CFPB Proposes Rules for Mortgage Servicers

The Consumer Financial Protection Bureau (CFPB) Friday proposed new rules for mortgage servicers designed to “protect homeowners from surprises and costly mistakes” it says are becoming too common in the home loan servicing industry.

“Millions of homeowners are struggling to pay their mortgages, often through no fault of their own,” said CFPB Director Richard Cordray in the press release detailing proposal. “These proposed rules would offer consumers basic protections and put the ‘service’ back into mortgage servicing. The goal is to prevent mortgage servicers from giving their customers unwelcome surprises and runarounds.”

Mortgage servicers are responsible for collecting payments from the mortgage borrower on behalf of the loan’s owner. They also typically handle customer service, escrow accounts, collections, loan modifications, and foreclosures. Generally, lenders contract out servicing after the mortgage deal is signed, giving borrowers little input on which company gets the account.

The CFPB noted that even before the financial crisis, the mortgage servicing industry had experienced problems with bad practices and sloppy recordkeeping. Now, with millions of homeowners in distress, many borrowers have complained about problems seeking loan modifications or other alternatives to and information about avoiding foreclosure.

The Dodd-Frank Wall Street Reform and Consumer Protection Act addressed some of these problems and imposed certain requirements on servicers, which the CFPB is implementing and refining, and which will be finalized in January 2013. The Dodd-Frank Act also gave the CFPB the statutory authority to help fix the market by writing additional rules.

Today’s announcement highlights two sets of proposals. The first set of CFPB’s proposed rules would provide consumers with clear and timely information about their mortgages so they can avoid costly surprises. They would bring greater transparency to the market. The proposed rules would do this with:

• Clear Monthly Mortgage Statements: Servicers would be required to provide regular statements which would include: a breakdown of payments by principal, interest, fees, and escrow; the amount of and due date of the next payment; recent transaction activity; and warnings about fees.
• Warning Before Interest Rate Adjusts: Servicers would have to provide earlier disclosures before the interest rate adjusts for most adjustable-rate mortgages. This disclosure would include information about alternatives and counseling resources if the new payment is unaffordable. This requirement would provide greater clarity to borrowers about the impact of interest rate changes. Existing disclosures for interest rate adjustments that cause a change in mortgage payments would be amended to include improved information and arrive earlier so that borrowers can anticipate consequences of payment changes.
• Options for Avoiding Costly “Force-Placed” Insurance: Servicers have the responsibility to ensure that borrowers maintain property insurance. If the borrower does not maintain this insurance, however, the servicer has the right to purchase insurance to protect the lender’s interest in the property. This is called “force-placed” insurance and is typically more expensive than insurance the borrower could privately purchase. The CFPB is proposing a rule that would provide more transparency in this process, including requiring servicers to give advance notice and pricing information before charging consumers for this insurance. The servicer would also be required to terminate the insurance within 15 days if it receives evidence that the borrower has the necessary insurance and the insurer would refund the force-placed insurance premiums.
• Early Information and Options for Avoiding Foreclosure: Servicers would be required to make good faith efforts to contact delinquent borrowers and inform them of their options to avoid foreclosure.

The second set of proposed rules would impose common-sense requirements for handling consumer accounts, correcting errors, and evaluating borrowers for options to avoid foreclosure. These “no-runaround” rules would include:

• Payments Promptly Credited: Servicers generally would have to credit a consumer’s account as of the date a payment is received.
• Maintain Accurate and Accessible Documents and Information: Servicers would be required to establish reasonable policies and procedures to provide accurate and current information to borrowers and minimize errors. They would have to submit accurate legal documents that comply with applicable law, help borrowers on options to avoid foreclosure, and provide oversight of their contractors and foreclosure attorneys.
• Errors Corrected Quickly: If a consumer notifies the servicer that she thinks there has been an error, the servicer would be required to acknowledge receiving the notification, conduct a reasonable investigation, and, in a timely manner, inform the consumer about the resolution.
• Direct and Ongoing Access to Servicer Personnel To Assist Delinquent Borrowers: Servicers would be required to provide delinquent borrowers with direct, easy, ongoing access to employees who are dedicated and empowered to help delinquent borrowers.
• Evaluate Borrowers For Options To Avoid Foreclosure: Servicers that offer options to borrowers to avoid foreclosure, such as loan modifications or other payment plans, would be required to promptly review applications for those options. Servicers would be prohibited from proceeding with a foreclosure sale until the review of the borrower’s application is complete. Servicers would also be required to let borrowers know when applications are incomplete and to allow borrowers to appeal certain servicer decisions.

All of these proposed rules are part of the CFPB’s ongoing effort to address servicing problems and create uniform standards for the mortgage servicing industry – regardless of how big or small the servicer, where it is based, or what is its business charter.

The public will have 60 days, until October 9, 2012, to review and provide comments on the proposed rules. The CFPB will review and analyze the comments before issuing final rules in January 2013.

The proposed mortgage servicing rules are available at http://files.consumerfinance.gov/f/201208_cfpb_tila_proposed_rules.pdf and http://files.consumerfinance.gov/f/201208_cfpb_respa_proposed_rules.pdf

A summary of the proposals is available at http://files.consumerfinance.gov/f/201208_cfpb_detailed_summary_proposed_mortgage_servicing_rules.pdf

The factsheet about these proposals can be found at http://files.consumerfinance.gov/f/201208_cfpb_mortgage_servicing_fact_sheet.pdf