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The Consumer Financial Protection Bureau plans to issue new rules for mortgage servicers this year with the state attorneys general ready to enforce them.
CFPB Director Richard Cordray, a former Ohio AG himself, gave a galvanizing speech at the National Association of Attorneys General Tuesday. He said the bureau will soon require servicers to provide borrowers with clearer information on billing statements. New rules would prevent servicers from charging for force-placed insurance unless the borrower failed to maintain their own insurance as determined on a reasonable basis.
Upcoming rules would also require servicers to notify borrowers months ahead of time before an interest rate is set to adjust. The borrower would also be given options to avoid the higher rate through either refinancing or a renegotiation of the terms, Cordray said.
The 49 state AGs in attendance are finalizing a $25 billion settlement with the top-five mortgage servicers over faulty practices, which surfaced more than one year ago. The documents are expected to be filed this week.
But as Illinois AG Lisa Madigan said in February when the broad terms of the deal were announced, "this is neither the beginning nor the end" of the crackdown.
The Dodd-Frank Act provided new authority to the state AGs to enforce new provisions regulators issue, attorneys at the Washington-based financial law firm Ballard Spahr said in a webinar Tuesday.
The states were given a larger role to pursue violations. They can enforce new origination guidelines such as upcoming qualified mortgage rule and others specific to servicing, such as how escrow accounts and payoff requests are handled. All of it, said Ballad Spahr practice leader Richard Andreano, would come under direct authority of the states.
"It's a tipping of the hat by Congress to the states to allow them to become bigger players in the regulation of the mortgage industry," Andreano said. "When you're an AG and you see that, you feel emboldened to take that step and become a regulator."
"As CFPB was coming online, there was talk of them saying now there are more cops on the beat, meaning the other AGs," said Alan Kaplinsky, another practice leader at Ballard Spahr.
Cordray said the bureau would be sending a memorandum of understanding to the AGs to establish a general framework for how the different entities would share information when supervising and investigating firms that escaped such oversight in the lead up to the financial crisis.
"Bad practices drove out the good; our responsible community banks and credit unions were literally robbed of market share; and the whole stinking mess eventually collapsed, dragging down many innocent people along with it. I firmly believe that had the consumer bureau been in place 10 years ago, the crisis would have been headed off before it metastasized," Cordray said.
One mortgage servicer executive at the February Mortgage Bankers Association conference in Orlando said there were two concerns facing the industry: "The AGs and the CFPB."
And costs will almost certainly go up for future borrowers. If mortgage bond investors want the same yields and the cost of servicing goes up, interest rates will follow, Andreano said.
"How much is the trade-off between the cost of mortgage financing and having a sufficient servicing system in place?" Andreano said. "That's not the decision of AGs to make. That's the decision of legislators to make."
Already, many companies, even those that did not have to sign onto the settlement are making changes.
"This settlement is not just about the five banks," said Michael Waldron, a practice leader at Ballard Spahr. "The dollars are overwhelming and the issues are broad and far reaching. If you walk the floor of any servicer today, that servicer's floor has a very different look and feel than it did 18 months ago."
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