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CFPB Releases Proposed Reforms for Mortgage Servicers
In an April 9, 2012 press release, the CFPB announced a new round of mortgage servicing rules to be proposed for comment by Summer 2012 and finalized by January 2013. The CFPB branded the proposal “No Surprises, No Runarounds” to address perceived problems with transparency and accountability among mortgage servicers. Some of the proposals have been taken up previously by the CFPB, including goals to streamline the information in monthly mortgage statements and de-incentivizing force-placed insurance, and a number address mandates Congress gave the CFPB under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Other proposed rules track reforms similar to the new servicing standards laid out in the State Attorneys General settlement reached with the five largest mortgage servicers in February, such as rules to create direct loss mitigation contacts for borrowers in default and to set timelines for responding to error complaints.
Industry insiders are not surprised that the CFPB is focusing attention on mortgage servicing practices in the wake of the robo-signing scandal and the recent Attorney General settlement. David H. Stevens, President and CEO of the Mortgage Bankers Association, released a statement just after the CFPB announcement stating that the proposed reforms reflect the issues he and his staff have been discussing with CFPB staff. “National standards that apply to all residential loan servicers have the potential to create more confidence and certainty in the real estate market for both borrowers and servicers alike,” Stevens stated. He further noted, “[b]orrowers would be protected by a single standard regardless of where they live and servicers would have one set of rules to comply with everywhere they operate.”
Industry specialists also stressed that additional requirements, especially those that would demand advanced technology, could create higher transactional costs that would likely be passed on to borrowers. Both the CFPB and industry insiders have also addressed the need to ensure that smaller servicers are not priced out of the market due to the reforms. In presenting the proposal, CFPB Director, Richard Cordray, noted that the new rules would apply to both banks and nonbanks but that the CFPB realizes that “a one-size-fits-all approach may not be appropriate, particularly for smaller institutions like community banks and credit unions.”
The CFPB laid out a general overview of the proposed reforms in a fact sheet on April 9, 2012. The rules under consideration by the Bureau include:
- Clear Monthly Mortgage Statements. Servicers would be required to provide a streamlined monthly mortgage statement that would include a summary of mortgage terms; a breakdown of payments by principal, interest, fees, and escrow; the amount and due date for the following payment; an itemization of recent fees and charges; late fee warnings; and information regarding loss mitigation alternatives for delinquent borrowers.
- ARM Warnings. Servicers would be required to provide earlier disclosures of upcoming interest rate adjustments on adjustable-rate mortgages that would include an explanation of how the rate would be determined and when it would take effect; a good-faith estimate of the new monthly payment amount; future interest rate adjustment dates; amounts of pre-payment penalties; and resources for borrowers who cannot afford the adjustment.
- Force-Placed Insurance Limitations. Before purchasing insurance on behalf of borrowers, servicers would be required to request proof of insurance from the borrower twice under certain timing rules; provide a good-faith estimate of the cost of force-placed insurance; accept any “reasonable” form of proof of insurance from the borrower; and terminate any force-placed insurance within 15 days of receiving proof of coverage from the borrower and refund any force-placed insurance premiums. If the servicer maintains an escrow account to cover insurance premiums, then even if a borrower becomes delinquent, the servicer would be required to continue payment under the borrower’s insurance policy rather than purchasing force-placed insurance.
- Avoiding Foreclosure. Servicers would be required to provide information about the foreclosure process, available housing counseling and foreclosure avoidance options to borrowers much earlier in any delinquency.
- Payments Immediately Credited. Servicers would generally be required to credit payments on the day they are received. In the case of partial payments, servicers would be permitted to hold the payments in a suspense account, applying the funds once the suspense account equals one full monthly payment.
- Information Management. This rule would ensure that servicers maintain up-to-date and accessible records in order to minimize errors and facilitate prompt error correction. Servicers would be required to keep records of borrower contact, better organize and manage loss mitigation documents and ensure reasonable and timely access to such information by loss mitigation personnel. The CFPB has acknowledged that some exceptions for small servicers under this rule, for example in maintaining records of all borrower contact, may be appropriate.
- Quick Error Correction. Servicers would be required to acknowledge borrowers’ concerns regarding possible errors within five days of receipt and complete investigations of such errors within thirty days. The CFPB may require shorter timeframe for errors relating to foreclosures and payoffs. Errors falling under this rule would include those involving: incorrect calculations of credits, payments, or amounts due; payment (or nonpayment) of taxes and insurance out of escrow accounts; inaccurate disclosures; inaccurate information about how a borrower can avoid foreclosure; and bringing or continuing a foreclosure after a loan modification.
- Direct and Ongoing Access. Servicers would be required to provide delinquent borrowers (or those asking for help avoiding delinquency) with direct, ongoing access to loss mitigation and foreclosure prevention staff. The CFPB would also require that the foreclosure prevention staff have easy access to the borrower’s records as well as to underwriters who could quickly evaluate loan modification eligibility or other loss mitigation options.