The new federal consumer watchdog agency is slated to announce Tuesday that it is considering several new rules aimed at increasing transparency and accountability in the scandal-ridden mortgage-servicing industry.
The rules would require mortgage servicers to warn homeowners before any interest rate adjustments, provide options for delinquent borrowers to avoid foreclosure, investigate errors within 30 days and improve staff accessibility to consumers, among other things. The Consumer Financial Protection Bureau is seeking business and public comment before formally proposing the rules, which are expected to be finalized by next year.
CFPB Director Richard Cordray is scheduled to unveil the plan for regulation during a speech Tuesday at Operation Hope, a Southeast Washington nonprofit group focused on financial literacy. In a prepared statement, he called the initiative “common sense.”
“For too long, mortgage servicers have not been held accountable to their customers, and the result has been profoundly punishing to homeowners in distress,” Cordray said. “It’s time to put the ‘service’ back in mortgage servicing.”
Mortgage servicers collect monthly payments from borrowers as well as handle consumer inquiries, loan modifications and foreclosures. The industry has come under fire for widespread examples of forged and shoddy paperwork. Five of the largest bank-run mortgage servicers agreed to a $25 billion settlement with state and federal agencies earlier this year over the issue, the largest corporate payout since the tobacco industry settlement in the 1990s.
Regulators have tried in the past to impose stricter standards on mortgage servicers, but the sector is so diverse — ranging from the nation’s biggest banks to independent operators — that consumer advocates say some companies have fallen through the cracks. The CFPB is the first agency with the authority to craft rules that would apply to all firms in the field.
Under the regulatory overhaul law that established the agency, the CFPB is required to write several of the eight proposals under consideration. They include revamping monthly mortgage statements to itemize fees, establishing a process for keeping borrowers’ records up to date and prohibiting servicers from replacing homeowners’ insurance with a more expensive plan unless the borrowers have fallen behind on their payments.
But the agency decided to add three additional proposals, marking the first time it is employing its broad new rule-making authority. First, it is seeking to mandate that servicers make “good-faith efforts” to contact delinquent borrowers and inform them of ways to avoid foreclosure. The CFPB would also require servicers to look into complaints of errors within 30 days — including complaints about moving to foreclosure when the borrower is in a loan modification. Finally, they would have to provide consumers with direct, ongoing access to staff dedicated to helping troubled borrowers.
The agency said it will share its draft proposal with a small-business review panel as well as the public. An official notice of proposed rulemaking is slated to be published this summer.