The mortgage service industry, the three dirty words of the financial crisis, will get a change of rules aimed at providing more transparency and avoiding a repeat of the conditions and events that led to the last crisis. The Consumer Financial Protection Bureau, set up in July by the Dodd-Frank financial reform law, has proposed several new practices for the industry aimed at making it more accountable.
The industry has been highly criticized for its almost careless business practices, and became the subject of several congressional hearings and billions of dollars of lawsuits and settlements for its part in the financial crisis.
The CFPB wants mortgage servicers to start making “good faith” efforts to contact defaulting borrowers, explain the foreclosure process, and provide counseling options before taking any action. The bureau may require servicers to have dedicated staff working with struggling borrowers to avoid foreclosures through loan modifications as much as possible.
Companies will have to credit payments immediately and warn homeowners before changing interest rates on adjustable-rate mortgages. Servicers may also have to explain the payment process to homeowners, including the terms of the mortgage and where their payments are being applied. The CFPB is also seeking to have servicers address any errors in documents within 30 days if a foreclosure or payoff is at stake.
The proposed rules will formally be published in the summer, and are likely to be finalized by the beginning of the coming year, after which they could take up to another year to be fully implemented.
“For too long, mortgage servicers have not been held accountable to their customers, and the result has been profoundly punishing to homeowners in distress,” CFPB director Richard Cordray said. “It’s time to put the ‘service’ back in mortgage servicing.”