The Consumer Financial Protection Bureau proposed the first set of national mortgage servicing regulations nearly two years after widespread foreclosure abuses surfaced.
The bureau will take comment on the rules until Oct. 9 and plans to make them effective Jan. 21. Servicers could have several months to implement some of the rules, and the bureau will consider different deadlines until the proposal is finalized. Many of the rules overlap some standards in the $25 billion foreclosure settlement that state and federal prosecutors struck with the largest banks in March.
Roughly 4 million homes have been lost to foreclosure since the housing crisis began in 2007. A backlog of troubled borrowers flooded the system, and many homeowners spent years lost in the foreclosure process. The largest firms halted their foreclosure procedures in October 2010 after the robo-signing scandal broke in which mortgage servicers admitted to signing and filing foreclosure documents without a proper review.
"The inadequate performance of many servicers helped widen the misery of many Americans," CFPB Director Richard Cordray said in a conference call with reporters.
The more than 177-page proposal from the CFPB requires new monthly disclosures to borrowers about their mortgage status, including the amount due. Warnings must also be given for when the interest rates rise on some home loans, including an estimate for what the monthly payment will be after the adjustment.
Servicers will also be required to provide early information and options to avoid foreclosure in early delinquency stages. A single point of contact must also be given to borrowers seeking assistance.
The CFPB estimated the new disclosures alone would cost a collective $2 million for the 12,800 servicers affected by the rule change and a total annual cost of $41 per servicer, according to the proposal.
Smaller servicers handling less than 1,000 mortgages or only home loans they own are exempt from many of the new rules. The CFPB said they exempted these smaller firms after meeting with many of them and noting these companies already have similar policies in place.
The bureau will also crack down on "force-placed" insurance. Servicers are required to ensure borrowers maintain property insurance and often charge higher premiums to homeowners who don't. Under the rules proposed Friday, servicers would have to give advance notice and a good-faith estimate of the charges and terminate them within 15 days if a borrower proves he or she already has the insurance.
The CFPB will be able to inspect mortgage servicing operations as part of its regulatory takeover of the industry. Mortgage Bankers Association CEO David Stevens said that industry has made a lot of progress adjusting to new ways of handling the loans.
"This is an important step to getting certainty into the industry and to ensure consumers know what to expect when they need help from their servicer," Stevens said in a statement.
The bureau began drafting these proposals in April. But the largest servicers began adjusting to the new requirements after signing consent orders in 2011 and the settlement was finalized in March.
"We view the impending rules as another example of the impending shift from large banks servicing mortgages to special servicers taking a much larger role," said Isaac Boltansky, a D.C. policy analyst at Compass Point. "We believe this shift has, in fact, already begun."
Bank of America (BAC), JPMorgan Chase (JPM) and other large banks have been unloading large inventories of servicing to smaller firms such as Nationstar Mortgage Holdings (NSM) and particularly Ocwen Financial Corp. (OCN]) since problems arose two years ago.
CFPB officials said the rules are not meant to change market dynamics but rather to ensure homeowners have a clearer and more direct relationship with their servicer, whoever that may be.
"Our newly proposed rules reflect two basic, commonsense standards — no surprises and no runarounds. The bureau now has the authority to adopt federal standards that, for the first time ever, apply to mortgage servicers across the entire market, both banks and nonbank firms," Cordray said in a conference call.