WASHINGTON — The Consumer Financial Protection Bureau will issue mortgage servicing rules this year that would impose new limits on force-placed insurance products and require additional disclosures for adjustable-rate mortgages, Director Richard Cordray said Tuesday.
The bureau will also issue a rule requiring servicers to provide consumers with better information in their billing statements, Cordray said in a speech to the National Association of Attorneys General annual meeting in Washington. Fixing the mortgage market is an "urgent priority" for the CFPB, he said.
"We now have the ability to examine participants in all segments of the mortgage market, and our authority over nonbanks will be especially helpful," he said. "Before the crisis hit, only part of this market was subject to federal oversight. How could that ever be expected to work? It most certainly did not."
"I firmly believe that had the consumer bureau been in place ten years ago, the crisis would have been headed off before it metastasized," Cordray added.
Under the Dodd-Frank Act, CFPB has the authority to supervise mortgage lenders of any size. It has been charged with finalizing a rule that would require a lender to verify a borrower's ability to repay his mortgage, unless the loan meets requirements of a so-called "qualified mortgage."
The bureau has also been working with regulators to develop new national mortgage servicing standards, the foundation for which was laid by a $25 billion settlement between the five largest mortgage servicers, state attorneys general and federal officials.
Cordray, who was the attorney general of Ohio when the settlement negotiations began, said the agreement was an important first step, but said the agency still has "an enormous role to play."
To that end, he said, CPFB will propose a regulation that would prevent servicers from charging for forced-place insurance products unless there is "a reasonable basis to believe that borrowers have failed to maintain their own insurance."
He also said the agency will issue new rules around adjustable-rate mortgages, including one that would require consumers to be notified months ahead of their first interest rate adjustment. Servicers would have to disclose the borrower's new monthly payment amount, as well as any available options to head off the higher rate, such as refinancing and renegotiation of the loan terms, Cordray said.
He did not say when the bureau planned to release the proposed rules.
A coalition of state AGs had targeted force-placed insurance as part of the multistate foreclosure settlement, and officials said the $25 billion deal imposes restrictions on those products. But they have not provided any details as they continue to finalize the settlement documents. Housing and Urban Development Secretary Shaun Donovan said the final agreement would be released last week, but so far nothing has been filed in federal court.
Industry observers have expected the bureau to launch investigations into force-placed insurance, in which banks buy insurance on behalf of uninsured borrowers and then tack the cost onto their mortgage debts.
The bureau inherited the authority to enforce the Real Estate Settlement and Procedures Act last year from the HUD, along with much of that agency's enforcement staff, including one lawyer who had already begun looking into alleged kickbacks paid to banks by insurers.
Banks have also been hit with a slew of class action lawsuits. At least 10 force-placed cases are now in progress against Bank of America, Wells Fargo & Co., JPMorgan Chase & Co, RBS Citizens Bancorp, and U.S. Bancorp.
Consumer advocates have said force-placed insurance is a widespread problem for troubled borrowers, and in many cases actually drives homeowners into foreclosure.
Ira Rheingold, the executive director of the National Association of Consumer Advocates, said the CFPB rules should require servicers to give homeowners the opportunity to purchase their own insurance, and put restrictions on the cost of the insurance servicers are offering, as well as the relationships they have with insurance providers.
"I would expect that the AG settlement will probably color or at least provide some guidance to the CFPB when they do regulations around force-placed insurance," Rheingold said. "Speaking to NAAG, [Corday] is sort of saying we know that you've done some work here . . . and we will take what you've done and try to make sure it applies to everyone."
Observers also expect the settlement will require servicers to keep making insurance payments even if the borrower does not have an escrow account, a move that could preclude the need for more expensive force-placed insurance.
"Our view is that the CFPB has the authority to require a force-placed insurance regime similar to that in the AG settlement," said Alys Cohen, a staff attorney at the National Consumer Law Center. "Our position is that the servicers should be required to continue making payments on the homeowner's policy, whether or not there is an escrow."
Cordray also said the CFPB is close to finalizing a framework for sharing information with the state AGs.
The bureau signed a joint statement of principles with the association last April, outlining their plans to coordinate investigations and identify mutual enforcement priorities. But the banking industry has raised concerns about the kinds of information CFPB might share with state law enforcement officials, and whether that information could be made public.
Cordray told the AGs they would be receiving a memorandum of understanding establishing a general framework to share information on consumer financial protection issues "shortly."
"A quick turnaround on this will help accelerate our partnership with each of you," he said. "We want to expand on what you already do so well — and we want you to take advantage of new resources we bring to the arena, including new analytical tools and insight into market trends."
Colorado Attorney General John Suthers said he hoped the bureau could work with states that have been waging legal battles against online payday lenders that affiliate with Native American tribes to avoid state regulation.
Cordray said CFPB has been following the cases and plans to work with the Federal Trade Commission to address those concerns at the federal level.
"This is one of the areas I think where you'll see a lot of cooperation going forward between the new bureau and the Federal Trade Commission," said FTC Commissioner Julie Brill, who addressed the meeting before Cordray.
Cordray also said the bureau, which has the authority to supervise the private student lending market, continues to monitor the lending practices of for-profit colleges. The bureau has been coordinating with a working group of state AGs, as well as with the Department of Education and Department of Defense.
"It may well lead to Congressional legislation to modify some of those pressures," he said. "And in the meantime is leading to enforcement actions by many of you and investigations where you're getting much more information so we can get to the bottom of what is and is not a problem in this area."