Richard Cordray, Director of the Consumer Financial Protection Bureau
When I was a state and local treasurer in Ohio, I saw the housing crisis unfold in slow motion. Brokers steered consumers into high-priced mortgages to earn higher fees. First-time homebuyers signed up for balloon loans — not understanding the risks. And unscrupulous operators looking to make fast cash crowded in, stealing market share from honest, responsible lenders that still cared about a borrower’s ability to repay.
It was the wild West of lending. Few people realized how dangerous or widespread the problem was. Neither did we, though we could plainly see that something was very wrong.
We all know how it ended. And we all recognize now that a lack of effective federal government oversight contributed to the problem. No single federal government agency was focused on viewing the markets for financial products and services from the perspective of the consumer. That was a tragic error.
President Barack Obama and Congress recognized this needed to change, so they created the Consumer Financial Protection Bureau. While the CFPB is charged with overseeing all sorts of financial products and services — including credit cards, checking accounts and payday loans — our greatest focus is on the mortgage market. It was, after all, the house of cards that crashed our economy and caused so much pain for millions of Americans.
There is much that needs to be fixed in this broken market — from the moment a prospective homeowner starts shopping for a loan all the way until the loan is finally terminated, which for too many people these days comes about through foreclosure.
The United States still has a long way to go to get through the aftermath of this crisis. Almost 4 million mortgages — about 7.6 percent of outstanding loans — are more than 90 days delinquent. Nearly a quarter of mortgages had negative equity at the end of the second quarter of 2011. And some studies indicate that as many as 10 million borrowers are at risk of default.
The CFPB is implementing rules and helping to articulate standards so we never again end up in the mess we still see around us today. This is tough work that will take careful thought and time. But we also recognize we can help struggling homeowners now. That is why we are taking action on the mortgage servicing front to help consumers as quickly as possible.
This is a far-reaching task because servicers touch borrowers in many different ways. The servicer is typically responsible for collecting payments from the borrower on behalf of the owner of the loan. They handle customer service, escrow accounts, collections, loan modifications and foreclosures. In the vast majority of cases, consumers do not choose their mortgage servicer. In fact, mortgage servicing rights can be, and often are, bought and sold among servicers.
The problems in mortgage servicing have been well documented. Some servicers have failed to communicate with homeowners, even letting phone calls go unanswered. Others have repeatedly lost paperwork and experienced widespread problems with foreclosure processing. Fees have been assessed that in some instances are unjustified or exorbitant. Reports also suggest that many borrowers who qualify for loan modifications have not received them in time to avoid losing their homes to foreclosure.
The mortgage servicing settlement has received a lot of attention. That settlement, which involves loans held in portfolio by the five largest mortgage servicers, is designed to address some of these continuing concerns. But there are also independent, nonbank institutions that tend to specialize in the servicing of subprime or delinquent loans. And they are not part of the settlement.
These nonbank servicers used to receive little or no oversight. The CFPB is changing that. Our new authority allows us to supervise both banks and nonbanks. Indeed, for the first time, the federal government will have the authority to look into the entire mortgage servicing market. This is a critical improvement: We will be able to monitor all players to make sure they abide by federal consumer financial laws.
The Dodd-Frank Act, which established the CFPB, requires us to put in place new mortgage servicing rules to protect consumers. For example, the law directs us to issue a rule requiring mortgage servicers to provide consumers with better information in their billing statements. The statement will be required to include the principal, the current interest rate, the next date on which the interest rate may change, a description of late payment fees and a telephone number and email address that may be used to contact the servicer.
This week, we are releasing a prototype of what such a statement with all the required information would look like. We will seek broad input and insight by making sure to post a prototype of this form online, at consumerfinance.gov, so people can share their thoughts with us.
In the future, we will also issue new consumer protections around “force-placed insurance” — a term referring to hazard insurance that mortgage servicers secure at the borrower’s expense, typically at a very high cost, when they believe (even erroneously) that a borrower’s previous hazard insurance has lapsed.
Under the new law, we will write a rule to prevent servicers of most mortgages from charging for this insurance unless there is a reasonable basis to believe that borrowers have failed to maintain their own insurance. It will require servicers to provide consumers an opportunity to obtain their own insurance, which is generally less expensive than force-placed insurance obtained by the servicer.
We will also issue new disclosures for hybrid adjustable-rate mortgages — complicated loans that usually start with a “teaser” interest rate before resetting to a much higher rate. Consumers will be notified months ahead of their first interest rate adjustment and will receive a good-faith estimate of their new monthly payment, along with a list of alternatives they may pursue to head off the higher rate, including refinancing and renegotiation of loan terms.
The CFPB cannot address all of the problems in the servicing industry in one fell swoop. But we are already making important adjustments that will protect consumers more effectively. As we mature and grow, we will carefully identify risks and act as needed. We will also make certain that all federal consumer financial laws are being followed.
Without question, these are big challenges. But we look forward to addressing them. And we look forward to working with consumers, responsible businesses and our government partners to put in place a better and sounder consumer financial marketplace.