They are aimed at vanquishing the unscrupulous practices that were commonplace during the financial crisis, such as “robo-signing,” where servicers processed foreclosure documents without a proper review.
The rules, which will take effect in January 2014, are part of a broader reform of the mortgage market that includes limiting upfront fees and curtailing harmful practices such as interest-only payments — provisions that were unveiled last week. The effort will change the way homeowners interact with their mortgage servicers and is likely to make the process more expensive.
“Anytime you create a better system, it means more costs, and consumers are going to bear that,” said Jaret Seiberg, senior policy analyst at Guggenheim Securities. “It will get passed on to them in the form of higher interest rates and less credit availability.”
To meet the requirements, mortgage servicers will have to improve their operating systems, quality-control measures, legal review and training, said David H. Stevens, president of the Mortgage Bankers Association.
“Everybody is going to have to rewrite the book on how they look at servicing, and that will have an extraordinary impact on homeowners,” he said.
Consumer advocates, however, say that new industry-wide standards will actually create greater efficiency that should ultimately reduce costs for borrowers. And with banks raking in record profits from their mortgage businesses, they should have the ability to absorb the initial costs, the advocates say.
“The cost to homeowners right now could not be higher. People who could afford loan modifications are losing their homes,” said Alys Cohen, a lawyer with the National Consumer Law Center. At least under the new rules, she said, “homeowners will have a better sense of what to expect procedurally and have some rights to enforce them.”
In the nation’s colossal mortgage market, where consumers owe about $10 trillion on their homes, servicers play a critical role: They are the middlemen employed by lenders or investors to collect mortgage payments from homeowners as well as handle foreclosures and loan modifications.
The industry is dominated by some of the nation’s largest banks, including Wells Fargo, Bank of America and Citigroup, but includes many independent operators who until now were not subject to federal supervision.
During the financial crisis, mortgage servicers were notorious for sloppy record-keeping that endangered borrowers’ chances of holding on to their homes. Many servicers were overwhelmed by the volume of cases, and some rushed through reviews and forged documents.
Last year, five of the largest mortgage servicers agreed to a $25 billion settlement with state and federal agencies over widespread cases of wrongful foreclosure.
According to the CFPB, it received more than 23,500 consumer complaints in the past six months alone involving homeowners having trouble with mortgage servicers on loan modifications, collections or foreclosure.
Stories of reckless mismanagement of homeowners’ cases prompted Congress to impose new guidelines on servicers. Under the Dodd-Frank financial reform law, the CFPB was given the authority to craft rules addressing the systemic problems in the mortgage-servicing industry.
The consumer bureau unveiled a draft of its plans last spring and made a series of tweaks. One of the more notable changes to the draft prohibits servicers from initiating foreclosure if a borrower has already submitted a complete application for a loan modification— barring a process known as “dual tracking.”
Servicers are also restricted from filing a notice for foreclosure until the account is more than 120 days delinquent. The CFPB’s rule preempts state foreclosure laws, a crucial point because in order to hasten the process, some states allow lenders to foreclose without first getting a court order.
“While this change is significant, it needs to go even further,” said Cohen of the Consumer Law Center. “Most people ask for modification once they’re in foreclosure and the sale date is close.”
Once foreclosure proceedings have begun, the CFPB says, servicers can no longer sell the home if they’ve renegotiated the mortgage with the homeowner. They must also consider and respond to a borrower’s application for a modification if it arrives at least 37 days before a scheduled foreclosure sale.
Cohen is concerned that “at the end of the day, the rules don’t require that people get modifications even if they are better for the investor and the homeowner.”
If mortgage servicers violate any of the new rules, consumers have the right to sue and the consumer bureau can pursue enforcement actions.
“Servicing rules are right now all over the map between what the banking agencies require and state attorneys general settlement imposed,” Seiberg of Guggenheim Securities said. “There are costs worth bearing, and having a comprehensive regulatory regime that applies to all servicers is probably one of those.”
There are exceptions. Mortgage servicers with fewer than 5,000 home loans that they either own or originated are exempt from the rules. This will primarily affect small community banks and credit unions. Senior officials at the CFPB said these institutions tend to be more vigilant in their treatment of consumers because they keep some of the mortgages in-house and therefore bear some of the risk.
If nothing else, the CFPB has provided the mortgage servicing industry with clear regulations under which to operate, which bodes well for the housing market, said National Community Reinvestment Coalition chief executive John Taylor.
“With very clear rules of what’s permissible and what’s not, there ought to be a flood of quality, sustainable mortgage product that allows people to refinance, buy homes or sell them,” he said.