Hidden issues of the CFPB: Periodic payments, late fees, and payoff statements

May 19-25, 2014

By Heather Martin-Herron, Attorney

Wilson & Associates, PLLC

In January 2014, new sections of the Consumer Financial Protection Bureau’s (“CFPB”) Truth in Lending Act (“TILA”) went into affect which impose additional requirements on the mortgage servicing industry. See 12 CFR 1026.36 (2014). TILA was implemented by what is commonly referred to as Regulation Z. There have been several discussions and articles regarding the new CFPB section that requires 120 days of delinquency prior to referral for foreclosure, but there is one section that may be cause for concern. See 10 CFR 1026.36(c). The concerning section applies when the loan is secured by the borrower’s principal residence and relates to the processing of payments, late fees, and providing payoff statements to borrowers. At first reading, the section appears to be clear, but there are hidden issues that may arise. 

Promptly Credit Payments –

10 CFR 1026.36(c)(1)

The payment processing subsection addresses the difference between how periodic payments and partial payments must be handled. The regulation states that if a servicer receives a periodic payment, it must credit the borrower’s account the date the payment is received, unless no negative credit reporting will result. A “periodic payment” is defined as an amount that covers the principal, interest, and escrow for a billing cycle, and specifically excludes late fees and other non-escrow fees. As to partial payments, the servicer may retain the payment, but the servicer has the choice to either return the funds to the borrower or credit the suspense account until sufficient funds have accumulated to cover a periodic payment. While this section of the regulation was intended to reduce confusion, it has only raised more questions which are discussed further below. 

No Pyramid Late Fees – 10 CFR 1026.36(c)(2)

The second subsection states that a servicer is not to “pyramid” late fees. The rule explains that if a late fee or delinquency charge is being assessed solely based on the borrower’s failure to pay a late fee on a prior payment, then an additional late charge may not be tacked on to the prior late fee. This section only applies as long as the payment received is otherwise a periodic payment and is received by the due date. 

Providing Payoff Statements –

10 CFR 1026.36(c)(3)

The last subsection states that if a borrower requests a payoff, then an accurate payoff statement must be provided and must designate a specified due date. The statement must show the entire outstanding balance that would be required to satisfy the entire loan and must be sent within a reasonable period of time from the date of the request. However, if the borrower or their agent sends a written request for the payoff statement, then the payoff must be provided within seven business days. If the statement cannot be provided within seven days, it must be provided within a reasonable time period. 

Hidden Issues of Periodic Payments

While the subsections on pyramiding of late fees and providing payoff statements are quite clear, the subsection on crediting of periodic payments brings up a couple of questions that have not been fully addressed in the regulation or in the Bureau’s interpretations. One of the biggest concerns is whether or not a servicer must accept a monthly payment after the loan has been accelerated and what that amount actually includes. The regulation itself seems to suggest that the servicer is required to accept a regular monthly payment made by a borrower, at any point, by stating that the periodic payment is for principal, interest, and escrow “for a given billing cycle,” or also described by the Bureau’s interpretations as “for any given billing cycle.”

Some servicers in the industry have taken the position that the periodic payment rule applies after loan acceleration, but that the full reinstatement amount must be paid. The Bureau’s interpretations state that several commentators requested clarification on the rule and urged an exemption for when the loan has been accelerated. The interpretation states that the term “periodic payment” is intended to reflect the borrower’s “contractual obligation, to the extent a consumer’s loan has been accelerated (such that the periodic payment constitutes the total amount owed for all principal and interest)…those amounts may be appropriately accounted for within this definition of periodic payment.” This seems to suggest that if the loan has been accelerated the periodic payment would then be considered to be all principal, interest, and escrow that would be required to reinstate the loan. 

Questions on Periodic Payments

The view that once the loan is accelerated it must be reinstated, could have a significant impact on servicers and investors if this is not what the Bureau intended or is not how the regulation is interpreted by the courts. In many instances, once the debt has been accelerated, the security instrument provides that the reinstatement must be for the principal, interest, and escrow, and also includes attorney fees and costs. Would the CFPB now require the servicer to reinstate an accelerated loan with only principal, interest, and escrow? If so, this may leave the servicer unable to collect attorney fees and costs, as well as the late charges and other incidentals of foreclosure that are not always designated as being a part of the escrow account. If the attorney fees are from the escrow account but listed separately on the reinstatement quote, is the servicer entitled to those amounts as part of the payment?

Unfortunately, neither the regulation nor the interpretation by the Bureau is clear in stating what constitutes a periodic payment once the loan has been accelerated. The conservative approach is to accept a payment from the borrower that covers principal, interest, and escrow, for any month, whether the loan has been accelerated or not. This interpretation would give a significant benefit to the borrower, but would have many repercussions for servicers and investors. This conservative approach would mean the borrower could theoretically send a payment covering one full month, or several, and have the loan repeatedly in and out of the 120 day time limit and/or the foreclosure process. 

Clarification is Needed

Without further guidance and clarification, what the meaning of the term “periodic payment” after a loan has been accelerated is remains unclear and raises questions that have not yet been fully addressed. As time passes and the further we delve into the CFPB requirements, more questions will arise.