In 2004, I encountered the foreclosure crisis for the first time. I was serving as the Franklin County Treasurer and we noticed that an unusual number of people in central Ohio were losing their homes. So we assembled a broad coalition of people and groups in a “Save Our Homes” task force. The problem was puzzling to us, for there was no recession at the time that was causing people to lose their jobs. We researched the history of home foreclosures and mounted a public information campaign. “Call your lender” was the earnest but naïve advice we offered to people in trouble.
When we began these efforts, we did not realize the problem had been building for years. And we had no idea that it would spread to become a national epidemic. Looking back, we now see that Ohio foreclosure filings set new records, every year, from 1996 to 2009. Predatory lending, equity stripping, and outright fraud created many of the problems.
But a notable feature of the situation was how often people with a problem were entirely unable to find a solution. “Call your lender,” we had advised, “because the lender wants your house payment, not your home.” But in community forum after community forum, we discovered that the direct link between many borrowers and their lenders had snapped. The rights to service a mortgage had often been sold and resold. The mortgage servicer might not have the right incentives to make a loan work out and could even be better off filing for a foreclosure. “Call your lender” was not the answer if people did not know whom to call and could not get help even if they did know. People were trapped in a broken system, with deeply tragic consequences.
At the Consumer Financial Protection Bureau, we have been writing rules to address the main flaws of that broken system. The mortgage market is the single largest consumer financial market in the United States, with consumers owing about $10 trillion on their homes. Mortgage servicers, who bear responsibility for managing these loans, play a central role in the lives of homeowners. They collect and apply payments to loans. They can work out modifications to the terms of a loan. And they handle the difficult foreclosure process. Because of what servicers do and the size of the market, their effects on borrowers can be profound.
Today, the Consumer Bureau is announcing new mortgage servicing rules that will help all borrowers, especially those facing foreclosure. Our rules will provide a fairer and more effective process for troubled borrowers who face the potential loss of their homes.
As we saw when the housing market collapsed, there have been severe consumer protection problems in the mortgage industry. In the wake of the financial crisis, many consumers have found themselves deeply underwater and struggling to figure out which debt to pay first. The result has been a tsunami of delinquencies that overwhelmed the servicing industry.
But the problems with mortgage servicing are not solely the result of an unexpected volume of delinquencies. Even before that happened, many servicers failed to provide the basic level of customer service that borrowers deserve, costing them money and dumping them into foreclosure. Dealing with sloppy mortgage servicing became a frustrating nightmare.
As the crisis unfolded, the problems worsened exponentially. Servicers were unprepared to work with borrowers that needed help to deal with their individual problems. People did not get the help or support they needed, such as timely and accurate information about their options for saving their homes. Servicers failed to answer phone calls, routinely lost paperwork, and mishandled accounts. Communication and coordination were poor, leading many to think they were on their way to a solution, only to find that their homes had been foreclosed on and sold. At times, people arrived home to find they had been unexpectedly locked out.
Many of these problems have gone on for years, and they continue to this day. In the second half of last year alone, our Office of Consumer Response fielded more than 47,000 complaints about mortgages; more than half were about the problems people have when they are unable to make their payments, such as issues relating to loan modifications, collections, or foreclosure. Nationwide, as many as ten million homes currently are at risk of foreclosure.
Georgia knows these heartaches. Nearly one out of ten mortgage borrowers is delinquent here. And nearly one in three Georgia homeowners owes more than the home is worth. Only Nevada, Florida, and Arizona have worse numbers.
In the past year, we have heard from many consumers about their mortgage servicing troubles. Mary from Georgia told us she had paid her mortgage on time for ten years before she had to take a pay cut. Her efforts to work with her mortgage servicer to get her monthly payments reduced proved fruitless. Instead, her servicer advised that she should stop paying the mortgage so she could “perhaps” qualify for a loan modification. Mary interpreted this to mean that she will have to ruin her credit before she can get help, and even then there is no guarantee.
Kelly from Arizona described her experience in applying for a loan modification. She received the paperwork, filled it out, and sent it back. She believed that she was being considered for relief, but before she heard anything further, her home was in foreclosure. Bank staff said they never received her paperwork because of a system error.
