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.