Consumer Financial Protection Bureau Proposes Mortgage Servicing Rules
To answer mounting problems in loan servicing, the Consumer Financial Protection Bureau (CFPB) proposed nine new rules to protect homeowners from these errors made by their mortgage servicers. If adopted, these rules will be implemented in January 2013.
Homeowners have struggled to pay their mortgages and have suffered with runarounds from mortgage servicers. Bad practices, sloppy record keeping and other problems have plagued homeowners to the point where many even lose their homes to foreclosure.
While trying to avoid foreclosure through renegotiating their loan, borrowers are faced with mortgage loan servicers who lose their applications and paperwork for loan modification, and if technical errors have occurred, they are finding it increasingly more difficult to have these errors corrected.
To make matters worse, the consumer isn’t even able to choose his or her loan servicing organization. That decision is made by the lenders who generally contract out loan servicing after the mortgage deal has been signed. Mortgage services handle all aspects of managing the loan including collecting payments, handling customer service, collecting escrow accounts, modifying existing loans and, when necessary, foreclosing on home owners.
Rules regarding information for borrowers
The first set of proposed rules provides borrowers with clear and timely information about their mortgages so they can avoid any costly surprises.
Clear periodic billing statements: Loan servicers would be required to provide regular statements that show breakdowns in payments by principle, interest, fees, and escrow; the amount of and due date of the next payment; any recent transaction activity; and a clear warning about fees.
Adjustable-rate mortgage interest-rate adjustment notices: Loan servicers would need to provide disclosures much earlier before the interest rate adjusts for adjustable-rate mortgages.
The disclosure notification would provide information to the borrower about alternatives and counseling resources if the new payment is not affordable, thus, providing more clarity to borrowers.
“Force-placed” insurance options: Loan services are obligated to ensure that borrowers maintain sufficient property insurance.
If the borrower neglects to do this, the loan service purchases insurance on the borrower’s behalf so that the lenders are protected. This is known as “force-placed” insurance. The problem is that this type of insurance is much more expensive to the borrower than if they were to procure the insurance on their own.
To ensure greater transparency in this process, this rule would require loan servicers to provide advanced notice along with pricing information before charging borrowers. In addition, the loan servicer would be required to cancel any purchased insurance within 15 days if it receives information that the borrower has purchased the appropriate insurance and would be required to refund the consumer the force-placed insurance premiums.
Contacting and options for avoiding foreclosure: Loan servicers would be obligated to make good faith efforts to contact any borrower in a delinquent status.
They would also be required to inform the consumer of options available to them to avoid foreclosure.
Rules regarding handling of consumer accounts
The second set of proposed rules would provide requirements for handling consumer accounts, including evaluating borrowers for options to avoid foreclosure and correcting errors.
Credit payments promptly: Loan servicers are required to credit a borrower’s account as of the date the payment was received.
Maintain accessible and accurate information and documents: Loan servicers would be obligated to put in place reasonable policies and procedures that would result in providing more accurate information to consumers and that would minimize processing errors.
They also would help borrowers on options to avoid foreclosure. In addition, they would be required to provide adequate oversight of their contractors and their foreclosure attorneys.
Review options to avoid foreclosure: Loan servicers that offer foreclosure avoidance options, such as payment plan changes and loan modifications, would be obligated to quickly review applications for those options.
Loan servicers would not be allowed to move forward with a foreclosure proceeding until the review of a borrower’s application was completed. In addition, loan servicers would be required to inform borrowers when their applications are incomplete and to establish policies and procedures that would allow borrowers to appeal decisions.
Provide direct access to loan servicer personnel to help delinquent borrowers: Loan servicers are obligated to provide any delinquent borrower with ongoing, direct, and easy access to qualified, empowered employees who are dedicated to helping the borrower resolve their problems.
Correct errors quickly: If a borrower contacts the loan servicer and thinks there has been a mistake, the loan servicer is required to document receiving the notification, conduct an investigation, and, in a timely manner, inform the borrower about the resolution.
These rules will ensure that consumers receive timely information on the status of the inquiries, assistance in resolving any errors quickly, and assistance in delinquency matters.
The general public has until October 9, 2012 to provide comments on the proposed rules. These comments will be analyzed before the final issuing of the rules in January 2013.
The Consumer Financial Protection Bureau website offers several documents that you might find helpful to understanding these proposed mortgage servicing rules:
The proposed mortgage servicing rules
The factsheet about these proposals
The SBREFA Panel report on the outreach with small servicers