Got junk? Safeguarding against new CFPB crackdown on junk fees

With the March 2023 publication of its Supervisory Highlights, the CFPB has made it abundantly clear that “junk fees” and improperly charged fee are in its sights. The new initiative, designed to save consumers billions of dollars each year, takes aim at exploitative fees charged by banks and other financial companies.

As a technology provider to many of the nation’s mortgage servicers, ICE took a close look at the four primary servicing junk fees targeted by this initiative and found the CFPB was really targeting compliance. The four fees outlined below are followed by solutions available to help servicers prevent mortgage servicing fee violations and stay out of hot water with regulators.

Late fees

The CFPB found some servicers have been assessing late fees in excess of the amounts allowed by their loan agreements. Instead, these servicers set up their system to charge the maximum late fee for the property’s state, which was often more than the highest permissible late fee specified in the loan agreement.

The CFPB also found that some mortgage servicers were issuing periodic statements that reflected inaccurate late payment fee amounts. In both cases, the CFPB found borrowers were unfairly charged for late fees.

To avoid charging impermissible late fees, make sure your servicing system of record has the capability to help you:

• Automatically update the servicing platform with the correct rate-fee cap within the loan agreement as part of the loan boarding process
• Conduct numerous calculation methods for late fees, including partial payment calculations for HELOCs
• Perform quality checks to compare loan documents to late-fee data for more accurate periodic statements

Unnecessary property inspection visits

When mortgages reach a specific level of delinquency, servicers are usually required by investors to conduct ongoing property inspections to assess the real estate’s condition. These inspections – usually conducted monthly – are handled by third parties hired by the servicer who visit the property at the address provided. The servicer typically charges the cost of these monthly property inspections to the borrower.

CFPB examiners found that in certain cases, inspectors would inform servicers that the property address was incorrect and could not be located. The servicers continued to send property inspectors each month to the same incorrect address and charge the borrower.

Reduce or eliminate property inspections on incorrect property addresses by using a best-in-class servicing system to help you:

• Perform a data quality check for addresses on delinquent mortgages that require monthly property inspections
• Place stops to prevent further property inspections when a notice of incorrect address is received, until the address correction has been made
• Support clear bi-directional communication tools to verify contact information from the borrower
• Provide reports and business intelligence tools to help you match the address with public record data and update when applicable

PMI overcharges

Borrowers who put less than a 20% down payment on a loan are usually required by lenders to obtain Private Mortgage Insurance (PMI) to help protect the lender or investor from potential losses due to nonpayment. When the principal balance on the loan is first scheduled to reach 78% of the property’s original value and the loan is current, servicers are usually required to automatically terminate PMI.

CFPB examiners found PMI was not always terminated at the right time resulting in borrowers making PMI overpayments.

To help avoid overcharging for PMI, make sure your servicing system:

• Has the ability to provide a snapshot of key loan activities occurring in the last 30 days and next 90 days, including whether a borrower’s balance requires terminating PMI
• Is integrated with capabilities that can track and alert staff to equity positions on particular loans or entire loan portfolios
• Provides client-configurable, automated PMI termination processing rules, including functionality for auto-termination on modified loans
• Includes an analytic dedicated to “Missing Data for PMI Removal,” designed for all loans with PMI to calculate when the loan is ready for PMI removal, and then to update missing data points for those loans

COVID-related charges

As part of COVID-19 pandemic emergency measures, the U.S. government implemented CARES Act forbearance programs to prevent servicers of federally-backed mortgage loans from imposing late or default-related fees while forbearing a borrower’s mortgage payments due to a pandemic-related financial hardship.

For FHA-insured loans that exited CARES Act forbearances and entered certain permanent loss mitigation options, HUD required servicers in certain circumstances to waive certain fees, penalties and charges accrued outside forbearance periods.

The CFPB found that some servicers failed to follow HUD’s requirements. In addition, some mortgage servicers sent borrowers in their last month of forbearance, periodic statements listing a late fee amount of zero dollars for the subsequent payment, when the servicer in fact would charge a late fee if the payment was not on time.

To help prevent fees from accidentally being charged to borrowers participating in forbearance programs, check to see if your servicing system:

• Allows you to set stops to help prevent fees from being assessed during a COVID hardship
• Displays the fee history for review and waiver when running the post-forbearance evaluation
• Allows you to set policies to waive all fees and exclude them from being included in the arrearage when evaluating for loss mitigation

Risks posed by junk fees

Improperly applied fees are more than a nuisance. They pose a serious risk to servicers on several fronts. First up: regulatory risk that can impact revenue. The CFPB recently found that one servicer had misled some customers who had requested a forbearance under the CARES Act into paying late fees and deceived them about forbearance and repayment options. The servicer has been ordered to change its faulty business practices, repay any unrefunded late fees and pay a $5.25 million penalty.

Improperly applied fees also pose a retention and referral risk. In a fiercely competitive market with disappointingly low retention rates, the last thing servicers need to do is give customers a valid excuse to jump ship to another company when it comes time for their next loan. Not to mention that customers who have been unfairly charged fees will more than likely refuse to refer friends, family and coworkers to their servicer for future business.