NWCUA Calls for Comment on Proposed Oregon DOJ Mortgage Service Rule

The Oregon Department of Justice (“DOJ”) has proposed new rules based heavily on the National Mortgage Settlement Agreement previously entered into with the five largest national mortgage loan servicers. Although the rule parameters are not yet finalized, the new rules would cover most mortgage servicers conducting business in Oregon.

The Oregon DOJ has stated that the proposed rules are intended to establish certain mortgage servicer practices as unfair and deceptive, and to establish a uniform standard of conduct in the mortgage servicing industry with regard to the services offered to consumers. Importantly, in the event that a servicer fails to comply, the rules also provide consumers a private right of action under the Oregon Unlawful Trade Practices Act.

The Northwest Credit Union Association (NWCUA) has several concerns over the proposed rules and is asking for feedback from member credit unions. Representatives from the Association have provided comment at an administrative rule hearing and have attended two advisory workgroups meetings at the Department of Consumer and Business Services (DCBS). The DOJ is taking comment through July 17, and the NWCUA will be providing comments based on member feedback.

Click here to review the full proposal.

The NWCUA has expressed concerns about the proposed regulation that is based on a number of assumptions.

The DOJ’s proposed regulation is based on the recent multistate settlement between the Attorneys General of 49 states and the nation’s five largest mortgage servicers. The settlement was carefully negotiated by the attorneys general and by the five servicers based on the practices, environments, and capabilities of those servicers, and on the key complaints from consumers about those servicers. The DOJ’s attempt to turn that settlement agreement into a regulation applicable to all servicers is premised on several false assumptions:

  • In “globalizing” the settlement, the DOJ assumes that all servicers are subject to the same complaints levied against the “big five.” In reality, the regulators, DOJ, and legislators have all told the NWCUA that credit unions have not generated the volumes or types of complaints generated by the large servicers.
  • The regulation assumes that all servicers have the same type of infrastructure and administration. In reality, the top five servicers have large, compartmentalized structures spread over the entire county. This leads to some of the communication issues about which borrowers have complained. Most Oregon credit unions have servicing personnel located in a single office, with each employee performing multiple types of tasks.
  • The DOJ assumes that all servicers have the same access to capital and resources as needed to increase personnel and infrastructure. In reality, credit unions have just weathered one of the most difficult economic periods in their history. Moreover, credit unions cannot raise capital by selling stock or otherwise attracting investors. They can only add capital through earnings.
  • The regulation assumes that all modifications are HAMP-like modifications, with trial periods and a specified order for the types of modifications offered/performed. Credit unions look at each individual borrower’s situation and (if a modification is appropriate) craft a unique modification that fits the borrower’s particular circumstances.

The conditions of the settlement agreement can’t be gracefully superimposed on small lenders that don’t have multiple departments staffed by hundreds (if not thousands) of employees. To put it another way, a lender with one office and 12 staff members doesn’t need the same regulation that a 12 office operation with 1000 staff members. Yet the proposed rule applies the same requirements for a $50 billon bank as for a $50 million credit union. This will increase the cost of doing business in Oregon, and this cost will be passed on to consumers in the form of higher rates on loans or higher mortgage-related fees.

Imposing terms and conditions in a settlement agreement on lenders and servicers who were not party to the agreement raises serious legal and policy concerns.

The multistate settlement is an agreement among the five largest mortgage servicers and attorney generals in 49 states. It is enforceable against those mortgage servicers only because they agreed to it. The DOJ’s legal authority to impose some terms from the settlement on other servicers is questionable. For example, the regulation would require servicers to grant modification requests in certain situations. It is quite possible that this provision would violate the constitutional prohibition on laws that impair the obligation of contracts. Similarly, certain portions of the regulation impose limitations on fees, charges, and practices that are an integral part of the lending and servicing function. Such limitations may be preempted by federal law for federally chartered institutions such as national banks and federal credit unions. If the goal of the regulation is to ensure uniform treatment among servicers, this approach will not achieve that goal.

The proposal is applicable to all real estate lending, however the vast majority of foreclosure issues identified by the Department relate to first lien transactions.

The majority of complaints about mortgage servicing concern first lien transactions. The proposal should exempt subordinate lien transactions from the rule’s requirements. There are also substantial differences between how first lien and second lien transactions are serviced by a mortgage loan servicer. Many credit unions offer equity loans even though they do not offer purchase money mortgages because they are not in a position to create the infrastructure necessary to administer first mortgage loans.

The proposal could subject servicers to UTPA claims for simple negligence and inadvertent clerical errors.

The requirement that sworn documents be “accurate and substantiated,” along with notice requirements for force-placed insurance, payment application requirements, and other similar issues, all create the potential that servicers will be subject to UTPA claims for basic clerical errors and inadvertent oversights. This is true even if the borrower can assert contractual claims against the lender.

The proposal requires servicers to modify loans.

The proposed rule requires a lender to modify a loan if the modification is “net present value positive”. Although this is a requirement under the HAMP program, it has never been applied across the board to all lenders. This impinges on the freedom of contract, and may not be constitutionally permissible.

The modification requirement is based on a net present value (NPV) calculation based on assumptions about the property value, default rate, re-default rate after modification, and anticipated growth in property value. And yet, the proposed regulation would hold credit unions to these calculations and would potentially create claims against a credit union for UTPA violations if the consumer calculates the NPV differently.

In addition, servicers are prohibited from requiring the borrower to waive existing claims against the servicer as part of the modification. This puts servicers in a position where the must modify a loan, but must also allow the borrower to come back to the lender and raise a claim for TILA, RESPA, or other violations. A mutual release has long been a tool used by businesses and individuals in modifying existing contractual obligations.

The proposal will be costly to Oregon consumers and Oregon credit unions.

The requirements for independent review, evaluation of modification requests, monthly statements, and other similar requirements will all cost servicers money. These costs will be passed on to Oregon consumer.

 

Questions? Contact a member of the Association’s Legislative Affairs team:

Jennifer Wagner, Vice President of Legislative Advocacy
Mark Minickiello, Vice President of Legislative Affairs
Stacy Augustine, Senior Vice President & General Counsel

Posted in Article Post.