When the framers of the national mortgage settlement agreed to let the deal expire in three-and-a-half years, it was with the assumption that the Consumer Financial Protection Bureau would in the meantime make permanent the mortgage servicing reforms that are written into the sprawling $25 billion agreement.
In April, the CFPB released a four-page summary of a proposal that it said "would put the 'service' back in mortgage servicing." The goal of the reforms outlined by the proposal, according to the Bureau, is to eliminate two of homeowners' biggest complaints: costly errors and the endless runaround many have experienced when trying to avoid foreclosure.
It's still early -- the rules haven't even been written yet -- but some consumer advocates say that the CFPB's proposed reforms don't go far enough to stamp out abusive practices.
"There is a limit to what the CFPB can do if it doesn't make firm rules," said Diane Thompson, an attorney at the National Consumer Law Center who has written extensively about botched foreclosures and other servicing errors.
Thompson said the proposals are "disappointing," particularly with respect to the regulation of "force-placed" home insurance on borrowers whose policies lapse. The costly insurance, which is often imposed with little or no notice, can push struggling homeowners into default or foreclosure. The CFPB and the New York Department of Financial Services are currently investigating alleged abuses of force-placed insurance by the biggest banks, including JPMorgan Chase, Wells Fargo and Bank of America.
Jen Howard, a CFPB spokeswoman, said that the agency's recent announcement was an outline of the servicing policies it is considering, not a formal proposal. She said that the agency will formally propose rules this summer. In the meantime, it wants and welcomes public feedback, she said.
The CFPB is one of the signature creations of the Dodd-Frank financial regulation law; it's a new federal agency, with more than 800 employees and counting, that has broad powers to regulate new corners of the financial services marketplace. In January, President Barack Obama used a recess appointment to tap former Ohio attorney general Richard Cordray to run the agency, bypassing Republicans who had held up the nomination in an attempt to weaken the CFPB's powers.
Under Cordray, the CFPB has been busy, announcing a blizzard of new initiatives to make student lending transparent, to better regulate debt collectors, and, especially, to make mortgage lending more fair.
One of the agency's first initiatives was "Know Before You Owe," an ongoing effort to make mortgage disclosure forms more clear. The CFPB is also tackling a series of rules mandated by Dodd-Frank; it offered a proposal last week that would prohibit mortgage originators from "steering" borrowers into higher-cost loans.
While significant, these proposed reforms probably matter less in the short term than what the CFPB does to rein in mortgage servicers, often arms of the biggest banks, which manage approximately 48.7 million outstanding mortgages in the United States. Thousands of homeowners blame mortgage servicers for improperly denying them loan modifications, misapplying mortgage payments to late fees and even improperly foreclosing on borrowers who thought they were current on their payments. According to RealtyTrac, which publishes a database of foreclosed homes, about one in five homeowners nationwide is underwater, and about 700,000 are in some stage of the foreclosure process.
The proposed servicing rules would prevent homeowners "from being hit by costly surprises or getting the runaround from their mortgage servicer," the CFPB said. While the rules outlined by the agency are primarily concerned with improving the disclosure of fees and charges, the reforms would also require banks and other financial institutions to quickly resolve "errors," such as continuing a foreclosure when borrowers have met their obligations under a loan modification plan.
But Thompson and some other consumer advocates, who have otherwise mostly supported the CFPB's efforts, say that they want to see more detailed servicing rules. One area of specific need, they say, is tough regulation that that would prevent loan servicers from abusively imposing home insurance when a borrower's policy lapses.
Under the current system, insurance companies pay commissions to banks in exchange for the right to impose one of these policies. Those commissions give the banks a financial incentive to choose the most expensive policy or to require unnecessary levels of coverage -- for instance, imposing hurricane and flood coverage on homeowners with existing policies that already offer that protection. The American Banker found that bank-imposed policies could cost 10 times the normal market rates and that many of the largest financial institutions own force-placed insurance subsidiaries.
The CFPB's proposal doesn't address the high cost of the policies or the apparent conflict of interest that occurs when a bank contracts with itself to award a lucrative insurance policy. Instead, as with many of its mortgage-related efforts, the agency appears to be zeroing in on better disclosure as its primary objective.
Under the proposal, banks and other loan servicers must give homeowners two chances to prove that they have independently obtained insurance before buying it on their behalf. Servicers would also have to provide the homeowner with a good-faith estimate of how much the force-placed insurance policy would cost.
Thompson argues that the CFPB doesn't go nearly far enough. "The proposal appears completely inadequate in addressing kickback or profit-sharing arrangements with affiliates or others," she said.
One fix would be to require the bank or servicer managing the loan to continue the homeowner's existing policy in most circumstances, Thompson said. "Continuing the existing policy eliminates conflicts of interest, reduces costs, and ensures meaningful coverage for the homeowner," she said. (Under the CFPB proposal, and the mortgage settlement guidelines, servicers are required to continue making payments on an existing policy, but only in those in instances where the homeowner has a funded insurance escrow account.)
Some housing activists have also voiced concern that the CFPB isn't directly taking on problems with botched loan modifications -- an issue that has plagued the industry, and caused headaches for thousands of borrowers in recent years.
O. Max Gardner III, a North Carolina bankruptcy attorney, said that he hoped the CFPB would enact detailed regulations about the proper matters that would be subject to a "Qualified Written Request" -- a homeowner's demand that a servicer discloses a certain piece of information concerning his or her home loan.
One of the biggest problems homeowners have today is a cryptic one-sentence response from a bank or other loan servicer that says something like "we are not responding to your [request] because it is not a proper [request]" under mortgage law, Gardner said.
Richard Andreano, Jr., an attorney at the law firm Ballard Spahr who represents the mortgage industry and closely follows CFPB rulemaking, said that more extensive rules, particularly in the arena of mortgage modifications, are expected next year. Those would likely be done in concert with other bank regulators, such as the Office of the Comptroller of the Currency and the Federal Reserve.