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Proposed Rules Mark New Era for Mortgage Servicers

Industry experts say that new rules proposed for mortgage servicers are mostly in line with recent regulatory actions and agreements — though they agree there is no going back to the old ways. In addition to how distressed borrowers are handled, the proposed rules would require earlier disclosure of upcoming rate and payment adjustments and changes to the way that servicers handle borrowers with lapsed insurance coverage.

In April, the Consumer Financial Protection Bureau issued Small Business Review Panel for Mortgage Servicing Rulemaking – Outline of Proposals Under Consideration and Alternatives Considered and disclosed plans to issue formal rules this summer with the intention of having final rules in place by the beginning of next year. The CFPB sought input from consumer groups, small servicers and other industry stakeholders as well as various government agencies.

After considering responses from the various stakeholders, the CFPB said Friday that has it refined some earlier ideas and proposed rules that are designed to protect borrowers from mortgage servicer mistakes and surprises. The adjustments were made to enhance consumer protections, especially with the process of evaluating borrowers for alternatives to foreclosure, and reduce potential burdens on small servicers.

The CFPB noted that problems in the servicing process have been around since before the financial crisis. Among the industries shortcomings were “bad practices and sloppy recordkeeping,” according to the regulator.

More recently, issues with foreclosure alternatives and the loan modification process have made it increasingly difficult for distressed borrowers. Among the allegations borrowers are lobbing at servicers are claims that applications for modifications are being lost. Borrowers are also accusing servicers of not correcting errors.

The CFPB said that it is implementing and refining servicer requirements addressed in the Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank also empowers the CFPB to write additional rules that will “help fix the market.”

Today’s announcement outlined two sets of proposed rules. The rules are designed to create uniform standards that work for both big and small servicers regardless of their locations or type of business charter.

One set of rules amends Regulation X, which implements the Real Estate Settlement Procedures Act of 1974. The second set of rules amends Regulation Z, which implements the Truth in Lending Act.

The RESPA proposal is 250 pages long, while the TILA proposal is 178 pages. However, while proposed rules are generally double-spaced, these proposed rules are single-spaced — making the combined proposals effectively close to a thousand pages. The revised format of the latest rules is likely in response to criticism of the nearly 1,100-page rule on integrated mortgage disclosures issued last month.

David H. Stevens, president and chief executive officer of the Mortgage Bankers Association, sees the proposals as resolving the need for a national set of standards that provide certainty about operational expectations and consumer protections.

“We’ve been wanting to get a set of national servicing standards for some time,” he said in a telephone interview. “We’ve been very explicit on the subject. And so, I actually think it’s great news that CFPB has come out with a proposed rule.”

The rules are “very consistent” with the multi-state servicer settlement earlier this year and do a relatively good job of adjusting some of the big standards in the settlement to accommodate smaller servicers, according to Stevens.

Michael Waldron, a partner with the law firm of Ballard Spahr LLP, agrees that the rules are in line with the settlement — though he hasn’t yet had a chance to comprehensively review the full proposed rules. The requirements actually were formed last year in the Interagency Review of Foreclosure Policies and Practices issued when bank regulators entered consent orders with the country’s biggest servicers.

“You have to look at the consent orders themselves that were entered into in April of 2011 and the ongoing efforts under those consent orders to truly get perspective on what these proposed rules mean and how they will be truly implemented,” Waldron explained.

Stevens sees the national set of standards as diluting efforts by state regulators who want to do their own thing.

The proposed rules will actually make residential mortgage servicers more like servicers of other consumer financial products and commercial mortgages, according to Steven Horne, founder, CEO and president of special servicer and Mortgage Daily advertiser Wingspan Portfolio Advisors. He explained that while servicers in other industries have always used specialists, mortgage servicers have been the “odd duck” that has operated for decades on the basis that every servicer should be able service all loans at every stage of delinquency.

The first set of proposed rules, the 2012 Truth in Lending Act (Regulation Z) Mortgage Servicing Proposal, would bring greater transparency to the market and help borrowers avoid costly surprises by providing them clear and timely information about their mortgages, the CFPB said. This would be accomplished by requiring servicers to provide clear monthly statements that include a breakdown of payments by principal, interest, fees and escrow. The statements would also need to include the next payment amount and due data as well as recent transaction activity and warnings about fees.

In addition, borrowers would need to be warned earlier about upcoming interest rate changes on adjustable-rate mortgages. Disclosures about rate adjustments would need to include information about alternatives and counseling resources in case borrowers can’t afford potentially higher payments. Existing disclosures about rate changes would be amended to provide better information and give the borrower more time to anticipate consequences of payment changes.

