NEW YORK -- In the latest effort by a federal regulator to force the mortgage industry to stop treating desperate homeowners like vagrants looking for a handout, the Consumer Financial Protection Bureau on Friday proposed new standards meant to force loan servicers to mend their ways.
"The inadequate performance of many mortgage servicers has helped widen the misery for many Americans," said Richard Cordray, director of the consumer agency, in remarks to reporters announcing the proposed rules. The rules will take effect next year after a public comment period. "Right now, people have too little protection under federal law if their mortgage servicer surprises them with costly fees or gives them the runaround."
Under the proposed rules, banks and other financial institutions that manage home loans -- the servicers -- must provide "direct, ongoing access" to staff members to help borrowers fighting to save their homes from foreclosure. Servicers must also halt foreclosure proceedings while borrowers apply for a loan modification and tell homeowners in danger of foreclosure about their options.
If enforced, the regulations would go a long way to resolving widespread abuses in the mortgage servicing industry. Borrowers seeking loan modifications, for example, often complain of a process that often feels like an existential nightmare: an endless cycle of lost paperwork, missed phone calls and conversations with low-level bank employees with no power to make deals. Judges have sanctioned servicers for charging unnecessary fees and for imposing expensive, insurance policies.
But there is reason to question whether servicers would follow the new rules, and whether regulators would enforce them. The mortgage industry has made promises before -- in deals reached with the Office of the Comptroller of the Currency and other federal agencies last year and as a condition of the $25 billion settlement with 49 states and the federal government six months ago.
The first set of new servicing standards were mostly ignored by the industry, housing advocates said. Early returns on compliance with the attorneys general settlement are not encouraging, they added.
"We're not seeing any changes in servicer behavior," Megan Faux, director of the foreclosure prevention project at South Brooklyn Legal Services, a legal aid firm that represents poor people confronting foreclosure in New York City recently told The Huffington Post. "We're still seeing huge delays, improper denials of modification, very few principal reductions. None of their practices are really changing."
The banks have until early October to fully comply with the attorneys general settlement, or face fines of $1 million per violation.
It is too early to predict how the CFPB might enforce its proposed rules. It is a new agency, so there is little precedent to gauge how effectively it might police the mortgage servicers. A senior agency official on Thursday declined to answer a question about enforcement, saying it was too early to discuss.
Though many of the new rules proposed by the consumer bureau mirror the attorneys general settlement, others stake out new ground. For instance, servicers would be required to give borrowers accurate and current account information and to quickly correct errors.
This might seem like kindergarten-level stuff for sophisticated financial institutions. But homeowners, lawyers and judges have accused banks of profiting off of delinquent borrowers by improperly applying charges in a way that keeps homeowners in a so-called rolling default, which leads to more late charges and sometimes foreclosure.There are other important differences. The consumer bureau's regulations would cover a much greater swath of servicers than the mortgage settlement, which affects just the biggest banks: Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial. The rules also wouldn't come with an expiration date, whereas the mortgage settlement expires in 2-1/2 years.