RESPA, Regulation Z, and Transfers of Servicing or Title

Issue/Inquiry

The Bank originates a mortgage loan and sells it but retains servicing. Is this considered a service transfer under Regulation X?

If the Bank sells loans to investors after origination, with the servicing to be done by the purchasing entity, would this be considered a transfer under Regulation X?

Response Summary

Under Regulation X, if the Bank sells a mortgage loan it originates but retains servicing, this is not considered to be a service transfer. If the Bank sells a mortgage loan to an investor, however, and the servicing will be handled by the purchaser, this will be a mortgage servicing transfer for the purposes of the regulation. In either case, the transfer of title will require the purchaser to notify the consumer of the transfer.

Response Detail

Under Regulation X, which implements the Real Estate Settlement Procedures Act (“RESPA”), “servicing” means receiving any scheduled periodic payments from a borrower pursuant to the terms of any federally related mortgage loan. This includes amounts for escrow accounts, and making the payments to the owner of the loan or other third parties of principal and interest and such other payments with respect to the amounts received from the borrower as may be required pursuant to the terms of the mortgage servicing loan documents or servicing contract. In the case of a home equity conversion mortgage or reverse mortgage as referenced in this section, servicing includes making payments to the borrower. 12 CFR §1024.2.

Regulation X requires a lender to provide an applicant with a servicing disclosure statement within three business days of an applicant and a notice of transfer of loan servicing at least 15 days prior to the effective date of the transfer. 12 CFR §1024.33(a),(b)(3).

With respect to the first question, if the Bank sells the loan but retains the servicing (i.e., if the borrower is required to continue making scheduled periodic payments to the Bank, including escrow payments), no transfer of servicing has taken place and no notice of transfer of loan servicing needs to be given.

The requirement of Regulation X for the lender to provide a servicing disclosure statement only pertains to reverse mortgages. 12 CFR §1024.33(a). For loans subject to the TILA-RESPA Integrated Disclosure rules, the intent of the lender to service the loan must be disclosed in the Loan Estimate, which is provided within three business days of receiving the application. 12 CFR §1026.37(m)(6).

As to the second question, if the Bank sells the loan and the servicing will be done by the purchaser (i.e., if the borrower is required to make scheduled periodic payments to the purchaser, including escrow payments) then a transfer of servicing has taken place and a notice of transfer of loan servicing must be given.

These questions are concerned with the applicability of the mortgage servicing transfer requirements of Regulation X. Regulation Z also has requirements regarding transfers of ownership, but these must be fulfilled by the purchaser of the mortgage.

Under Regulation Z, when closed-end consumer credit secured by a dwelling or real property or open-end consumer credit secured by the principal dwelling of a consumer is sold or assigned, the person who obtains legal title to the debt obligation must mail or deliver the required disclosures concerning the transfer before the 30^th calendar day following the date of transfer. 12 CFR §1026.39(a),(b).

In the situations posed by both questions, the purchase or assignment of legal title to the obligation will require the purchaser to notify the consumer, whether or not the servicing of the loan is being done by the purchaser.

This entry was posted on Monday, April 24th, 2017 at 1:34 pm.