On August 9, the Consumer Financial Protection Bureau (CFPB) released two sets of proposed rules that will substantially impact the mortgage servicing industry. The proposed rules, which were issued under the Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA), cover nine major topic areas and impose new, stringent requirements on the servicing industry. The proposed TILA rules are available here, and the proposed RESPA rules are available here. In an indirect jab at current mortgage servicing practices, CFPB Director Richard Cordray claims that the new rules “offer consumers basic protections and put the ‘service’ back into mortgage servicing.” Bob Davis, executive vice president of the American Bankers Association, warns that, when considering these rules, servicing should not “get tangled up in so much red tape that high-quality, responsive servicing is no longer viable.” Others caution that these regulations will impose significant costs on mortgage servicers. Indeed, some suggest that some large banks have already begun shifting their mortgage servicing to dedicated mortgage servicers in anticipation of these regulations. The Bureau has provided some relief from the mortgage statement provisions for small servicers that handle 1000 or fewer mortgage loans and is considering similar exemptions from other rule provisions.
The proposed rules are set out in a massive 427 pages of single-spaced text. While a full analysis is beyond the scope of this article, the proposed rules incorporate certain provisions of the national mortgage settlement reached between the state attorneys general and the country’s five largest banks and thereby extend them to non-bank mortgage servicers. Likewise, the proposed rules add additional requirements not included in the settlement. For example, they would require servicers to: (i) respond to homeowners’ complaints or calls for information within five (5) days; (ii) provide “clearer” monthly mortgage statements; (iii) give more advance notice of interest rate changes on adjustable rate mortgages; and (iv) provide borrowers "direct, ongoing access" to staff members. Moreover, as with the national mortgage settlement, the rules would prohibit dual track foreclosure, i.e., prosecuting foreclosures against borrowers during the pendency of a loan modification application. “No surprises and no run-arounds” is how Director Cordray summed up the rules.
The CFPB has divided the proposed rules into two sets. The first addresses transparency issues and includes the following:
- Clear Monthly Mortgage Statements: Servicers would be required to provide regular statements which would include: a breakdown of payments by principal, interest, fees, and escrow; the amount and due date of the next payment; recent transaction activity; and warnings about fees.
- Warning Before Interest Rate Adjusts: Servicers would have to provide earlier disclosures before the interest rate adjusts for most adjustable-rate mortgages. This disclosure would include information about alternatives and counseling resources if the new payment is unaffordable. This requirement would provide greater clarity to borrowers about the impact of interest rate changes. Existing disclosures for interest rate adjustments that cause a change in mortgage payments would be amended to include improved information and arrive earlier so that borrowers can anticipate consequences of payment changes.
- Options for Avoiding Costly “Force-Placed” Insurance: Servicers have the responsibility to ensure that borrowers maintain property insurance. If the borrower does not maintain this insurance, however, the servicer has the right to purchase insurance to protect the lender’s interest in the property. This is called “force-placed” insurance and is typically more expensive than insurance the borrower could privately purchase. The CFPB is proposing a rule that would provide more transparency in this process, including requiring servicers to give advance notice and pricing information before charging consumers for this insurance. The servicer would also be required to terminate the insurance within 15 days if it receives evidence that the borrower has the necessary insurance and the insurer would refund the force-placed insurance premiums.
- Early Information and Options for Avoiding Foreclosure: Servicers would be required to make good faith efforts to contact delinquent borrowers and inform them of their options to avoid foreclosure.
The second set of proposed rules imposes new requirements on mortgage servicers on the handling of consumer accounts. These rules include:
- Payments Promptly Credited: Servicers generally would have to credit a consumer’s account as of the date a payment is received.
- Maintain Accurate and Accessible Documents and Information: Servicers would be required to establish reasonable policies and procedures to provide accurate and current information to borrowers and minimize errors. They would have to submit accurate legal documents that comply with applicable law, help borrowers on options to avoid foreclosure, and provide oversight of their contractors and foreclosure attorneys.
- Timely Error Corrections: If a consumer notifies the servicer that he/she thinks there has been an error, the servicer would be required to acknowledge receiving the notification, conduct a reasonable investigation, and, in a timely manner, inform the consumer about the resolution.
- Direct and Ongoing Access to Servicer Personnel To Assist Delinquent Borrowers: Servicers would be required to provide delinquent borrowers with direct, easy, ongoing access to employees who are dedicated and empowered to help delinquent borrowers.
- Evaluate Borrowers For Options To Avoid Foreclosure: Servicers that offer options to borrowers to avoid foreclosure, such as loan modifications or other payment plans, would be required to promptly review applications for those options. Servicers would be prohibited from proceeding with a foreclosure sale until the review of the borrower’s application is complete. Servicers would also be required to let borrowers know when applications are incomplete and to allow borrowers to appeal certain servicer decisions.
The comment period on these proposed rules closes on October 9, 2012 and the CFPB will issue the final rules in January 2013.