Consumer Financial Protection Bureau Proposes Loan Servicing Rules
by Anna DeSimone
President
On August 9, 2012 the Consumer Financial Protection Bureau (CFPB) today proposed two notices containing rules concerning mortgage servicing. The Dodd-Frank Wall Street Reform and Consumer Protection Act addresses some of these problems and imposes certain requirements on servicers, which the CFPB is implementing and refining. The new rules will be finalized in January 2013. The Dodd-Frank Act also gave the CFPB the statutory authority to write additional rules.
The first set of CFPB’s proposed rules require servicers to provide consumers with clear and timely information as follows:
1-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 of and due date of the next payment; recent transaction activity; and warnings about fees.
2-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.
3-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.
4-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 would impose requirements for handling consumer accounts, correcting errors, and evaluating borrowers for options to avoid foreclosure. Described as “no-runaround” rules, they 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.
- Errors Corrected Quickly: If a consumer notifies the servicer that 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 CFPB’s proposed rules would mean that consumers would get better and timelier information about where they stand in the long foreclosure process. If their loan modification application is missing paperwork, for example, the servicer would have to tell them. Critically, the servicer would not be able to actually foreclose on the consumer without fully considering borrowers’ timely and complete applications for alternatives to foreclosure. The servicer would only be able to proceed with foreclosure if: a borrower does not qualify for options to avoid foreclosure; the borrower rejects a servicer’s offer of such options; or the borrower fails to keep up his or her end of a deal for such an option.
All of these proposed rules are part of the CFPB’s ongoing effort to address servicing problems and create uniform standards for the mortgage servicing industry – regardless of how big or small the servicer, where it is based, or what is its business charter.
About The Author
Anna is President and Founder of Bankers Advisory, Inc. She can be reached at anna@bankersadvisory.com
Anna DeSimone founded Bankers Advisory in 1986 and is a nationally recognized authority in residential mortgage lending. She has received numerous industry awards and has authored more than 40 best practices guides and hundreds of articles.
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