The Consumer Financial Protection Bureau has proposed new rules for the mortgage servicing industry, which include a requirement that servicers must make a decision on any mortgage relief applicant within 30 days, and must not begin foreclosure proceedings until completing that process.

Under the Consumer Financial Protection Bureau’s proposal, loan servicers would be required to evaluate homeowners’ applications for loan-assistance within 30 days of receiving an application and would be barred from going ahead with a foreclosure until a final decision has been reached on a borrower’s application for help [...]

The consumer bureau’s proposal, along with new bank-capital standards and other regulations, could push some large banks to accelerate sales of poorly performing loans to smaller companies that specialize in managing distressed loans, said Issac Boltansky, a Washington analyst with Compass Point Research & Trading.

“We expect the big bank servicers to offload a sizable portion of their servicing assets,” to smaller companies known as special servicers, he wrote in a note to clients. Some of those companies include Ocwen Financial Corp., Nationstar, and Walter Investment Management Corp.

Large banks are “simply not going to make as much money,” on servicing and are likely to hire other companies to perform many servicing functions, said Ed Delgado, a former Wells Fargo executive and chief operating officer of Wingspan Portfolio Advisors, which performs those functions.

It is a sad day in America when large banks will be prevented from making as much money as before. But this would greatly benefit the consumer. Mortgage servicing, by design, can only make big profits with a bare-bones staff that doesn’t attend to the needs of the customer, and with the ability to rip off those customers with illegal fees and charges. Wells Fargo admitted in court that their servicing arm routinely pays off fees and interest before paying down principal in any payment given to them, which violates what is supposed to be the standard practice. And that’s just one example of systematic servicer abuse. As currently constructed, servicers cannot accomplish the goals laid out by CFPB.

That doesn’t mean CFPB should withdraw the request. Ben Hallman has a bit more on the new proposed rules:

Under the proposed rules, banks and other financial institutions that manage home loans — the servicers — must provide “direct, ongoing access” to staff members to help borrowers fighting to save their homes from foreclosure. Servicers must also halt foreclosure proceedings while borrowers apply for a loan modification and tell homeowners in danger of foreclosure about their options [...]

Though many of the new rules proposed by the consumer bureau mirror the attorneys general settlement, others stake out new ground. For instance, servicers would be required to give borrowers accurate and current account information and to quickly correct errors.

This might seem like kindergarten-level stuff for sophisticated financial institutions. But homeowners, lawyers and judges have accused banks of profiting off of delinquent borrowers by improperly applying charges in a way that keeps homeowners in a so-called rolling default, which leads to more late charges and sometimes foreclosure.

The big problem here is going to be enforcement. Servicers, as I said, can’t do a lot of this, and history has shown that they won’t, even under a mandate. Servicers have not changed their ways at all despite an OCC consent decree and the foreclosure fraud settlement, which laid out a series of common servicer standards.

CFPB has ongoing control over the standards, deriving the authority from Dodd-Frank. So it’s going to be up to them to enforce them. They’ve laid out a strong set of rules, but rules don’t mean much unless they’re followed.

As for the sale to “special servicers,” I’ll believe it when I see it. Banks may determine that it’s much more profitable to them to just ignore the standards, pay the fines as the cost of doing business, and still send homeowners into a nightmare when they get into trouble. This is an important moment for CFPB to establish themselves as more than the current version of a federal financial regulator, i.e. a doormat.