The Consumer Financial Practices Bureau (“CFPB” or “Bureau”) was formed after the passage of Dodd-Frank to protect American consumers in the market for consumer financial products and services through regulation. Not surprisingly, the mortgage market became the immediate target for reform, but the Bureau also has future plans to regulate private student loans, credit card debt, and other financial services. When the Consumer Financial Protection Bureau celebrated its birthday on July 21, many regarded the Bureau’s first year as a successful one and anxiously awaited the debut of progress made during that time.
Citing a lack of both transparency and accountability in a market where “consumers have the most at risk and the most at stake,” CFPB Director Richard Cordray’s first order of business was to revamp the process of getting a mortgage, through a set of rules governing the process, from the initial shopping phase to closing to servicing. Before the CFPB was created, there was no national servicing standard, and servicers operated with little or no regulation or governance from regulatory agencies. However, that is all about to change as the Bureau is slated to release a set of default servicing guidelines that will be followed nationwide and are set to be proposed this summer and (hopefully) implemented by January 21, 2013. The rules’ objective is to prevent borrowers from incurring unexpected, expensive costs while obtaining a mortgage and offer them increased assistance and information. However, with mortgage servicers currently responsible for juggling customer service requests, loan modifications, monthly payment collection, and foreclosures, American consumers aren’t the only ones who will benefit from default servicing guidelines; servicers will also reap long-term benefits from a consistent set of rules that streamline and simplify industry practices as a whole.
In April, 2012, the CFPB announced that it was working on a mortgage services rules proposal that would establish new policies for servicers to abide by, as well as modify concepts already found within the mortgage provisions of the Dodd-Frank Act and existing law. At the time this article was published, the Bureau had not yet released the rules for mortgage servicers, but the market was aware of various considerations likely to be addressed in the Bureau’s proposal.
The CFPB opened a forum where borrowers could lodge complaints, and reported findings that many borrowers felt they didn’t receive enough information to prevent foreclosure, weren’t able to get their questions to servicers answered, and found it difficult to obtain a response from servicers. Taking this feedback into consideration, the Bureau’s proposed rule governing servicers will be premised on two principles: protecting homeowners from surprise costs and preventing them from “getting the runaround” from their servicers. In the pursuit of transparency and accountability, the implementation of the forthcoming rules will require servicers to provide clearer information, better service, and greater options for a borrower facing foreclosure. This will happen by requiring servicers to change monthly mortgage statements to include more detail and information, give advanced notice of upcoming interest rate adjustments, offer early information and advisement to borrowers to help prevent or avoid foreclosure, and preventing charges for force-placed insurance in the absence of certain conditions.
Going forward, monthly mortgage statements will include an itemized breakdown of all charges (principal, fees, interest, and escrow), the amount due, and the due date. The statement will also include information or notices for delinquent borrowers and information on how to receive counseling to avoid or prevent foreclosure.
Any adjustment in a borrower’s interest rate will require advanced notice that lets the borrower know when the change will take effect and also offers possible alternatives, should the new rate render the monthly payment unaffordable.
The CFPB rules will only allow servicers to charge for force-placed insurance if there is a reasonable basis to believe that borrowers have failed to maintain their own hazard insurance after the servicer has provided the consumer an opportunity to obtain their own policy. Like the other provisions governing servicers, notice and alternative options to force-placed insurance must be given to the borrower.
Servicers can expect to implement efficiency policies that prevent lost documents, reduce errors, and provide information to homeowners. When borrowers make payments, servicers will now need to credit payments to the borrower’s account promptly, a measure the Bureau hopes will reduce late fees. Finally, mortgage servicers will be required to contact borrowers who are behind on their mortgage payments and advise them of alternative options available to them to prevent or avoid foreclosure. If the borrower contacts the servicer, there will be specific timeframes and guidelines under which the servicer must respond and provide information.
The proposed rules emphasize the importance placed by the Bureau on avoiding and preventing foreclosure. All forthcoming requirements aim to ensure that consumers are wellinformed by servicers who are readily and easily accessible, ultimately resulting in an overallimproved mortgage market. In the wake of the housing crisis, there has been a recognized need for a watchdog of sorts to govern and enforce the actions of the mortgage market. The CFPB has taken on this watchdog role, and servicers can expect to be subject to stringent auditing in an effort to achieve ever-important market transparency and accountability.
In certain areas, examinations will be conducted on a routine basis, with default servicing subject to specific scrutiny. The Bureau’s initial focus will be on loans in default, moving outward to routine inspection. Servicing transfers, loan ownership transfers, escrow disclosures, payment processing, account maintenance, customer inquiries, credit reporting, and information sharing are some of the areas that will be inspected on a routine basis by the Bureau. In the event of default, servicing examinations of collections, loss mitigation, and the foreclosure will occur. It is highly likely that these audits will be frequent and conscientious once the rules are implemented early next year, and servicers should prepare accordingly. However, after adapting to the regulation, servicers’ data will be more readily available and meeting audit requirements should be a less laborious task. The proposed rule, although not yet released, is expected to contain very specific instructions on how to meet auditing guidelines.
The CFPB’s proposed rules have received some criticism for further regulating a market already subject to heavy regulation, arguing that complicated mortgage forms was not what caused consumers to take out loans they couldn’t afford. Critics also chide the increased costs that servicers and, ultimately, consumers will incur as a result of the regulation. However, at present, the rules have been generally accepted by consumers and mortgage market members alike. Mortgage servicers that operate in multiple states will benefit from having a consistent set of forms and guidelines and avoiding discrepancies and mistake caused by differing servicers’ practices. Only time will tell how effective the default servicing rules will be in practice, but at present the Consumer Financial Protection Bureau appears to be an agency with a promising future making strides in streamlining and changing the mortgage market for the better.