safe harbor, lenders need to verify one source or the other. Checking both would be a duplication of effort and expense and serve no purpose.

2. When we check on a covered borrower, if they are not covered, is there any reason to retain that verification?

– Absolutely yes. It is your evidence as to why disclosures were not made and the MAPR was not calculated. It is your justification for ignoring MLA requirements.

3. Is the waiver of a jury trial an allowed clause in your contracts?

– Some bankers have discussed this with counsel and been told it is an acceptable clause; others have been told it would be prohibited. If you have questions about your contracts, discuss them first with the forms vendor and then with bank counsel who is well versed in state and federal laws. The DoD has not said if or when it will provide additional guidance on MLA compliance.

4. When a vehicle is purchased and is exempt, what is allowed to be financed with it?

– The DoD has not opined on this question and opinions vary. It is logical to me that tax, title and license are part and parcel of the purchase. They apply to a cash or loan acquisition and are paid to government entities. It’s less clear that things like GAP insurance or the satisfaction of debt on a trade-in vehicle when negative equity exists won’t cause a problem. What is very clear is that additional money loaned directly to the borrower would remove the purchase exemption.

5. Are guarantors covered borrowers under the MLA?

– No. To be a covered borrower consumer credit must be offered or extended to the individual, as in the case of a borrower, co-borrower or co-signer. But a guarantor doesn’t receive funds directly or indirectly from the loan.

Mortgage servicing rules update

By John S. Burnett

Both Regulations X and Z affected

On October 19, 2016, about two and a half months after the Consumer Financial Protection Bureau announced its final rule amending the 2013 Mortgage Servicing Rules in Regulations X and Z, the rule was finally published in the Federal Register at 81 FR 72160. The purpose of the amendments to Parts 1024 and 1026 is to clarify, revise or amend provisions regarding force-placed insurance notices, policies and procedures, early intervention, and loss mitigation requirements under Regulation X’s servicing provisions; and the prompt crediting and periodic statement requirements under Regulation Z’s servicing provisions. The amendments also address proper compliance regarding certain servicing requirements when a person is a potential or confirmed successor in interest, is a debtor in bankruptcy, or sends a cease communication request under the Fair Debt Collection Practices Act (FDCPA).

The final rule also makes a number of technical corrections (read: fixes mistakes).

The Bureau also issued an Interpretive Final Rule to clarify the interaction of the FDCPA and specific servicing requirements in Regulations X and Z. This provides safe harbors from liability for servicers acting in compliance with specified mortgage servicing rules in three situations.

Effective dates.

Most of the changes made by this rule will become effective on October 19, 2017, one year after publication. The changes concerning dealings with successors in interest and periodic statements for debtors in bankruptcy won’t be effective until 18 months after publication, or April 19, 2018. Those are considerably longer delays than originally proposed.

The debtors in bankruptcy and FDCPA-related changes are concentrated in § 1026.41(e) and (f); the successors in interest provisions are scattered throughout both Regulations X and Z. You can see all of the pending changes to the regulatory text and commentary posted to BankersOnline’s Regulations pages at ttps://www.bankersonline.com/regulations, with separate colors indicating which changes are effective next October and which are postponed to April 2018.

The Bureau’s Interpretive Final Rule will be effective October 19, 2017.

Borrower’s principal residence

Several of the Regulation X provisions in §§ 1024.39 through 1024.41, including the provision in § 1024.41 of a 120-day foreclosure referral waiting period, don’t apply when the property securing a loan ceases to be a borrower’s principal residence. Because several servicers requested better guidance from the Bureau on when a property stops being a borrower’s principal residence, the CFPB is adding a comment that clarifies that the determination of principal residence status will depend on the specific facts and circumstances regarding the property and applicable state law. It adds an example explaining that a vacant property may still be a borrower’s principal residence. In the prefatory text that accompanied the rule at publication, the Bureau indicated that “a property may still be the borrower’s principal residence where a servicemember relocates pursuant to permanent change of station orders, was occupying the property as his or her principal residence immediately prior to displacement, intends to return to the property at some point in the future, and does not own any other residential property.” The Bureau also indicated in its prefatory text that it “is not establishing a bright-line test in [the new] comment,” specifically because state laws and court rulings could conflict with any hard-and-fast definition.

Definition of “delinquency”

A number of servicing provisions in Regulation X involve loans that are delinquent, but “delinquency” isn’t defined in the regulation (there is a definition, which will be relocated, buried in commentary for §§ 1024.39 and 1024.40). The Bureau received many inquiries on delinquency, particularly with regard to the 120-day foreclosure referral waiting period in § 1024.41. The final rule adopts a definition of delinquency in § 1024.31, with four new comments. The definition explains that delinquency means a period of time during which a borrower and a borrower’s mortgage loan obligation are delinquent. It further explains that a borrower and a borrower’s mortgage loan obligation are delinquent beginning on the date a periodic payment sufficient to cover principal, interest, and, if applicable, escrow becomes due and unpaid, until such time as no periodic payment is due and unpaid. A borrower performing under a permanent loan modification agreement who has made all payments under the modified contract would not be delinquent. The Bureau states in the prefatory text that the definition applies only for purposes of the servicing rules in Regulation X.

