The Consumer Financial Protection Bureau has begun its rulemaking process for mortgage servicing, starting with a description of the rules they will consider. The formal proposal of servicing rules will come this summer, and the final rules will get promulgated in January 2013.
This would supersede the mortgage servicing standards from the foreclosure fraud settlement, as well as outlast them, because while the settlement standards expire after 3 1/2 years, the rules from the CFPB can be permanent. CFPB has statutory authority under Dodd-Frank to adopt rules for the servicing industry, so the vaunted “servicing standards” in the settlement will become mostly superfluous, or at least a stopgap.
With the theme of putting the “service” back in mortgage servicing, CFPB released a factsheet of the rules they will consider. They fall into two buckets: transparency and accountability.
On the transparency side, CFPB wants clear monthly mortgage statements with a complete breakdown of payments, long warning times before interest rate adjustments on adjustable-rate mortgages, alerts for delinquent borrowers of services like counselors and foreclosure mitigation programs, and options for borrowers before servicers install “force-placed” insurance, which is when servicers take it upon themselves to install homeowner’s insurance on a property, usually at a steep mark-up.
On the accountability and fairness side, CFPB’s rules would include:
• Immediately crediting payments to consumer accounts, in the proper manner, with interest and principal first before fees or escrow.
• Accessible and presentable records that inspectors and borrowers can review.
• An actual review process for errors, where the servicer acknowledges receipt of a complaint, conducts an investigation, and is required to inform the customer of the resolution.
• A dedicated foreclosure prevention team within the servicer that troubled borrowers can access.
A more detailed explanation of the rules under consideration is here.
It’s amazing that some of these elements don’t exist already, but mortgage servicing hasn’t had a regulator, at least not at the federal level. And the fact that none of these rules are a feature of their conduct today shows how these rules would really rebuild servicing from the ground up. They differ in some ways from the “single point of contact” and “no dual track of loan modification and foreclosure” rules that we normally hear about from reformers, but in a way they’re more comprehensive, because they actually envision every borrower’s interaction with their servicer, whether they’re current on the loan, about to have their interest rate adjust, or whether their servicer simply ripped them off.
Again, the plan is for a notice of proposed rulemaking filed in the Federal Register sometime this summer, with the rule finalized by January 21, 2013 (the day after the next inauguration). There would be some ramp-up for implementation, but no longer than a year, and the decision on the time frame has not been made.
In remarks today, CFPB Director Richard Cordray notes that the servicing industry “has never had a requirement, or a strong incentive, to meet the needs of consumers.” The industry was built for speed and not accuracy, and in the wake of the housing collapse started cutting back on staff rather than increasing to meet needs. Cordray sounded appropriately disgusted by servicers today:
Consider for a moment the impact of these problems on families. We are not talking here about a $10 overcharge on a utility bill. We are talking about the largest single investment that people will make in their lifetimes, and a matter that goes far beyond a mere economic investment. We are talking, specifically, about people’s homes. A place consecrated by a deep bond that only the passage of time – and the precious enjoyment of time – can create in an enduring way. The swing-set your children loved. The deck you built with your own hands. The door that swung shut behind you every day you went to work, to earn the money to make the payments to keep the place you called your own.
And it is not just consumers who suffer. Mortgage investors do not benefit from a broken system where servicers do not fulfill their obligations or make reasonable efforts to mitigate losses. And this failed business model widened the pain of the housing crisis and destroyed an incalculable measure of consumer trust in financial businesses, perhaps in a lasting way.
Hopefully he will bring the same amount of disdain to the process of unwinding these servicers and creating a model that can work.