WASHINGTON — Just a week after overhauling how mortgages are underwritten, the Consumer Financial Protection Bureau was set Thursday to unleash an additional series of rules dictating extensive new requirements for mortgage servicing.
Unlike the rule defining a "qualified mortgage," which the industry said was more flexible and less harsh than expected, the servicing regulations are significantly tougher than what the CFPB initially proposed last year.
The rules set specific timetables and restrictions on when a servicer can foreclosure on a borrower, including forcing them to wait at least four months after a loan is delinquent before even initiating a foreclosure proceeding. They also ban dual tracking of foreclosures and loan modifications and require additional disclosures and timetables for when servicers must comply with consumer requests.
"We will exercise our supervision and enforcement authority to make these rules stick for mortgage servicers across the entire market," said CFPB Director Richard Cordray in his prepared remarks at a field hearing in Atlanta on Thursday. "By working to see that homeowners are treated with dignity once again, we are taking a big step forward for progress and fairness in this country."
The agency's goal is to fix a "broken system," he said, placing the once behind-the-scenes mortgage servicer on the hook for everything from a lack of transparency to poor response times to the foreclosure process itself.
The CFPB is particularly focused on mortgage servicers because they are the single largest consumer financial market in the nation, holding about $10 trillion in outstanding mortgages, Cordray said.
It is also an area where problems have been readily apparent. Servicers have weathered intense criticism over the last four years for losing customers' paperwork, denying loan modifications when the borrower should have received one, and initiating foreclosures while a loan mod was being processed.
"Many servicers failed to provide the basic level of customer service that borrowers deserve, costing them money and dumping them into foreclosure," Cordray said. "Dealing with sloppy mortgage servicing became a frustrating nightmare."
Like the QM rule, the new servicing rules, which are effective Jan. 10, 2014, are complicated and intricate. We present the following detailed summary of its most important provisions:
Dual Tracking, Foreclosure Timetables
The new rules ban servicers from moving forward with a foreclosure while simultaneously working with a borrower on a loan modification, a practice known as dual tracking.
They also force servicers to wait until a loan is at least 120 days delinquent before initiating a foreclosure, a requirement that supercedes state laws that allow speedier foreclosure timetables.
Servicers are also restricted from starting the foreclosure process if a borrower has already submitted a complete application for a loan modification and the application is pending a review.
But the CFPB rules also set another timetable that may not be as helpful to borrowers in nonjudicial states, where foreclosures are not processed by the courts. If the foreclosure process has already been started, a borrower can still submit an application for a loan modification, and the servicer must stop the foreclosure process and review the application, as long as the application was received more than 37 days before a scheduled foreclosure sale.
Since most servicers send out a foreclosure notice after 90 days, the one-month extension might appear to extend the foreclosure process. But in reality, 42% of delinquent borrowers have not made a payment in almost two years, according to data from RealtyTrac, so it is unclear whether the change by the CFPB will have much impact.
A basic premise of national servicing standards is that borrowers must be provided with all available options to avoid foreclosure and the process must be uniform for banks and nonbanks alike. With millions of homeowners in distress, many borrowers still have problems getting a loan modification. While the new servicing rules do not mandate that servicers give all borrowers a modification, they do outline the basic steps that must be taken, such as a fair review process, before a servicer can start a foreclosure.
"Servicers failed to answer phone calls, routinely lost paperwork, and mishandled accounts," Cordray said. "Communication and coordination were poor, leading many to think they were on their way to a solution, only to find that their homes had been foreclosed on and sold."
One of the more controversial areas related to servicing has been force-placed insurance, where servicers have come under fire for charging borrowers for such insurance without notice or time for the consumer to shop themselves.
The CFPB rules stop servicers from charging for such insurance unless the servicer has notified the consumer first and has a "reasonable basis" such insurance is necessary. To meet those tests, servicers must:
- Notify customers at least 45 days before charging for force-placed insurance and send a second notice at least 15 days prior to charging any fee.
- Cancel any force-placed insurance within 15 days and refund all premiums if the borrower provides proof of hazard insurance coverage.