New Rules Issued For Mortgage Servicing Companies

Last week, the Consumer Financial Protection Bureau unveiled new rules for mortgage lenders. On Thursday, it releases new rules for the companies that service those loans.

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The Consumer Protection Financial Bureau is unveiling today the second half of its new mortgage rules. It will outline how the mortgage industry must manage loans that are delinquent or in the process of being foreclosed.

NPR's Yuki Noguchi reports that these rules, among other things, aim to make it easier for borrowers to communicate with the people handling their mortgages.

YUKI NOGUCHI, BYLINE: In the home loan industry, the messiest, most intractable problems often arise from what's known as mortgage servicing. Simply put, servicers are companies that collect your monthly mortgage payment on behalf of the lender. But when borrowers fall behind, servicers are supposed to reach out to the borrower to see whether they're eligible for a loan modification or a short sale. If not, the servicer handles the foreclosure.

But in recent years, the mortgage servicing industry has had plenty of problems. Richard Cordray is the director of the Consumer Financial Protection Bureau.

RICHARD CORDRAY: Servicers have routinely failed to answer phone calls, mishandled accounts, failed to credit bills promptly, charged unexplained fees - things that cost borrowers money and dumped many of them into foreclosure.

NOGUCHI: Loan experts say many services are understaffed and undertrained. Most were not prepared for the high volume of foreclosures that hit during the crisis. Then, three years ago, services were caught robo-signing foreclosure documents, essentially cutting corners on paperwork to speed up the process. Cordray says in the second half of last year alone, his watchdog agency received 47,000 consumer complaints about mortgage servicers.

CORDRAY: Oftentimes, servicers had financial incentives to proceed with foreclosure rather than try to avoid it, and one of the things that our rule specifies is servicers can't put themselves first in this process.

NOGUCHI: Among other things, the new rules bar services from proceeding with foreclosure if a borrower has applied for a mortgage modification. The rules also give borrowers rights to clear communications from their servicer. Servicers must also provide notice of all the foreclosure alternatives available to homeowners who miss two months of payments.

To enforce these rules, Cordray says his agency can audit servicing operations to monitor their compliance.

UNIDENTIFIED MAN: If they are violating the law and harming consumers, we can get restitution back to consumers.

NOGUCHI: These new rules are a cornerstone for Cordray's bureau, a year-old agency established in the aftermath of one of the worst financial crises since the Great Depression, one caused by the enormous problems in the mortgage market. Cordray notes the rules build on the settlement reached last year between five major banks and state attorneys general to settle the robo-signing case. Unlike that settlement, he says, the new rules will cover all servicers.

Scott Talbott, an executive with the Financial Services Roundtable, which represents many services, says his members' only real concern is that the final rules are consistent with other regulations.

SCOTT TALBOTT: We certainly don't want to create two different sets of rules from two different regulators around mortgage servicing rights.

NOGUCHI: Last week, the bureau issued separate rules barring lenders from underwriting loans without first verifying the borrower's income and ability to repay. Lenders and servicers will have a year to implement all of the bureau's new mortgage rules. Yuki Noguchi, NPR News, Washington.

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