These stories are sadly familiar. Huge numbers of struggling homeowners across the country have faced similar frustrations and are telling us similar things. Like Mary and Kelly, they see their chances for much-needed help in tough times slipping away due to the indifference or incompetence of their mortgage servicers.
At the Consumer Bureau, we believe that today’s rules are all the more important because of the basic structure of the mortgage servicing market. For the consumer, this relationship often is not a matter of voluntary choice. After a borrower chooses a lender and takes on a mortgage, the responsibility for managing that loan can be transferred to another provider without any say-so from the borrower. So if consumers are dissatisfied with their customer service, they have no opportunity to protect themselves by switching to another servicer.
In fact, the actual paying business relationship here is between the mortgage owner and the mortgage servicer – individual homeowners are almost incidental. As a result, normal market forces do not work well for consumers, and the quality of customer service from their vantage point may be little more than an afterthought. Unsavory and fraudulent practices like those exposed in the “robo-signing” scandal became widespread.
Our new rules announced today are designed to give strong protections to struggling borrowers. In this market, as in every other, consumers have the right to expect information that is clear, timely, and accurate. When it comes to mortgage servicing, they also deserve a fair process. This is all the more true given the high stakes for consumers and the central importance of homeownership in our society.
Our new mortgage servicing rules achieve two main objectives. First, they will help prevent all borrowers from being caught off guard by surprises and getting the runaround from their servicers. Second, there are special protections for borrowers who are having trouble making their mortgage payments.
For all borrowers, the rules provide for more specific notices and protections, as well as better payment processing, information maintenance, and communication with consumers. On required notices in particular, the rules provide that the mortgage statements consumers receive each month should be clearly written and easy to understand. Statements must break down payments by principal, interest, fees, and escrow. They must also include the amount and due date of the next payment.
Our rules also require mortgage servicers to provide advance notice before interest rates adjust for most adjustable-rate mortgages. The disclosure must specify the new interest rate and payment amount, and when that payment is due. The disclosure must also include information about alternatives and counseling services, which can provide valuable assistance for consumers in all circumstances, and particlarly if the new payment turns out to be unaffordable.
And consumers will not be surprised by “forced-placed insurance,” which often can be more expensive than the insurance borrowers buy on their own. Our rules force servicers to provide more transparency in this process, including advance notice and pricing information before charging consumers. Servicers must have a reasonable basis for concluding that a borrower lacks such insurance before purchasing a new policy. If servicers go ahead and buy the insurance, but receive evidence that it was not needed, they must terminate it within fifteen days and refund the premiums.
To prevent harm to consumers in routine payment processing, our rules also require common-sense policies and procedures. Payments must be promptly credited as of the day they are received. When consumers notify servicers about errors, that notice must be acknowledged and investigated, and consumers must be informed in a timely manner about how the investigation was resolved.
In general, servicers must maintain accurate and accessible documents and records. They must be able to provide accurate and timely information to borrowers, mortgage owners (including investors), and the courts. These provisions will prevent the egregious “robo-signing” practices that were rampant from ever happening again. These obligations apply even through transfers of servicing rights between firms; both the transferor and the transferee have the same duties to maintain accurate information about an account. This cuts off yet another frequent source of harm to consumers.
All of these measures will help protect mortgage borrowers against more costly surprises and frustrating runarounds.
For borrowers who get into trouble, our rules provide further specific protections for a fair process to avoid foreclosure wherever possible. The key point to understand is that these measures can determine whether people save or lose their homes. If you have seen, as I have, the anguish on people’s faces at the prospect of losing their home – perhaps the only safe place in their lives, and a key symbol of their progress in climbing the ladder to financial success – then you realize how much is at stake.
Importantly, at every stage of the efforts people make to save their homes, our rules provide new protections to ensure that mortgage servicers are giving borrowers information about their available options. The goal is to avoid needless foreclosures – which is in the best interest of the borrower, the lender, and indeed our entire economy. So let me run through how our rules work in ten key respects.