Waldron, the attorney, sees the new ARM disclosure requirements getting much attention from the industry. Estimates that will be required of servicers earlier before upcoming adjustments will create problems in determining the new rate and payment since the index value won’t be available at the time of the notice.

“I think that’s going to be of particular interest to the industry, and the details about how the servicer will be obligated to perform and their methodology of estimating is gonna to be an area of particular focus,” Waldron said.

Another area addressed in the first set of rules is the hot-button issue of forced-placed insurance. The CFPB is proposing to require more transparency by servicers in the process and that they give advance notice and pricing information before charging prior to incurring the cost on behalf of borrowers. Servicers would have 15 days to terminate the insurance once they receive evidence that the borrower’s insurance in back in place.

Waldron noted that instead of buying new forced-placed insurance, the proposal will require that servicers make advances to escrow accounts and keep existing coverage in place. Such a process will likely keep premiums down and reduce servicer incentives to maximize earnings off of forced-placed premiums. In addition, servicers would reduce cash-flow burdens.

Finally, the CFPB said servicers would be required to make good faith efforts to contact delinquent borrowers early in the delinquency process and advise them of their options to avoid foreclosure.

The second set of proposed rules, the 2012 Real Estate Settlement Procedures Act (Regulation X) Mortgage Servicing Proposal, “would impose common-sense requirements for handling consumer accounts, correcting errors, and evaluating borrowers for options to avoid foreclosure,” the regulator said. This would include prompt payment posting and quick resolution of errors.

It would also include a requirement that servicers establish reasonable policies and procedures to provide accurate and current information to borrowers and minimize errors. Servicers would need to submit accurate legal documents that help borrowers with options to avoid foreclosure and provide oversight of their contractors and foreclosure attorneys. Borrowers considered for foreclosure alternatives would need prompt review of their applications for those options.

“Servicers would be prohibited from proceeding with a foreclosure sale until the review of the borrower’s application is complete,” the CFPB stated. “Servicers would also be required to let borrowers know when applications are incomplete and to allow borrowers to appeal certain servicer decisions.”

The servicer cannot proceed with foreclosure unless it first determines that the borrower doesn’t qualify for foreclosure alternatives, or if the borrower rejects an offer or defaults on the terms of an option.

The second set of proposed rules additionally requires servicers to “provide delinquent borrowers with direct, easy, ongoing access to employees who are dedicated and empowered to help delinquent borrowers.”

MBA’s Stevens noted that while there is no explicit mandate for a single point of contact, servicers will be required to provide clear access for borrowers.

“These proposed rules would offer consumers basic protections and put the ‘service’ back into mortgage servicing,” CFPB Director Richard Cordray said in the news release. “The goal is to prevent mortgage servicers from giving their customers unwelcome surprises and runarounds.”

Comments on the proposed rules are being accepted until Oct. 9. Final rules are expected to be in place by January 2013.

Waldron said that the industry needs time to digest the massive proposed rules before understanding how they conform to prior recent actions and declaring a certain outcome.

Stevens doesn’t see the proposed CFPB rules leading to a big sell off of servicing rights on distressed loans by large servicers. He views Basel III as having a far greater impact on servicing because of proposed capital requirements to retain mortgage servicing rights.

Likely increased operational costs from the CFPB’s proposals have already been anticipated by the industry because of the terms of the servicing settlement, according to Stevens. But he does see the industry as permanently changed.

“There’s no doubt that we are in a new world,” he said. “I think where we invest our time, as an industry, has to be more focused on making sure that whatever these rules are that are being implemented whether it’s servicing standards or QM or Basel or L.O. comp or whatever, with all these rules coming out, that we make certain that we are not eliminating access to credit.”

Horne, the distressed servicer, agreed that the mortgage servicing business has been permanently changed as a result of the foreclosure crisis. He acknowledged that the old servicing model worked reasonably well as long as delinquencies were low and home prices were rising. But with the new rules, “a new reality emerges.”

Two types of special servicers are emerging in today’s market, according to Horne. The first are aggregators like Ocwen Financial Corp. and Nationstar Mortgage LLC. The other type of emerging special servicers is companies like Wingspan that augment the performance of primary servicers by assisting in parts of the servicing process.

“We have a specialized skill set that enables us to help with all of the problems associated with borrowers experiencing financial distress,” He explained.

Horne noted that Wingspan’s incentive, which is based on the outcome of the loan versus a share of each payment collected, is more in line with that of a portfolio lender than a third-party servicer.

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