The comments to the definition further refine the application of the definition. New comment 31-2 provides that if a servicer applies payments to the oldest outstanding periodic payment, a payment satisfying such a periodic payment by a delinquent borrower advances the date the borrower’s delinquency began. For application of the 120-day foreclosure referral waiting period, this comment is critically important in interpreting how to determine when to start counting that 120-day period. Note, though, that the Bureau is not dictating how payments must be applied to delinquent loans. While certain federal loan programs do impose a requirement that payments be applied to the oldest outstanding periodic payment, to impose such a requirement universally could create conflicts with state law.

New comment 31-3 gives servicers the latitude to allow a slightly short payment to satisfy a periodic payment that’s due, regardless of whether, or the method by which, the servicer covers such a payment shortfall, as long as it’s permitted by applicable law. A creditor that receives a payment of $595 for a periodic payment due of $597.58, for example, could declare it “close enough” and update the date next due on the loan.

Comment 31-4 makes it clear that the regulation does not prevent a creditor from exercising a right provided by a mortgage loan contract to accelerate payment for a breach of that contract. It further explains that failure to pay the amount due after the creditor accelerates the mortgage loan obligation in accordance with the mortgage loan contract would begin or continue delinquency.

Force-placed insurance

The current regulation, in §§ 1024.37, requires specific content for notices to be provided before charging a borrower from force-placed insurance premiums or fees. The Bureau has amended § 1024.37 to address situations in which a borrower has insufficient, rather than expiring or expired, hazard insurance. Other amendments to this section allow the notices to include the borrower’s mortgage loan account number, but any other information not specifically required to appear in the notices will continue to be permitted only on separate sheets sent with the notice.

Evaluating loss mitigation applications

Section 1024.41(c) has been amended to add requirements with respect to the servicer’s obligation to pursue necessary information not in the borrower’s control, and the servicer’s responsibilities if unable to obtain such information within 30 days of receiving a complete loss mitigation application. New paragraph .41(c)(4) will ensure that servicers timely pursue that information.

Early intervention – live contact

The Bureau adopted revisions to § 1024.39(a) and associated comments to make clear the Bureau’s intent that servicers establish or make good faith efforts to establish live contact with a delinquent borrower no later than the 36th day after each payment due date for the duration of the borrower’s delinquency. Comment 39(a)-3 accounts for the burden associated with § 1024.39(a) where there is a prolonged delinquency. It clarifies that the length of a borrower’s delinquency may be a factor to consider in the determination of what constitutes good faith efforts to establish live contact. The amendments also clarify that the live contact requirements apply, except as otherwise provided in § 1024.39 (for example, when the bankruptcy exemption in § 1024.39(c) or the exemption in § 1024.39(d) when a borrower has invoked certain FDCPA rights applies).

The Bureau also clarified, in comment 39(a)-6, that if the servicer has established and is maintaining ongoing contact with the borrower under the loss mitigation procedures under § 1024.41, including during the borrower’s completion of a loss mitigation application or the servicer’s evaluation of the borrower’s complete loss mitigation application, or if the servicer has sent the borrower a notice pursuant to § 1024.41(c)(1)(ii) that the borrower is not eligible for any loss mitigation options, the servicer complies with § 1024.39(a) and need not otherwise establish or make good faith efforts to establish live contact. It further provides that a servicer must resume compliance with the requirements of § 1024.39(a) for a borrower who becomes delinquent again after curing a prior delinquency.

Early intervention – written notice

The CFPB made revisions to § 1024.39(b)(1) and its commentary to clarify the frequency with which a servicer must provide the written early intervention notice and to ensure consistency with the proposed revisions to the live contact requirements in § 1024.39(a). First, the language of that section will explain that, except as otherwise provided in § 1024.39, a servicer shall provide to a delinquent borrower a written notice with the information set forth in § 1024.39(b)(2) no later than the 45th day of the borrower’s delinquency and again no later than 45 days after each payment due date so long as the borrower remains delinquent. It further explains that a servicer is not required to provide the written notice, however, more than once during any 180-day period. It provides that if a borrower is 45 days or more delinquent at the end of any 180-day period after the servicer has provided the written notice, a servicer must provide the written notice again no later than 180 days after the provision of the prior written notice. Finally, it provides that, if a borrower is less than 45 days delinquent at the end of any 180-day period after the servicer has provided the written notice, a servicer must provide the written notice again no later than 45 days after the payment due date for which the borrower remains delinquent. A comment was added to clarify how to coordinate notices when a servicing transfer is involved. In addition, the Bureau has amended Model Clause MS-4(D) to convey more accurately the circumstances under which a servicer may invoke its specific remedy of foreclosure, to provide a safe harbor from Fair Debt Collection Practices Act liability under FDCPA § 805(c).

