Today, the Consumer Financial Protection Bureau announced two new rules to help consumers who may be facing foreclosure – and not a moment too soon. We’ve all heard the stories of the homeowners who were passed from one disinterested bank representative to another as they tried to learn why they were losing their homes, the ones who struggled to arrange a loan modification even as foreclosure procedures commenced, and those who never should’ve had mortgages to begin with. Now, the CFPB has stepped in to make sure that homeowners are treated fairly and with dignity.
An end to the runaround
Richard Cordray, director of the CFPB, announced the two new regulations in an Atlanta, GA field hearing. In a nutshell, the rules will:
Prevent borrowers from being blindsided. Many consumers found themselves foreclosed upon, even as they worked with their lender to find an alternative. These new rules require lenders to notify consumers about becoming delinquent early and often, to provide a constant and accessible point of contact, to process loan modification applications before foreclosing, and clearly outline the reasons, costs and alternatives of any action.
Put consumers’ needs first. Lenders must work with borrowers to avoid foreclosure, prioritizing deferred payments and loan modifications and prohibiting lenders from forcing borrowers into arrangements that emphasize profits over consumer welfare.
With these regulations, the CFPB acknowledges:
The rabbit hole that so many homeowners have fallen through while trying to refinance their mortgages, from the infamous process of dual-tracking to dealing with 13 different representatives, each of whom have 1/13th of the required information or authority necessary to act.
The community-wide cost of foreclosure, from decreased property values to heightened insecurity and instability.
The hard truth that some lenders put corporate profits ahead of consumer welfare. During the lead-up to the financial crisis, loan originators shifted mortgages off their books and into an alphabet soup of CDO’s and MBS’s, meaning they had no incentive to screen borrowers or work with them if they were unable to repay their loans.
The new rules in detail
The CFPB’s issuances amend Regulation X of the Real Estate Settlement Procedures Act and Regulation Z of the Truth in Lending Act. They also implement some provisions of Dodd-Frank. In detail, the newest regulations would require mortgage services to:
1. Limit “dual-tracking.” Among the most infamous procedures in the foreclosure file is so-called “dual-tracking,” where a mortgage lender works with the borrower to avoid foreclosure, while simultaneously moving forward to complete that foreclosure. Consumers found themselves blindsided, hit by an outcome they thought they were working on preventing. Under the new rule, mortgage servicers can’t start foreclosure proceedings until the borrower has missed payments for 120 days.
2. Notify borrowers that they’re delinquent. If the borrower misses two consecutive payments, his monthly statement must identify the date he became delinquent, the amount needed to stay current, and what happens if he doesn’t.
3. Be proactive. Lenders must proactively reach out to borrowers falling behind and lay out loan modification options.
4. Improve lender-borrower contact. Lenders must provide borrowers with “direct and ongoing access” to those responsible for helping struggling homeowners.
5. Simplify loan modification applications. Lenders must offer a single application for all available options, and borrowers must be considered for all options at once.
6. Promptly acknowledge receipt of a loan modification application. Lenders must acknowledge receipt of a loan modification application within five days, and use “reasonable diligence” to ensure the application is complete.
7. Consider all options. Lenders have to consider all options from the mortgage owners or investors to help the borrower retain his home, whether it be deferring payments, loan modifications or even a short sale.
Key point: Lenders cannot steer a borrower to whichever option is most profitable for the lender itself.
8. Process loan modification applications before starting foreclosure proceedings. If the borrower submits a loan modification application 37 days or more before a foreclosure sale, the foreclosure process cannot proceed until the application is processed.
9. Stop foreclosure proceedings if the borrower comes to an agreement. If the lender and borrower come to a loss-mitigation agreement, the lender can’t start or finish foreclosure proceedings unless the borrower fails to follow through.
10. Tell a borrower why he’s rejected for a loan modification program. Similar to legislation for credit card rejections, a lender must tell the borrower specifically why he’s been denied, including all inputs for any financial model used. If the borrower disputes the outcome, the lender must have a new person conduct a review.
11. Warn borrowers before interest rate adjustments. Servicers must tell adjustable-rate mortgage borrowers about their first rate adjustment at least seven months before it takes effect. This notification must include an estimate for the new rate and new payment amount, available alternatives, and how to access a mortgage counselor.
12. Avoid force-placed insurance if possible. If a borrower doesn’t have property insurance, a servicer purchases force-placed insurance to cover the property – but sometimes, the borrower already has insurance, or becomes stuck with the cost of force-placed insurance. Now, servicers must reasonably suspect that borrowers don’t have insurance, review the case individually, and notify borrowers before the insurance is purchased and every year before it’s renewed.
Will it make a difference?
They won’t take effect until January 2014, too late for many American homeowners. Will the rules have any effect going forward? The borrower wants to avoid foreclosure for obvious reasons; the lender has other incentives. The CFPB’s route here is to punish behavior, to make the consequences of doing something that’s often in the lenders’ best interests so dire that lenders will think twice. Absent traffic cops, parking illegally is in each individual’s best interest; meter maids exist to make the risks of getting caught outweigh the benefits.
But this only works if the penalties are severe enough, and enforcement reliable. But given the current regulatory climate, the recent mortgage settlements that barely amount to a slap on the wrist, and the bureau’s limited resources, it remains to be seen whether regulators can make lenders do something they don’t want to do. A more difficult, more complicated solution would be to change the mortgage lending system in such a way that better aligns the interests of both borrower and lender. If a lender benefitted from a stable, financially secure community, or suffered a significant loss if it made a bad loan, these regulations would be superfluous. Instead of waiting for the regulators’ backs to be turned, both lenders and borrowers would dedicate their energies to a common goal.