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Published: December 2011

Mortgage servicers must be held to strong standards by consumer agency

Coalition: Housing

Consumer Action signed onto a letter asking the Special Advisor to the Secretary of the Treasury on the Consumer Financial Protection Bureau (CFPB), Raj Date, to advance strong national mortgage servicing standards.

Below please find the full text of the letter:

Dear Mr. Date, Earlier this year, a number of members of Americans for Financial Reform met with CFPB staff to discuss pervasive and profound consumer abuses in the mortgage servicing market, and we are writing to request another meeting to continue this discussion.

On July 21, 2011, the Consumer Financial Protection Bureau (CFPB) acquired rule-making authority and enforcement tools under the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (Dodd-Frank) to address abusive servicing, and ensure that mortgage servicing companies follow legal procedures when foreclosing on a home. The CFPB also received authority transferred from HUD and the Federal Reserve Board to enforce and issue regulations under the Real Estate Settlement Procedures Act and the Truth in Lending Act. Due to years of reckless and abusive mortgage practices, there have been as many as 5 million homes lost since 2007, and there may be as many as 11 million more foreclosures filed in the next few years. This crisis is exacerbated by the misconduct of mortgage servicing companies whose staff are trained for collection activities rather than loss mitigation. As a result, many homeowners who qualify for a loan modification end up in foreclosure.

Through its own rulemaking and enforcement authority as well as through coordination with other federal and state agencies, the CFPB should advance strong national mortgage servicing standards. Servicing rules would stop avoidable foreclosures and would reform industry incentives to align with those of homeowners, communities and investors. National servicing standards should at a minimum include the following:

1) Conduct mandatory loss mitigation and offer sustainable loan modifications to qualified homeowners where consistent with Net Present Value for the investor. Foreclosures are extremely costly. The costs to investors alone include legal and servicing fees, property maintenance, and sales costs, in addition to the depressed prices that properties usually yield at foreclosure auction. Every loan should receive a good-faith review of foreclosure alternatives before foreclosure is initiated, comparing expected cash flow to the investor from a modified loan against the expected cash flow without a modification. A loan modification should be offered where it results in a positive net present value (NPV) for the investor. All positive NPV loans also should be disclosed to the investors. Modifications should be structured to increase their long-term success, incorporating principal reduction, prioritizing meaningful interest rate reductions over term extensions, and providing affordable payments for the entire loan term.

2) End the “dual track” of loss mitigation and foreclosure. Currently, mortgage servicers continue with foreclosure proceedings at the same time that homeowners are applying for and being considered for loan modifications. These parallel tracks or “dual tracks” confuse the homeowner and often result in foreclosures being wrongfully completed even when the homeowner has applied for or even received a loan modification. They also increase foreclosure costs for homeowners and investors. Fees mount during the pendency of the foreclosure case: attorneys appear in court; advertising is ordered; title searches are prepared; fees are incurred for service. Accordingly, where a homeowner has requested a loan modification or other alternative to foreclosure, no foreclosure process should be started while that request is reviewed and processed. Where an application comes after foreclosure has started, both judicial and non-judicial foreclosures should be frozen during review, including cancellation of sales. Staying all foreclosures during the pendency of a loan modification review would encourage servicers to expedite their reviews, provide transparency and fairness to homeowners, and save investors on foreclosure–related losses.

3) Prohibit servicing abuses. The robo-signing scandal was just the tip of the problems created by a servicing system outmatched by the scope of delinquencies and staffed by ill-trained and under-prepared personnel. Servicing abuses are endemic throughout the industry and include imposition of improper fees and force-placed insurance, misapplication of payments, mismanagement of escrow accounts, and failure to send proper notices and documentation of payoff amounts. Federal policy should follow those states that have articulated duties of good faith and fair dealing for servicers while prohibiting specific unfair and deceptive practices. For example, a servicer should renew an existing insurance policy rather than force-placing a policy that is more costly while often providing less coverage.

4) Require reasonable repayment for forbearance arrears. Forbearance is an increasingly valuable tool for loss mitigation, particularly for unemployed homeowners. National servicing standards should establish the requirement that homeowners who receive forbearance and become reemployed, and whose loan is otherwise affordable, will be permitted to resume the original loan payment amount through a capitalization of arrears and term extension.

5) Streamline servicing case management. Homeowners need a single case manager or point of contact for their loan modification requests. Servicers often lose paperwork, make inconsistent requests, and give conflicting information to homeowners. This confusion could be greatly reduced by assigning a single case manager to each homeowner’s case. Servicers also should assign specific staff to provide greater accountability and resolve urgent disputes, such as missing paperwork and improper NPV inputs. Allowing servicers to develop their own approaches to customer service has clearly failed to provide adequate results. In addition, it is critical for servicers to have staff who speak such languages other than English as are necessary to communicate effectively with the borrowers whose loans they are servicing, and to have key documents available in appropriate languages for borrowers who are not comfortable conducting major financial transactions like loan modifications in English.

6) Establish transparency and accountability. Increased transparency and accountability are essential to mortgage servicing reform. The NPV analysis used by a servicer should be available to the public, and inputs and outputs should be provided to the homeowner. Transparency is vital both in allowing borrowers to verify and address any errors or discrepancies and in ensuring that investors have access to NPV calculations.

7) Review and escalation process. Homeowners should be able to obtain a third-party review for modification denials and wrongful foreclosures. Currently, foreclosures and evictions often proceed while modification reviews are underway and servicers and the GSEs in particular provide little opportunity to obtain meaningful review of such circumstances. Servicers also should be prohibited from initiating or continuing a foreclosure while an outstanding request for information or a dispute is pending (if the request for information or dispute is connected to the basis for foreclosure). Fixed timeframes for the servicer’s response should keep the dispute resolution process from being a source of continuous delay in the foreclosure process.

8) Establish clear-post foreclosure duties. Where a foreclosure occurs, servicers should be held to clear standards for respecting tenants’ rights and maintaining properties as to avoid harm to families and communities. Servicers must develop adequate policies and procedures to ensure compliance with federal, state and local tenant protection laws and ordinances in tenant-occupied properties. REO properties must be maintained and improved to FHA standards so that potential buyers can secure FHA financing, and so that neighborhoods are spared the blight, criminal activity and depressed property values that come from weak servicer property maintenance performance.

9) Enforcement. Vigorous enforcement of servicing standards, including the imposition of substantial penalties for noncompliance, is essential to reforming the industry and restoring fairness and economic sense to the market as a whole.

10) Promote fair housing compliance. To further the goals of transparency, accountability and fair housing, servicers must be required to publicly report loan-level loss mitigation data including, but not limited to, data on the race, ethnicity, census tract, and loss mitigation outcome (loan modification, short sale, foreclosure, etc) of homeowners. Such an obligation can be implemented by CFPB thru its authority under the Home Mortgage Disclosure Act (HMDA).

Lead Organization

National Consumer Law Center, Center for Responsible Lending, Consumer Federation of America

Other Organizations

California Reinvestment Coalition | Center for Responsible Lending | Consumer Federation of America | Consumers Union | Empowering and Strengthening Ohio’s People | National Association of Consumer Advocates | National Community Reinvestment Coalition | National Consumer Law Center (on behalf of its low-income clients) | National People’s Action | National Economic Development Advocacy Project (NEDAP) | National Fair Housing Alliance | Philadelphia Unemployment Project | The Leadership Conference on Civil and Human Rights | U.S. PIRG

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