First: One of our most significant new consumer protections is to restrict “dual tracking.” We have heard many complaints about this practice, which occurs when the servicer is supposedly working with the borrower to avoid foreclosure while simultaneously moving forward to complete a foreclosure. This practice has blindsided many consumers, like Kelly mentioned earlier. And so under our rules, a servicer cannot start foreclosure proceedings until the borrower has missed payments for at least 120 days. This allows borrowers to get their affairs in order, understand their options, and apply for loss mitigation. In general, once the borrower submits a completed application, the servicer cannot commence or complete the foreclosure process until the application has been addressed and the borrower has had time to respond.
Second: If the borrower misses two consecutive payments, the monthly statement will identify the date the borrower became delinquent, the amount needed to bring the loan current, and the risks of failing to do so.
Third: The servicer must intervene early on by proactively reaching out to a borrower who has begun to miss payments and by laying out the loan modification and other options offered by the mortgage owners or investors.
Fourth: Servicers must have policies and procedures in place to provide such borrowers with direct and ongoing access – the term of art is “continuity of contact” – to personnel who are responsible for helping struggling borrowers. Those personnel must have full access to all of the borrower’s information.
Fifth: Servicers must offer a single application for all available options and the borrower must be considered for all options at once. This will help prevent multiple applications for multiple modifications that get crossed in the system and mixed up under different timelines.
Sixth: When a borrower applies for a loan modification, the servicer must acknowledge receipt of the application within five days. The servicer must inform the borrower if the application is incomplete and specify what is needed to complete it. This will help borrowers like Kelly, who was foreclosed on without being told that her application was not received. The servicer also must use reasonable diligence to obtain all information needed to make the application complete.
Seventh: In the loan modification process, the servicer must consider all options available from the mortgage owners or investors to help the borrower retain the home. These options can range from deferment of payments to loan modifications. If the home cannot be saved, the servicer must consider the borrower for all other options, such as a short sale. And servicers can no longer steer borrowers to those options that are most financially favorable for the servicer.
Eighth: A servicer cannot start foreclosure proceedings if the borrower has submitted a complete application for a loan modification. Once a completed application is received by the mortgage servicer, borrowers no longer have to worry about the clock running out and their homes being foreclosed on. The servicer must process the application for a loan modification first, as long as it is received 37 days or more before a foreclosure sale.
Ninth: A servicer cannot start or finish foreclosure proceedings if the borrower and servicer have come to a loss-mitigation agreement, such as a trial loan modification, unless the borrower fails to perform under that agreement.
Tenth: If a borrower is rejected for a loan modification, the servicer must provide specific reasons why. If the decision was based upon a financial model, the servicer must provide the borrower with the specific inputs used in making their calculations about the borrower. Any borrower who disagrees with the outcome can appeal, and the servicer must have someone new conduct a review.
All of the protections just outlined mean that struggling homeowners will not be kept in the dark about where they stand in the loan modification process or the foreclosure process. They cannot be forced to roll this rock up the hill only to see it roll down again, repeatedly. People are entitled to be treated with respect, dignity, and fairness.
Mortgage servicers that choose to be indifferent to the plight of consumers will now be subject to these mandatory rules, which are backed by the full supervisory and enforcement authority that Congress has conferred upon the new Consumer Bureau. Importantly, those authorities now extend to the entire servicing market, not just to banks and other chartered institutions. We will be vigilant about enforcing these rules.
One exception we are making is for smaller institutions, such as community banks and credit unions, which service small numbers of mortgages. They are exempt from certain requirements. By all accounts, they do this work very well, with a high-touch customer-service model that is deserving of strong support.
The rules we are finalizing today were shaped by vigorous input on the proposal we released last summer. That input came from people all around the country who have first-hand experience of the issues we are addressing here. Based on many comments and many discussions, we revised our proposal with a focus on how we could best exercise our legal authority to provide more help for borrowers in distress.
It would be understandable if many consumers who have heard the horror stories about mortgage servicing are now wary of exposing themselves to these risks by purchasing a home. But nobody should give up on the promise of the American dream.
This month, we are issuing other rules designed to improve the mortgage market by prohibiting unsafe lending practices that set up borrowers for failure. If consumers do run into trouble in making their payments, today’s rules offer stronger consumer protections and a fairer process. And as I have stressed, we will exercise our supervision and enforcement authority to make these rules stick for mortgage servicers across the entire market. By working to see that homeowners are treated with dignity once again, we are taking a big step forward for progress and fairness in this country. Thank you.