Consumer Bureau Targets Improper Floreclosures

The head of the Consumer Finance Protection Bureau says he wants to "extend new protections to consumers against the kind of shabby customer service and law-breaking by mortgage servicers that has been so thoroughly documented." The bureau has proposed new rules to help homeowners facing foreclosure. But housing advocates say it will all depend on enforcement.

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Now, Florida is among the states that were hardest-hit by the housing crisis; and foreclosures remain a big problem there, and in several other parts of the country. One thing the government has been struggling with, is how to stop banks from foreclosing on people improperly. The government is also trying to figure out how to more quickly help homeowners who qualify for reduced interest rates. A federal regulator has released new rules aimed at doing both, and NPR's Chris Arnold has more.

CHRIS ARNOLD, BYLINE: As you probably remember, after the financial crisis, Congress set up this new Consumer Financial Protection Bureau. It's potentially a very powerful new regulator, tasked with protecting the rights of average people. Richard Cordray now heads up the CFPB. So he's the new top financial cop on the beat. And it's turning out that one of his top priorities is going to be taking on the nation's largest banks, who he says make mistakes that cost many Americans their homes.

RICHARD CORDRAY: The kind of shabby customer service - and outright law-breaking by mortgage servicers - that has been so thoroughly documented.

ARNOLD: Cordray was speaking there at an event back in April, when he first started outlining some of these new rules. And Cordray is not new to this issue. As the state treasurer in Ohio in 2007, he chaired a taskforce. And way back then, Cordray started documenting all kinds of problems that homeowners were running into, trying to work with their banks to get lower interest rates to avoid foreclosures. And, Cordray says, those problems continue.

CORDRAY: Picture every bad customer-service experience you've ever had - calls going unanswered; glacially slow processes; mistakes made, and not fixed; a kaleidoscopic cast of characters who never seem to deal with you more than once; your paperwork submitted, and lost, repeatedly.

ARNOLD: Often, the banks that manage - or it's called servicing - people's loans, they don't actually own those loans; some other investors do. So many analysts think that the banks don't have the right incentives to invest enough money, to really fix these problems. And, Cordray says, he takes all of this very seriously.

CORDRAY: We're talking about the largest single investment that people will make in their lifetimes, and a matter that goes far beyond a mere economic investment. We're talking, specifically, about people's homes.

ARNOLD: Now, of course, if somebody was reckless and bought way beyond their means, nobody's really trying to help them. But there are many families out there where - say, one spouse lost their job, but the other's still working. And with a lower interest rate, the family could keep making their loan payments. That's often better for the family, of course. And it's also better for the investors who own mortgage securities because when you prevent a foreclosure, they lose less money.

CORDRAY: Mortgage investors do not benefit from a broken system, where servicers do not fulfill their obligations or make reasonable efforts to mitigate losses.

ARNOLD: One of the key changes that Cordray is now proposing, is that banks would face a one-month deadline to make a decision, after a homeowner has applied for help. Homeowners would also be able to appeal a rejection.

GARY KLEIN: The question is whether rules like this, can make banks do the right thing.

ARNOLD: Gary Klein is an attorney who is suing the major banks on behalf of homeowners. He says the banks routinely already violate other rules that have been set up by other regulators.

KLEIN: Every bank in America has improperly denied loan modifications. So in some ways, this proposal comes a little late. Many thousands of families have lost their houses, when they should be in affordable mortgages.

ARNOLD: For their part, the banks deny that they foreclose on anybody improperly. They say that they've been working to improve their systems. And so far, they have helped nearly a million families stay in their homes, through a federal foreclosure-prevention program.

Chris Arnold, NPR News.

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