Think of the new mortgage servicing regulations, released today by the Consumer Financial Protection Bureau, as a bill of rights for mortgage borrowers. Or think of it as "radical movement of common sense," John Hope Bryant, founder and CEO of the nonprofit Operation Hope, told an audience of bankers, consumers and CFPB members.
Bryant, a member of President Barack Obama's Advisory Council of Financial Capability, spoke at a CFPB hearing in Atlanta to announce and discuss the new standards mortgage servicers will have soon have to follow.
The new rules will "help clean up" many of the problems that borrowers have faced when dealing with the companies that collect the payments on their loans every month, Bryant told the CFPB's director, Richard Cordray.
"We will be vigilant about enforcing these rules," Cordray assured the audience.
The speeches are eloquent. But will the rules do what they are supposed to do, and will they be enforced?
It depends on who you ask. Some bankers say the new servicing rules go too far and may impose prohibitive costs on small lenders, even though the CFPB exempts servicers with fewer than 5,000 loans from most of the rules. Consumer advocates say the rules set basic standards for an industry that regulators have long overlooked but that there are still holes that need to be fixed.
One of those flaws relate to the controversial dual-tracking issue, when a servicer continues to the foreclosure process even though it's negotiating foreclosure alternatives with the homeowner.
"For people who are in foreclosure already, the provision doesn't halt the foreclosure process when they apply for loan modification," Julia Gordon, director of housing finance and policy at American Progress, told the CFPB during a panel discussion held at the event. The new rules prohibit the servicer from initiating foreclosure while the borrower is negotiating an alternative such as loan modification. Servicers will be prevented from finalizing the foreclosure sale while the borrower is being considered for workout options -- but they won't be required to put the foreclosure process on hold if the foreclosure has begun.
The rules require servicers to proactively reach out and negotiate with borrowers early in the process, when the loan goes delinquent. But it's unclear how much effort the servicer will have to make to contact the borrower, says Lot Diaz, vice president of housing community development at the National Council of La Raza. Getting messages to borrowers is not as simple as mailing them letters, he says. None of these rules will be effective if borrowers are not aware of their rights, he says.
Borrowers gain basic rights
At the least, the new rules will provide borrowers with more information about their mortgages and more access to their servicers. Consumers will be entitled to receive periodic statements with details about their loans and will know that servicers must credit payments promptly.
Servicers will have systems in place to keep borrowers' records and avoid lost paperwork. Gordon described the classic "he said-she said" scenario that happens when borrowers claim to have sent the required documentation numerous times, and lenders claim the paperwork isn't there or was not received.
Common sense isn't free
That's pure common sense, Bryant says. But common sense can be costly to lenders.
Being a mortgage servicer may sound easy to most people, John Beggins, president of Specialized Loan Servicing, told the other panelists. People think servicers just "collect payments and distribute the money," he says. But it takes significant investment in staff and information technology to make the process run smoothly, he says.
Money that some lenders say they can't afford to spend.
"Credit unions will incur significant costs to comply," Pam Davis, vice president of real estate at Delta Community Credit Union in Atlanta, told the CFPB. Her credit union services more than 10,000 mortgages and would not be exempt from the CFPB's servicing rules.
The final rule issued by the CFPB today is anything but final. With so much pressure from both sides, the rules will likely be amended before implementation.