The massive financial reform legislation passed in 2010 that established the CFPB also required it to take steps to retool the mortgage servicing industry. The plans outlined Monday will apply not only to servicers operated by banks but also to those run by other financial institutions that were previously not subject to federal supervision.
The Mortgage Bankers Association, which represents servicers, said it supports the CFPB’s efforts to create more transparent disclosures and create a single set of standards across the industry.
“There’s so much uncertainty about the rules of engagement for the housing system going forward that credit has become more constrained,” said Dave Stevens, the group’s chief executive. “There’s an opportunity to help put balanced yet meaningful practices in place on a national scale to allow the markets to move forward.”
The CFPB’s announcement comes on the heels of last week’s $25 billion settlement between state and federal agencies and five of the nation’s biggest bank-run mortgage servicers. The agreement — the largest in corporate history since the settlement with tobacco companies in the 1990s — was prompted by outrage over banks’ use of forged and shoddy paperwork to foreclose on homeowners, a practice known as “robo-signing.” Nonbank servicers were not included in the settlement.
Meanwhile, President Obama recently created a new investigative unit to focus on subprime mortgage lending, and nearly a dozen financial institutions have received federal subpoenas so far this year.
On Monday, the CFPB released a draft of the homeowners’ new mortgage billing statement. It includes not only the principal loan amount and interest rate, but also the date the rate could reset and a description of any late payment or penalty fees. One section addresses consumers “experiencing financial difficulty” and includes information on housing counselors. The statements include a phone number and e-mail address to contact the servicer.
The agency also highlighted plans to address the practice of pushing consumers into high-cost insurance known as “forced-place insurance.” If homeowners fall behind on insurance payments, servicers can place them in a new, often more expensive program. That increases the monthly payments, and homeowners often end up in an even deeper hole.
The CFPB said it will prohibit servicers from charging for new insurance unless there is a reasonable belief that homeowners have fallen behind on their payments. It also plans to allow consumers to find their own replacement insurance, rather than rely on the more expensive option from the servicer.
Alys Cohen, staff attorney for the National Consumer Law Center, an advocacy group, said the moves were a strong first step. Eventually, she said, she hopes the CFPB will require nonbank servicers to determine whether homeowners are eligible for a loan modification before moving to foreclosure. The settlement with bank servicers prohibits the firms moving forward on a loan modification and a foreclosure at the same time.
“This is a crucial moment and we hope they can step in more fully,” Cohen said.
In an op-ed published Monday in Politico, CFPB Director Richard Cordray said that a lack of government oversight contributed to the collapse of the mortgage market and that creating new standards will take “careful thought and time.”
“For the first time, the federal government will have the authority to look into the entire mortgage servicing market,” Cordray wrote in the article, which outlined the agency’s mortgage servicing plan. “This is a critical improvement: We will be able to monitor all players to make sure they abide by federal consumer financial laws.”