WORD ON THE STREET: Mortgage servicing issues are sensitive and important because they involve the frightening prospect of people losing their homes. Think of what your home means to you. Losing your house – your largest single possession – is an economic event of lasting dimensions.
Even the possibility of losing your house can be a major shock. It is a psychological blow, taking you backward on the path of life. It is a profound disruption of your daily patterns, involving difficult explanations, new arrangements, and revised plans. And for households with children it can mean seeing them uprooted suddenly from their schools, teachers and friends.
But while the American economy continues to lift itself out of the financial crisis, millions of homeowners across the country are facing this uncertain prospect. The mortgage servicing industry, which collects payments on behalf of the owners of the loans, is prominent on this scene. The inadequate performance of many mortgage servicers has helped widen the misery for many Americans.
Right now, consumers often struggle to get critical information about their mortgage loans. Many have a hard time correcting errors. They often do not know about options to avoid foreclosure. And when they are trying to keep their homes and find options that make sense, they often get little help from their servicers.
Consumers that get in trouble need to take steps to address those problems, but servicers need to make that process work. Right now, people have too little protection under federal law if their mortgage servicer surprises them with costly fees or gives them the runaround.
To be fair, some mortgage servicers do their jobs well, and many others have improved over the last few years. Some servicers are models in how they work with borrowers to fix problems that arise. But the major failures in this industry demonstrate that all servicers need to meet basic standards of good customer service. Thus, we are announcing that the Consumer Financial Protection Bureau is proposing important reforms to the mortgage servicing market.
Our proposed rules reflect the widespread public input we have received since April, when we first unveiled this initiative. Since then we have met with consumers, consumer groups, servicers both large and small, investors, other industry stakeholders, and government agencies to solicit their feedback. Taking into account their ideas and opinions, we have worked to reduce potential burdens on small servicers that may be unwarranted, and we have made some proposed standards clearer, particularly around the foreclosure process.
Our newly proposed rules reflect two basic common sense standards: no surprises and no runarounds. The bureau now has the authority to adopt federal standards that, for the first time ever, apply to mortgage servicers across the entire market, which includes both banks and nonbank firms.
We designed the first set of rules to arm consumers with the information they need in order to avoid costly surprises. We want to make sure that, at all times, consumers can get information about how much they owe, what they are paying, and how their payments are being applied. And if consumers fall behind on their mortgage, we want them to know how to assess their options and take action.
So our rules would require all but the smallest servicers to send clear mortgage statements to every customer that summarize the key terms of their deal. All servicers would generally have to provide earlier warnings to customers with adjustable-rate mortgages before their interest rates change. And they would have to reach out promptly when borrowers become delinquent in order to inform them about their options to help avoid foreclosure.
The second set of rules we are proposing would address the problem of consumers getting the runaround. Consumers would have to receive timely decisions on their applications for loan modifications. Servicers would be required to have policies and procedures to provide accurate and current information to borrowers. They would be required to minimize and correct errors. And they would have to provide oversight of their contractors and foreclosure lawyers.
When it comes to the stressful experience of facing foreclosure, our proposed rules would provide consumers with some assurances. Servicers would have to make sure that personnel who deal with borrowers have full access to customer documents so they can answer questions accurately and specify whether any documents are missing or incomplete.
Borrowers who are working in good faith to avoid foreclosure would no longer have to worry about their homes being sold out from under them without warning. When a borrower submits a timely and complete application to pursue other options, that would restrict a servicer's ability to proceed with foreclosure unless the borrower is ineligible or fails to comply with the criteria. The proposed rules would help consumers understand exactly where they stand.
Before we finalize these rules in January, we are inviting public comment to help us improve them, and we are consciously trying something new. We are partnering with Cornell University on its eRulemaking Initiative, which is experimenting with ways to present proposed rules in a more accessible Web-based format. We want to get comments from as many people as possible and, in particular, to reach out to average consumers and smaller providers. We believe that doing so will lead to better mortgage servicing rules and, more generally, will generate valuable insight into ways to improve our rulemaking process on all fronts.
Fundamentally, these proposed rules are about putting the ‘service’ back in mortgage servicing. From processing payments to evaluating struggling homeowners and helping them avoid foreclosures, the bottom line is to treat consumers fairly by preventing surprises and runarounds.
Richard Cordray is the director of the Consumer Financial Protection Bureau. This article is adapted from prepared remarks delivered during an Aug. 10 press call. The original text is available online.