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.
The CFPB rules also mandate that if a borrower already has an escrow account that covers hazard insurance premiums and the account runs out of funds, the servicer cannot purchase more expensive force-placed insurance. It must stick with the borrower's current insurer and even forward funds to the account if necessary.
Force-placed insurance "often can be more expensive than the insurance borrowers buy on their own," Cordray said. "Our rules force servicers to provide more transparency in this process, including advance notice and pricing information before charging consumers."
Servicers are required to:
- Inform borrowers within 60 days about their loss mitigation options after a borrower has missed two consecutive mortgage payments, including providing examples of various options to help avoid foreclosure.
- Make a good faith effort to establish "live" contact with a distressed homeowner after they have fallen behind on their mortgage payments by 36 days.
- Provide written notice about loss mitigation once a loan is delinquent by 45 days.
- Acknowledge receipt of a borrower's application for loss mitigation within five days and inform the borrower if their application is complete.
- Evaluate any mitigation application within 30 days for all eligible options to avoid foreclosure based on investors' eligibility rules.
- Give an explanation to borrowers if they are denied a loan modification. Servicers must provide a written decision, including their basis for a denial, and borrowers have a right to appeal as long as their application was received 90 days before a scheduled foreclosure sale.
Fair Review Process
Another major change to the final rules is that servicers now have to double-check with investors that own a delinquent loan what loss mitigation options they offer — from deferment of payments to loan modifications — and provide those options to the borrower. They also have to inform the investor of what they are doing.
For years, servicer incentives have not been aligned with the interests of investors, a senior CFPB official told reporters on Wednesday. Investors themselves have been unable to force servicers to provide loan modifications, in part because servicers may actually be paid more when a loan goes into foreclosure. Under the rules, servicers can no longer steer borrowers to those options that are most financially favorable to the servicer.
The CFPB's final rule differs from a requirement in the national mortgage settlement that the top five banks provide a "single point of contact," to borrowers. Instead, servicers are required to have "dedicated personnel" to provide delinquent borrowers "with direct, easy, ongoing access to employees responsible for helping them."
The CFPB rules require servicers to provide servicers with a handful of new notices, some of which are more common practices than others. Even for those that are already in use, however, the agency is mandating much more detail and a new set of timetables in certain cases.
- Billing statements must include a myriad of information such as payments due and made; fees imposed; contact information for the servicer and housing counselors; and delinquencies if applicable. The periodic statement requirement generally does not apply to fixed-rate loans if the consumer has a coupon book with the same information or is provided the remaining information, the CFPB said. The rule will also include sample forms and the timetable required to provide the information.
- Creditors, assignees, and servicers must provide consumers with an adjustable-rate mortgage a notice between 210 and 240 days before the first rate-adjustment payment is due. They must also give notice between 60 and 120 days before a payment is due that has been adjusted because of an interest rate change.
- Servicers must credit the periodic payments from borrowers on the day of receipt. If the borrower sends a payment less than the periodic amount due, the payment can be held in a suspense account. When there is enough funds in the suspense account to covers the payment, the servicer must apply the funds to the consumer's account.
- Creditors, assignees, and servicers must provide the correct payoff balance to a consumer no later than seven business days after receiving a written request from the borrower.
While some of this sounds like basic information, Cordray said such problems have gone on for years and continue today.
"In the second half of last year alone, our Office of Consumer Response fielded more than 47,000 complaints about mortgages," he said. "More than half were about the problems people have when they are unable to make their payments, such as issues relating to loan modifications, collections, or foreclosure."
The CFPB also issued requirements for how servicers must respond to written information requests or error complaints. The rule outlines error-resolution procedures that include any error relating to the servicing of a mortgage loan and timetables for responding.
Servicers have five days to acknowledge the notice of an error. They also have 30 to 45 days to: correct the error asserted by the borrower and provide the borrower written notification; or conduct an investigation and provide the borrower written notification that no error occurred.
Servicers must also follow a similar amount of time when a consumer requests for information in writing, either by providing the information or explaining why it's not available.
Exemptions for Smaller Servicers
There are also a handful of exemptions and adjustments for smaller servicers, including community banks and credit unions. Unlike the first proposal, the CFPB gave an exemption to institutions that service less than 5,000 mortgage loans and only mortgages that they or an affiliate originated or own.
A senior CFPB official said during the call Wednesday that the bureau set this threshold based on comments, including from the Small Business Administration. This threshold would cover nearly 99% of the community banks and credit unions across the nation, the official said.
"These exceptions and adjustments should help reduce burdens for these institutions that have strong consumer service safeguards already built into their business models," the bureau said in its rule summary.
Even More to Come
Cordray also hinted at "other rules" for the mortgage market to be released this month that will prohibit "unsafe lending practices." The agency is also expected to ramp up enforcement and supervision of those regulations.
"We believe that the CFPB is likely to concentrate more on servicing in the coming quarters once it finalizes the rules," said Jaret Seiberg at Guggenheim Partners, in a note released Wednesday prior to the issuance of the final rules. "In our view, this is an area where many Democrats believe that consumers get taken advantage of. So they want to see more attention to servicing enforcement."