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Amy Hoak's Home Economics

New rules aim to lessen mortgage complaints

CHICAGO (MarketWatch) -- New proposed rules aimed at protecting homeowners in their interactions with mortgage servicers were announced by the Consumer Financial Protection Bureau on Friday.

"These rules are about putting the service back in mortgage servicing," said CFPB Director Richard Cordray, on a conference call with reporters. "The bottom line is to treat consumers fairly by preventing surprises and run-arounds." The rules provide basic protections, he added.

They include requiring servicers to provide detailed monthly mortgage statements to borrowers, give them an early warning when an adjustable-rate mortgage is about to reset and correct errors in a timely fashion.

A mortgage servicer collects payments from a borrower on behalf of the mortgage's owner, and handles customer service, escrow accounts, collections, loan modifications and foreclosures. Lenders will often contract out servicing after the closing of the mortgage loan.

"A lot of this stuff is common sense," said Keith Gumbinger, vice president of HSH Associates, a publisher of consumer loan information, of the proposed rules. "You shouldn't have to codify proper business practices. That's not to say everyone is a bad actor. But the ones who did it wrong did it so badly, they forced the regulators' hands on the rest of the industry."

Many of these proposed rules stem from problems that consumers began facing several years ago, he said. For example, distressed borrowers often would complain that they'd contact their servicer, only to be sent to someone else, causing them to feel they couldn't get a straight answer from anyone, Gumbinger said. "[The rules are] addressing yesterday's problems, but also in some ways preventing tomorrow's."

The rules get at defining the level of customer service that servicers need to provide borrowers, he added.

Many of the proposed rules are a direct result of requirements outlined in the Dodd-Frank Wall Street Reform and Consumer Protection Act. They are scheduled to be finalized in January, according to a CFPB news release.

Below are proposed new rules.

Monthly mortgage statements. Under the new rules, servicers would have to provide monthly statements to consumers, breaking down payments by principal, interest, fees and escrow. They'd include the amount of the next payment and its due date, as well as recent transaction activity and warnings about fees. This is a big one, Gumbinger said, because there were plenty of cases in which borrowers weren't getting notification of where they stood with their account in a timely fashion.

A heads up before ARMs adjust. Borrowers would get an early notice that their adjustable-rate mortgage will adjust before their ARM resets, and would be given information about alternatives if the payment could become unaffordable. The early reminder and greater clarity about the impact of the new payments would give borrowers time to be proactive before their bill goes up.

Options for avoiding "force-placed" insurance. If borrowers don't maintain property insurance, the servicer has the right to purchase insurance for them -- often at a higher rate than a consumer would get. But the proposed rule would make this process more transparent, requiring servicers to give advance notice and pricing information before they charge borrowers for force-placed insurance. Servicers would also have to cancel the force-placed insurance within 15 days if the borrowers prove they are properly insured.

Options for avoiding foreclosure. Servicers would be required to make efforts to contact borrowers who are delinquent, providing them options for avoiding foreclosure. It's outreach that often didn't exist in the early parts of the housing crisis.

Evaluating borrowers. Servicers would also be required to review applications for loan modifications and other payment plans -- and in a timely fashion. In fact, servicers wouldn't be able to proceed with a foreclosure sale until they've reviewed the borrower's application. They'd also have to give consumers a heads up when applications are incomplete. Borrowers would be able to appeal certain servicer decisions.

Access to servicer personnel. Delinquent borrowers would get direct and easy access to employees whose job it is to help them resolve their mortgage issues. The employees that borrowers work with will be empowered to help them.

Crediting payments. Servicers would be required to credit the borrower's account the day a payment is received.

Accurate and accessible documents. Policies and procedures would be required for servicers to provide accurate information to borrowers and minimize their errors. They'd also have to provide oversight of their contractors and attorneys.

Correcting errors. When the borrower tells the servicer there has been an error, the servicer would be required to acknowledge it, conduct an investigation and update the consumer on findings and results in a timely manner.