The Consumer Financial Protection Bureau (CFPB) is requesting comments on two sets of proposed rules governing the operation of mortgage servicers.  The new regulations, posted in The Federal Register, cover servicer's operations involving both performing and delinquent mortgage loans.

CFPB said that the financial crisis has brought into focus many of the problems with bad practices and sloppy record keeping that have plagued the servicing industry for years.  With millions of homeowners falling delinquent on mortgages and facing or undergoing foreclosure, complaints mounted about servicers losing applications and paper work for loan modifications, homes being foreclosed in error, borrowers unable to reach personnel who could assist them and facing difficulties in getting obvious mistakes corrected.

The Dodd-Frank Wall Street Reform and Consumer Protection Act gave CFPB authority to address some of these problems and the agency is implementing and refining requirements for services which will be finalized in January, 2013.  The first set of rules set out requirements covering all mortgages and are designed, CFPB said, to provide consumers with "clear and timely information about their mortgages so they can avoid costly surprises." 

  • Servicers would be required to provide clear monthly mortgage statements which include a breakdown of payments by principal, interest, fees, and escrows. The notices would also be required to inform consumers of the amount and due date of their next payment, recent transaction activity, and warnings about fees.
  • Servicers would be required to provide earlier disclosures before any adjustments on adjustable rate mortgages. In addition to basic interest rate and payment change information, servicers would have to inform borrowers about alternatives and counseling resources if the new payment will be unaffordable. Existing adjustment disclosures would be amended to include improved information and mandated to arrive earlier so borrowers can anticipate consequences of payment changes.
  • If a borrower defaults in his obligation to maintain property insurance the servicer has the right to purchase insurance to protect their collateral. This "force-placed" insurance is typically more expensive than the consumer could purchase on his own so the new rule would provide more transparency in the process. Servicers would be required to give advance notice and pricing information before charging the customer for a forced placed policy and would require the servicer to terminate the insurance within 15 days if the borrower provides proof of his own coverage. The insurer would also have to refund any premiums for the forced-placed policy.
  • 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 aimed at preventing events that might unnecessarily lead to foreclosure.  They include rules for handling consumer accounts, correcting errors, and evaluating borrowers for options to avoid foreclosure.

  • As a general rule, servicers would have to credit a consumer's account as of the date a payment is received.
  • Servicers would be required to establish reasonable policies and procedures to maintain accurate information, provide it to borrowers, and minimize errors. Legal documents would have to comply with applicable law. Servicers would be required to help borrowers with options to avoid foreclosure, and provide oversight of their contractors and foreclosure attorneys.
  • When a consumer notifies a servicer of a possible error, the servicer must acknowledge receiving the notice, conduct a reasonable investigation, and inform the consumer about the resolution in a timely manner.
  • Delinquent borrowers must have direct, easy, and ongoing access to servicing personnel who are dedicated and empowered to assist them with their problems.
  • Where servicers offer alternatives to foreclosure such as loan modifications or payment plans, they will be required to evaluate borrower requests for such assistance in a prompt manner. Servicers would be prohibited from proceeding with a foreclosure sale while prevention actions are pending and would be required to let borrowers know about incomplete applications and allow them to appeal certain servicer decision.

 "Millions of homeowners are struggling to pay their mortgages, often through no fault of their own," said CFPB Director Richard Cordray. "These proposed rules would offer consumers basic protections and put the 'service' back into mortgage servicing. The goal is to prevent mortgage servicers from giving their customers unwelcome surprises and runarounds."

The agency said that in formulating the rules it sought impact from consumer groups, small servicers, and other government agencies and industry stakeholders.  The proposed rules released today represent refinements that came out of these discussions, particularly regarding processes for evaluating consumers for alternatives to foreclosure - and also lessen potential burdens on small servicers.

CFPB is also working with the Cornell University e-Rulemaking Initiative (CeRI) to make it easier for the public to comment on the proposed rules through a pilot project called Regulation Room ( Regulation Room provides a mechanism for people and groups to learn about, discuss, and react to selected rules proposed by federal agencies and CFPB expects contributions to Regulation Room, while not becoming formal public comments, will be incorporated into a public report prepared by CeRI researchers and submitted to the CFPB for use in preparation of a final rule.

The public will have 60 days, until October 9, 2012, to review and provide comments on the proposed rules. The CFPB will review and analyze the comments before issuing final rules in January 2013.