Successors in interest

To implement in Regulations X and Z the protections afforded successors in interest by the Garn-St Germain Act (which generally prohibits the exercise of due-on-sale clauses with respect to certain protected transfers), the Bureau has added definitions of “successor in interest” and “confirmed successor in interest” to §§ 1024.31 and 1026.2(a)(27)(i) modeled on the categories of transfers protected under Garn-St Germain. A successor in interest for purposes of the servicing requirements in subpart C of Regulation X is a person to whom an ownership interest in a property security a mortgage loan subject to subpart C is transferred from a borrower, if the transfer falls into one or more of these categories:

• A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
• A transfer to a relative resulting from the death of a borrower;
• A transfer where the spouse or children of the borrower become owners of the property;
• A transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property; or
• A transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.

The definition in Regulation Z mirrors that in Regulation X except that the Regulation Z definition substitutes “a dwelling securing a closed-end consumer credit transaction is transferred from a consumer” for “a property securing a mortgage loan is transferred from a borrower” and substitutes “consumer” for “borrower” throughout.

A number of sections of the regulations will be modified on April 19, 2018, to incorporate protections for successors in interest regardless of whether that person has assumed the mortgage loan obligation. In § 1024.32 of Regulation X, a provision will be added for an optional notice to confirmed successors in interest concerning their rights under subpart C of Regulation X and certain Regulation Z provisions.

Provisions will be added to Regulation X §§1024.35 and .36 allowing servicers to omit (from their responses to error claims and requests for information) location and contact information and personal financial information (other than information about the terms, status, and payment history of the mortgage loan) if the omitted information pertains to a potential or confirmed successor in interest who is not the requester, or the requester is a confirmed successor in interest and the omitted information pertains to any borrower who is not the requester. These changes were made in response to concerns about divulging confidential information to or about a successor in interest who is not obligated on the mortgage loan.

Portions of § 1024.38 will also be amended to incorporate requirements that successors in interest be addressed in general servicing policies, procedures and requirements. And commentary to § 1024.41 will address receipt of loss mitigation requests from successors in interest.

Changes addressing successors in interest will also be made to Regulation Z on April 19, 2018. Section 1026.20(f) will be added to indicate the circumstances under which ARM payment change or escrow account cancellation notices are to be sent to a successor in interest. A comment to § 1026.36(c)(1)(iii) will be added to include successors in interest as individuals for whom mortgage payment requirements (to ensure day-of-receipt payment crediting) must be reasonable. And paragraph 1026.39(f) will be added to indicate the circumstances under which a successor in interest will be entitled to receive written mortgage transfer disclosures under § 1026.39.

Finally, changes will be made to § 1026.41 and its commentary to permit changes to periodic statements sent to successors in interest not obligated on the mortgage loan, and to prescribe the circumstances under which a successor in interest would or would not be entitled to receive the disclosures required by § 1026.41.

Consumers in bankruptcy

Other changes to § 1026.41 clarify the circumstances under which an exemption from the periodic billing statement or coupon book provisions of the section applies when a consumer is or was formerly a debtor in bankruptcy, including when the exemption ends. Other changes to this section will describe alterations to be made to any billing statement that is sent to a consumer who is a debtor in bankruptcy or who has discharged personal liability for the mortgage loan under identified sections of the Bankruptcy Code.

More on the effective dates

The Bureau delayed the effective dates in this rule longer than it had originally proposed. There was no legal deadline for the amendments, and the CFPB was aware that some of the more significant changes would require programming and other systems work, along with policy and procedural revisions and retraining of servicing personnel. Revisions to notices and periodic billing verbiage and procedures are likely to involve third-party involvement. Instead of approximately nine months or one year from publication as suggesting in the proposed rule, the changes brought by the final rule will be effective 12 months or 18 months from publication.

Virtually all of the changes to be made to comply with this rule are favorable to consumers and could theoretically be implemented today without violating the regulations as they are currently worded. Therefore, there doesn’t appear to be a need to treat this rule (as the industry has had to treat so many rules lately) as a stroke-of-midnight “flip–of-the-switch” production. Instead, servicers should be able to bring parts of their operations into compliance with the new rules earlier than the effective dates, phasing in the changes between now and October 2017 (or April 2018). Where programming is required, especially programming involving outside vendors, servicers should start things moving early to allow for testing and training. They should definitely not allow vendors to aim for delivery on or near the October and April effective dates.