The government watchdog agency for consumer financial protection rolled out new rules on Friday aimed at giving homeowners more information about their mortgage loans, including warnings about future interest-rate increases and greater details about the foreclosure process.
Richard Cordray, the head of the Consumer Financial Protection Bureau, said the rules would set “common sense standards” to require greater transparency from banks and other mortgage servicers. He said the bureau wants to prevent homeowners from facing surprises or getting the “runaround” when problems arise with their loans.
In the aftermath of the financial crisis and housing-market meltdown, lawmakers and regulators have struggled to come up with a comprehensive approach to helping homeowners. Financially distressed borrowers are among those most in need of greater clarity on issues such as how to communicate with their lenders if they fall behind on payments.
Even the mortgage-banking industry has joined the calls for overhauling and standardizing the broken mortgage-servicing system, arguing that such steps are necessary to provide greater certainty for homeowners and mortgage investors alike.
A reduction in the rate of foreclosures could be one benefit of the new rules, which are due to take effect in January. Companies will need to notify distressed borrowers of their position and of options they might have to avoid foreclosure. Borrowers with adjustable-rate mortgages would in most cases need to be notified in advance of rate changes, giving them a greater ability to plan if their monthly payments are due to increase.
All but the smallest mortgage-servicing companies would be required to send out monthly statements with the due date for the next payment and a breakdown of payments by principal, interest, fees, and escrow. An exception would be made for companies handling fewer than 1,000 loans.
The rules would also theoretically cut down on the use of expensive “forced-place” insurance for borrowers who fail to independently maintain property insurance. Servicers would have to give such borrowers advance notice of their status and information about pricing.
In what the CFPB refers to as “no runaround” rules, companies would be required to quickly credit payments and correct errors. They would also have to give consumers access to employees who can help them in the foreclosure process.
For the country’s five biggest mortgage-servicing companies, the new rules will come on top of new requirements from a $25 billion settlement the industry struck in March with 49 state attorneys general and the Obama administration. Under the settlement, servicers will need to approve or deny loan-modification applications within 30 days of receiving them and give all struggling borrowers a single point of contact.
The new CFPB rules, according to two senior CFPB officials who briefed reporters on Thursday, serve those objectives while going into more detail on the operational aspects of compliance. The new rules, the officials emphasized, will not conflict with any of the requirements set by the settlement.
Servicing reforms were eyed as a task for the CFPB even before Congress passed the 2010 Dodd-Frank financial-reform legislation that created the consumer agency. The CFPB, whose creation was one of the more controversial aspects of the Dodd-Frank law, has oversight of both traditional financial institutions and nonbank mortgage companies.
The agency’s proposal comes as the mortgage industry awaits other major rules that are expected to have an even more profound effect on the housing market, such as standards for so-called qualified mortgages that will dictate underwriting criteria and the flow of credit. The new CFPB rules will be dissected by the mortgage industry and fair-housing advocates for clues about the direction of what is still to come.
To date, the CFPB has had to walk a fine line to build its credibility. It is caught in the crosshairs of Democrats, who want to prove the agency’s record for protecting consumers, and Republicans, who are on guard for any signs it is unfairly constricting credit and who blanch at the new bureau’s lack of congressional oversight.