The Consumer Financial Protection Bureau issued a proposal Friday that would require mortgage servicers to provide clear monthly statements, earlier disclosures for interest rate adjustments and options to help borrowers avoid foreclosures and costly force-placed insurance.
The plan, which must be finalized by January 2013, goes beyond many of the consumer protections provided in the $25 billion national mortgage servicing settlement signed earlier this year between the five largest servicers and federal regulators. Among other things, it would force servicers to immediately credit payments to customers' accounts and provide troubled borrowers with direct access to foreclosure prevention programs.
"The inadequate performance of many mortgage servicers has helped widen the misery for many Americans," CFPB Director Richard Cordray said in a press release. "These proposed rules would offer consumers basic protections and put the 'service' back into mortgage servicing. The goal is to prevent mortgage servicers from giving their customers unwelcome surprises and runarounds."
The proposal does not deviate substantially from details the CFPB released in April about how it planned to revamp mortgage servicing.
The agency did make small adjustments, however. It gave an exemption to small servicers that handle fewer than 1,000 loans from sending periodic billing statements to borrowers with a breakdown of terms and fees. CFPB officials said on a conference call with reporters Thursday that the agency is considering whether to exempt small servicers from other aspects of the proposed rules.
Servicers may take issue with the requirement to provide earlier disclosures on adjustable rate mortgages. Because servicers would have to provide a notice to borrowers as early as seven or eight months before the first interest rate adjustment, the CFPB has said the notice "may contain an estimate" of the rate and payment change.
Some industry observers said the provision is ripe for disaster.
"The early warning on interest rate adjustments is probably a terrible idea," said Robert Cook, a partner with HudsonCook LLP. "It's not helpful for consumers to get information that isn't accurate and it's going to cause confusion if all the servicer can do is make a best estimate."
Other observers had concerns about a proposal for force-placed insurance that requires servicers to give advance notice and pricing information before charging consumers. Servicers would be required to terminate force-placed insurance within 15 days if there is evidence that the borrower already has property insurance, and insurers would have to refund the force-placed insurance premiums.
"They seem to be suggesting that the borrower has the right to discontinue coverage on 15 days notice as opposed to the insurance policy having a specific term," said David Dunn, a partner in Hogan Lovells' New York office.
Many of the other requirements are already part of most servicers' processes, including promptly crediting payments to a consumer's account as of the date received, and maintaining accurate and accessible documents and information. Servicers would be required to correct errors quickly and conduct a reasonable investigation that informs consumers in a timely manner.
Bob Davis, executive vice president of the American Bankers Association, warned in a prepared statement that small banks may be harmed by some of the proposed rules.
"We want to make sure servicing doesn't get tangled in so much red tape that high-quality, responsive servicing is no longer viable, particularly at small banks," Davis says. "Requiring duplicate disclosures and mounds of documentation for simple one-to-one conversations may push some banks out of the servicing business, which doesn't benefit borrowers."
Still, many servicers have already made changes to their servicing practices, including significant technology upgrades in preparation for uniform servicing standards.
One of the largest remaining issues is that servicers would be required to make a good faith effort to contact delinquent borrowers and inform them of their options to avoid foreclosure through loan modifications and other payment plans. They also would be prohibited from proceeding with a foreclosure sale until the review of the borrower's application is complete.
In an effort to get more input from borrowers, the CFPB said it is partnering with Cornell University on an e-Rulemaking Initiative to make it easier for the public to comment on the proposed rules through an online pilot project called Regulation Room. Comments provided there will not become part of the agency's formal public comments but will be incorporated into a public report prepared by Cornell researchers and submitted to the CFPB for use in preparation of a final rule.
The public comment period ends October 9.