Servicing Mortgage Loans: Beware the NC SAFE Act!

Given the increased emphasis on compliance with consumer-protection laws in recent years, it is expected that banks and mortgage companies will be familiar with all the federal laws and regulations impacting lending and servicing.  However, it is also important to remember that the individual States often have their own regulatory framework that must be adhered to.  One such enactment from 2009, the North Carolina Secure and Fair Enforcement (S.A.F.E.) Mortgage Licensing Act was designed to “protect consumers seeking mortgage loans and to ensure that the mortgage lending industry operates without unfair, deceptive, and fraudulent practices on the part of mortgage loan originators.”  N.C.G.S. § 53-244.020.

The N.C. SAFE Act imposes a number of duties on loan servicers, including:  (1) filing with the Office of the North Carolina Commissioner of Banks “a complete, current schedule of the ranges of costs and fees it charges borrowers for its servicing-related activities with its application and renewal and with its supplemental filings made from time to time” (§ 53-244.110(4)), and (2) at the time the servicer “accepts assignment of servicing rights” disclosing to the borrower the cost and fee schedule filed with the Commissioner (§ 53-244.110(6)(b)).

The SAFE Act also prohibits a laundry list of activities with respect to residential mortgage loans, including improperly refusing to satisfy a mortgage and the failure to properly disburse escrow funds for taxes and insurance.  § 53-244.111(2) and (23), respectively.  Some prohibitions tie into other North Carolina statutes.  For example, a servicer may not “charge or collect any fee or rate of interest or… make or broker or service any mortgage loan with terms or conditions or in a manner contrary to the provisions of Chapter 24, 45, or 54 of the General Statutes.”  § 53-244.111(5).  Chapter 45 of the North Carolina General Statutes regulates mortgages and deeds of trust, and § 45-91 requires that when a servicer incurs a fee that it intends to charge to a borrower’s account, it must assess that fee to the account within 45 days from when it was incurred, and then must mail the borrower a written statement clearly and conspicuously explaining the fee within 30 days after assessment.  § 45-91(1)a and b, respectively.  Failure to follow this procedure results in the waiver of the fee.  § 45-91(3).  

The SAFE Act also contains a broader requirement with respect to the pre-foreclosure notice than does the mortgage statute.  Whereas the mortgage statute requires the mailing of a 45-day pre-foreclosure notice only with respect to a “home loan” (§ 45-101), which excludes from its definition certain loans including an equity line of credit, a construction loan, a reverse mortgage and a bridge loan, the SAFE Act requires the mortgage servicer to mail a 45-day pre-foreclosure notice (§ 53-244.111(5)) to all borrowers with a “residential mortgage loan” (§ 53-244.111(5)), which is defined more broadly than “home loan” and would include, for example, a construction loan if the loan was made to a natural person for personal, family or household use.

The SAFE Act provides the Commissioner with a wide array of disciplinary powers, including the imposition of a civil penalty for any violation of the statute of up to $25,000, including the failure to comply with any directive or order of the Commissioner (§ 53-244.116(a)(2) and (3)), as well as requiring the servicer to disgorge or refund any fees unlawfully collected (§ 53-244.116(a)(4)).

From a practical perspective, therefore, even though the Commissioner’s office is lightly staffed and does not place a priority on enforcement actions, the servicer must ensure its staff is trained on state-law requirements impacting mortgage lending and servicing.  For North Carolina mortgage loan servicing this includes ensuring that the servicer regularly updates the fees and costs schedule it refers to when charging expenses to the borrower’s account and that any changes are reflected in a current filing with the Commissioner.  And, when a borrower goes into delinquency and the servicer starts to incur expenses for actions associated with a delinquent loan such as property inspections and foreclosure charges, the servicer must ensure it is timely assessing those charges to the borrower’s account, and mailing timely notice to the borrower informing her of the charges.  It is essential that the servicer maintain an effective procedure to track requests for vendor services, incoming invoices, and account assessments in order to meet the assessment and notification timelines.

Published by Hutchens Law Firm on June 15, 2016