The Consumer Financial Protection Bureau (CFPB) has released an outline of possible rules for servicing companies which are designed to protect mortgage borrowers from being hit by costly surprises or "getting the runaround" from their mortgage servicer.  The outline will form the basis for rules that the Bureau will propose this summer and hopes to finalize by early next year.

CFPB said there are two underlying problems with the servicing system as it currently exists; lack of transparency and lack of accountability.  Borrowers do not chose their servicers and have few alternatives when a servicer which is not responsive to their questions or complaints.  CFPB says that even before the foreclosure crisis there were problems with servicers' business practices and "systemic sloppy recordkeeping."  As borrowers began to run into hardship and needed help or special attention to continue paying their mortgage, "the industry's deficiencies have begun to inflict significant harm on an increasing numbers of borrowers."

The outline sets out over a half dozen proposals for the final rules.  The first four deal with the kinds of surprises which borrowers encounter due to the lack of transparency in their servicer's operations.

First is a rule requiring servicers to provide clear monthly statements including definitions of mortgage terms, a breakdown of how payments will be applied, amounts and dates for the next payment, recent activity with fees and charges clearly itemized, and late fee warnings.  Servicers would also have to provide information about loss mitigation alternatives for delinquent borrowers.

Servicers would have to provide borrowers with adjustable rate mortgages ample notice before any rate adjustment including the manner in which the new payment is to be determined, effective date of change, a good-faith estimate of the new payment and alternatives if that payment will be unaffordable including contact information of housing counselors and the amount of any prepayment penalties.

Servicers would be prevented from levying unnecessary charges for forced-placed insurance.  This rule would involve a process and timelines for contacting borrowers about any suspected lapse in coverage, reasonable and clear requirements for documenting valid coverage, a good-faith estimate of the cost of any forced-placed insurance and reasonable timelines for cancelling forced placed coverage if the borrower documents his own coverage.

Servicers will be required to make good faith efforts to contact borrowers in a timely manner if the borrower misses payments and inform them of their options to avoid foreclosure.

There are five areas in which the Bureau is considering requiring "common-sense rules and procedures" for handing consumer accounts and preventing runarounds.  The first is to require servicers to credit a customer's account on the day that a payment is received including retaining a partial payment in a suspense account and crediting from that account to the oldest missed payment when the suspect account holds an amount equal to one month's payment.  

Servicers would be required to establish reasonable information management procedures to minimize errors and quickly correct them when they do occur including maintaining a log of customer contacts (with exceptions for some small servicers), properly accepting, organizing and managing documents required in a loss-mitigation procedure, and notifying borrowers of any missing documents required for that procedure.

Errors including incorrect calculations of amounts due, payments out of escrow accounts, inaccurate disclosures, or inappropriate collection procedures will be acknowledged within five days and investigated within 30 days.  A shorter timeframe might be required for errors relating to foreclosures or payoffs. 

Finally, CFPB envisions a rule under which servicers would be required to provide distressed borrowers with direct, ongoing access to staff dedicated to servicing troubled borrowers and who would have access to the borrowers' records and to underwriters who could evaluate the borrower for foreclosure avoidance alternatives.

"The mortgage servicing rules we are considering reflect two basic, common-sense principles - no surprises and no runarounds," said CFPB Director Richard Cordray. "For too long, mortgage servicers have not been held accountable to their customers, and the result has been profoundly punishing to homeowners in distress. It's time to put the 'service' back in mortgage servicing."

The CFPB expects to publish a Notice of Proposed Rulemaking this summer, which will be followed by a public comment period. The rule will be finalized by January 21, 2013. The CFPB can provide up to one year for implementation, but has not yet decided how long of a transition period is necessary.

MBA's David H. Stevens reacted:
"National standards that apply to all residential loan servicers have the potential to create more confidence and certainty in the real estate market for both borrowers and servicers alike.  Borrowers would be protected by a single standard regardless of where they live and servicers would have one set of rules to comply with everywhere they operate.
"The reforms that Director Cordray outlined appear to closely track the issues we have talked to him and the CFPB staff about and MBA looks forward to working with the CFPB and other policymakers and stakeholders to ensure that the process used to develop the standards includes servicers of different sizes and business models.  It is important that the final rules don't give preference to one business type over any other, nor should they inhibit innovation or discourage new companies from entering the marketplace."