The Consumer Financial Protection Bureau (CFPB) has issued a set of rules, the 2013 Real Estate Settlement Procedures Act (Regulation X) and Truth in Lending Act (Regulation Z) Mortgage Servicing Final Rules, to establish increased protections for struggling homeowners facing foreclosure. The rules also protect mortgage borrowers from costly surprises and runarounds by their servicers. The CFPB’s mortgage servicing rules ensure that borrowers in trouble get a fair process to avoid foreclosure. The new protections for struggling borrowers include:
►Restricted Dual-Tracking: Under the CFPB’s new rules, dual-tracking, when the servicer moves forward with foreclosure while simultaneously working with the borrower to avoid foreclosure, is restricted. Servicers cannot start a foreclosure proceeding if a borrower has already submitted a complete application for a loan modification or other alternative to foreclosure, and that application is still pending review. To give borrowers reasonable time to submit such applications, servicers cannot make the first notice or filing required for the foreclosure process until a mortgage loan account is more than 120 days delinquent.
►Notification of Foreclosure Alternatives: Servicers must let borrowers know about their “loss mitigation options” to retain their home after borrowers have missed two consecutive payments. They must provide them a written notice that includes examples of options that might be available to them as alternatives to foreclosure and instructions for how to obtain more information.
►Direct and Ongoing Access to Servicing Personnel: Servicers must have policies and procedures in place to provide delinquent borrowers with direct, easy, ongoing access to employees responsible for helping them. These personnel are responsible for alerting borrowers to any missing information on their applications, telling borrowers about the status of any loss mitigation application, and making sure documents get to the right servicing personnel for processing.
►Fair Review Process: The servicer must consider all foreclosure alternatives available from the mortgage owners or investors—those with decision-making power over the loan – to help the borrower retain the home. These options can range from deferment of payments to loan modifications. And servicers can no longer steer borrowers to those options that are most financially favorable for the servicer.
►No Foreclosure Sale Until All Other Alternatives Considered: Servicers must consider and respond to a borrower’s application for a loan modification if it arrives at least 37 days before a scheduled foreclosure sale. If the servicer offers an alternative to foreclosure, they must give the borrower time to accept the offer before moving for foreclosure judgment or conducting a foreclosure sale. Servicers cannot foreclose on a property if the borrower and servicer have come to a loss mitigation agreement, unless the borrower fails to perform under that agreement.
“For many borrowers, dealing with mortgage servicers has meant unwelcome surprises and constantly getting the runaround. In too many cases, it has led to unnecessary foreclosures,” said CFPB Director Richard Cordray. “Our rules ensure fair treatment for all borrowers and establish strong protections for those struggling to save their homes.”
The CFPB’s new rules are aimed at helping every borrower, whether struggling or not, by bringing greater transparency to the market with clear and timely information about mortgages. These rules include:
►Clear Monthly Mortgage Statements: Servicers must provide regular statements which include: the amount and due date of the next payment; a breakdown of payments by principal, interest, fees, and escrow; and recent transaction activity.
►Early Warning Before Interest Rate Adjusts: Servicers must provide a disclosure before the first time the interest rate adjusts for most adjustable-rate mortgages. And they must provide disclosures before interest rate adjustments that result in a different payment amount.
►Options for Avoiding Costly “Force-Placed” Insurance: The CFPB’s rules ensure consumers will not be surprised by this insurance, which often can be more expensive than the insurance borrowers buy on their own. The rules say servicers must provide more transparency in this process, including advance notice and pricing information before charging consumers. Servicers must also have a reasonable basis for concluding that a borrower lacks such insurance before purchasing a new policy. If servicers buy the insurance but receive evidence that it was not needed, they must terminate it within fifteen days and refund the premiums.
"While bad lending practices and risky products triggered the housing crisis, the abject failure of the mortgage-servicing industry to mitigate losses or to follow the law when pursuing foreclosures greatly exacerbated the damage done to homeowners, communities, the housing market, and the larger economy," said Julia Gordon, Director of Housing Finance and Policy at the Center for American Progress. "The rule addresses some of the most pernicious practices causing unnecessary damage to families, including dual-tracking foreclosures and force-placed insurance. What’s more, individual homeowners now have the ability to enforce these rules, a crucial piece that has been missing from previous foreclosure-prevention programs."
The CFPB’s rules will also require common-sense policies and procedures for handling consumer accounts and preventing runarounds, including:
►Payments Promptly Credited: Servicers must credit a consumer’s account the date a payment is received. If the servicer places partial payments in a “suspense account,” once the amount in such an account equals a full payment, the servicer must credit it to the borrower’s account.
►Prompt Response to Requests for Payoff Balances: Servicers must generally provide a response to consumer requests for the payoff balances of their mortgage loans within seven business days of receiving a written request.
►Errors Corrected and Information Provided Quickly: Servicers must generally acknowledge receipt of written notices from consumers regarding certain errors or requesting information about their mortgage loans. Generally, within 30 days, the servicer must: correct the error and provide the information requested; conduct a reasonable investigation and inform the borrower why the error did not occur; or inform the borrower that the information requested is unavailable.
►Maintain Accurate and Accessible Documents and Information: Servicers must store borrower information in a way that allows it to be easily accessible. Servicers must also have policies and procedures in place to ensure that they can provide timely and accurate information to borrowers, investors, and in any foreclosure proceeding, the courts.
“An initial reading of the summary indicates that there are some issues that still concern us. For example, the definition of ‘small servicer’, while improved, may still be too narrow and there may be inconsistencies between the new rules around dual tracking and existing timelines mandated by Fannie Mae, Freddie Mac, FHA and the states," said David H. Stevens, president and CEO of the Mortgage Bankers Association (MBA). “We look forward to continuing to work with the CFPB to smooth over the implementation process for these new rules and address any remaining concerns with the new standards.”
These rules originate from the Dodd-Frank Wall Street Reform and Consumer Protection Act, which directed the CFPB to implement reforms for the mortgage servicing industry. The CFPB announced in August that it was considering a number of proposals to implement the Dodd-Frank Act requirements and address systemic problems in the industry. Recognizing that small servicers approach servicing quite differently, the CFPB made certain exemptions to the mortgage servicing rules for small servicers that service 5,000 or fewer mortgage loans that they or an affiliate either own or originated. These servicers are mostly community banks and credit unions servicing mortgages for their customers or members.
The mortgage servicing rules take effect in January 2014. The CFPB plans to work with mortgage servicers to ensure an easy transition to implementation. To help with compliance, the CFPB will, among other things, be issuing plain language implementation guides and, in coordination with other agencies, releasing materials that help servicers understand supervisory expectations. For many of the new rules that require specific notifications, the rule contains model and sample forms. As the effective date approaches, the CFPB will also give consumers information about their new rights under these rules.