The Consumer Financial Protection Bureau (CFPB) has outlined rules that it is considering to help protect mortgage borrowers from being hit by costly surprises or getting the runaround from their mortgage servicer. The CFPB plans to formally propose rules during the summer and finalize them in January 2013. The CFPB expects to publish a Notice of Proposed Rulemaking this summer, which will be followed by a public comment period. The rule will be finalized by Jan. 21, 2013. The CFPB can provide up to one year for implementation, but has not yet decided how long of a transition period is necessary.
“The mortgage servicing rules we are considering reflect two basic, commonsense principles—no surprises and no runarounds,” said CFPB Director Richard Cordray. “For too long, mortgage servicers have not been held accountable to their customers, and the result has been profoundly punishing to homeowners in distress. It’s time to put the ‘service’ back in mortgage servicing.”
The Dodd-Frank Wall Street Reform and Consumer Protection Act imposed certain requirements on servicers and gave the CFPB the statutory authority to write strong additional rules to help fix the mortgage servicing market.
The rules under consideration by the CFPB are aimed at tackling two underlying servicing problems: A lack of transparency and lack of accountability.
To bring greater transparency to the servicing market, the CFPB is considering rules that would provide consumers with clear and timely information about changes to their mortgages so they can avoid costly surprises. The rules under consideration include:
►Clear Monthly Mortgage Statements: Servicers would be required to provide regular statements with: A breakdown of payments by principal, interest, fees, and escrow; the amount of and due date of the next payment; and, for delinquent borrowers, alerts and information about counselors who can help them work with servicers and avoid foreclosure.
►Warning Before Interest Rate Adjustments: Servicers would be required to provide disclosures before the interest rate changes on most adjustable-rate mortgages (ARMs). This disclosure would include information about when the change will take effect and a list of alternatives that the consumer may pursue if the new monthly payment is unaffordable. The first interest rate reset notice would include contact information for housing counselors.
►Options for Avoiding Costly “Force-Placed” Insurance: Because servicers have the responsibility to ensure that borrowers maintain hazard insurance on the property, if the borrower does not maintain such insurance, the servicer has the right to purchase insurance to protect the property. This is called “force-placed” insurance and is typically more expensive than insurance the borrower can purchase privately. The CFPB is considering a rule that would give the consumers more rights including requiring servicers to give advance notice and pricing information before charging consumers for this insurance.
►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 help avoid foreclosure. And if a borrower contacts the servicer because she is having difficulty paying the loan, the servicer would have to provide timely, complete, and accurate information about her options.
To hold servicers accountable for treating consumers fairly, the CFPB is considering rules that would require common-sense policies and procedures for handling consumer accounts and preventing runarounds. These rules would include:
►Payments Immediately Credited: Servicers generally would have to credit a consumer’s account promptly after receiving payment.
►Records Kept Up-to-Date and Accessible: Servicers would be required to establish reasonable policies and procedures designed to minimize errors, prevent document loss, provide accurate information to borrowers, and assist with error resolution.
►Errors Corrected Quickly: If a consumer notifies the servicer that she thinks there has been an error the servicer would be required to acknowledge receipt of the notification, conduct a reasonable investigation, and inform the consumer about the resolution in a timely manner.
►Direct and Ongoing Access to Servicer Foreclosure Prevention Team: Servicers would be required to provide delinquent borrowers (or borrowers who are asking for help to avoid delinquency) with direct, easy, ongoing access to employees who are dedicated and empowered to help troubled borrowers.
"The reforms that Director Cordray outlined appear to closely track the issues we have talked to him and the CFPB staff about and MBA looks forward to working with the CFPB and other policymakers and stakeholders to ensure that the process used to develop the standards includes servicers of different sizes and business models," said David H. Stevens, President and CEO of the Mortgage Bankers Association (MBA). "It is important that the final rules don't give preference to one business type over any other, nor should they inhibit innovation or discourage new companies from entering the marketplace."
In developing the proposed mortgage servicing rules, the CFPB plans to engage extensively with consumers and industry. The documents that the CFPB will be sharing with a Small Business Review Panel for feedback include an overview of the rules under consideration and a list of questions for input. The Small Business Review Panel will provide its comments and the CFPB will consider them when formulating proposed rules. The CFPB will also be conducting other outreach to gather feedback from consumer groups, industry, and other agencies.
“The CFPB is in a unique position to apply universal servicing requirements across the industry," noted the Financial Services Roundtable and Housing Policy Council in a statement. "Servicers are already working hard on many fronts to improve the customer experience. We hope that all these new requirements will be coordinated and rules will align. We look forward to working with CFPB on rules that benefit both consumers and financial institutions.”