CFPB Proposes Rules to Protect Mortgage Borrowers

Rules Would Establish Standards to Prevent Servicer Mistakes and Surprises

WASHINGTON, D.C. – The Consumer Financial Protection Bureau (CFPB) today proposed two notices containing rules to protect homeowners from surprises and costly mistakes by their mortgage servicers.

“Millions of homeowners are struggling to pay their mortgages, often through no fault of their own,” said CFPB Director Richard Cordray. “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, the borrower has little say in the choice of mortgage servicer. Lenders frequently contract out servicing after the mortgage deal is signed.

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. Borrowers say that servicers lose their applications and paperwork for loan modifications. And borrowers say that when errors arise, they find it difficult to have them corrected.

The Dodd-Frank Wall Street Reform and Consumer Protection Act addresses some of these problems and imposes 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.

The CFPB first announced in April that it was considering a number of proposals to implement the Dodd-Frank Act requirements and address systemic problems in the servicing industry. The CFPB reached out to consumer groups, small servicers, other industry stakeholders, and various government agencies for input. In response to that feedback, the CFPB refined some of its earlier ideas to both enhance consumer protections – particularly regarding processes for evaluating consumers for alternatives to foreclosure – and also lessen potential burdens on small servicers.

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.

The CFPB’s proposed rules would mean that consumers would get better and timelier information about where they stand in the long foreclosure process. If their loan modification application is missing paperwork, for example, the servicer would have to tell them. Critically, the servicer would not be able to actually foreclose on the consumer without fully considering borrowers’ timely and complete applications for alternatives to foreclosure. The servicer would only be able to proceed with foreclosure if: a borrower does not qualify for options to avoid foreclosure; the borrower rejects a servicer’s offer of such options; or the borrower fails to keep up his or her end of a deal for such an option.

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.

In addition, CFPB is working with the Cornell University e-Rulemaking Initiative (CeRI) to make it easier for the public to comment on the proposed rules through a pilot project called Regulation Room (www.regulationroom.org ). Regulation Room provides an online environment for people and groups to learn about, discuss, and react to selected rules proposed by federal agencies. Individual contributions to Regulation Room will not become formal public comments on the CFPB’s docket, but CFPB expects contributions will be incorporated into a public report prepared by CeRI researchers and submitted to the CFPB’s docket for use in preparation of a final rule.

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 here: https://files.consumerfinance.gov/f/201208_cfpb_tila_proposed_rules.pdf and https://files.consumerfinance.gov/f/201208_cfpb_respa_proposed_rules.pdf

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

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

The SBREFA Panel report on the outreach with small servicers is available here: https://files.consumerfinance.gov/f/201208_cfpb_SBREFA_Report.pdf

A report about how the Bureau developed the new disclosures and how consumers understood the forms can be found here: https://files.consumerfinance.gov/f/201208_cfbp_ICF_Macro_Forms_Testing_Report.pdf