WASHINGTON, D.C. — On January 17, 2013 the Consumer Financial Protection Bureau (CFPB) issued rules to establish new, strong protections for struggling homeowners facing foreclosure. The rules also protect mortgage borrowers from costly surprises and runarounds by their servicers.
“For many borrowers, dealing with mortgage servicers has meant unwelcome surprises and constantly getting the runaround. In too many cases, it has led to unnecessary foreclosures,” said CFPB Director Richard Cordray. “Our rules ensure fair treatment for all borrowers and establish strong protections for those struggling to save their homes.”
Mortgage servicers are responsible for collecting payments from mortgage borrowers on behalf of loan owners. They also typically handle customer service, escrow accounts, collections, loan modifications, and foreclosures. Generally, borrowers have no say in choosing their mortgage servicers. Lenders frequently sell loans to investors after the mortgage deal is signed, and the investors, not the consumers, often choose the servicers.
Even before the financial crisis, the mortgage servicing industry at times experienced problems with bad practices and sloppy record keeping. As millions of borrowers fell behind on their loans as a result of the crisis, many servicers were unable to provide the level of service necessary to meet homeowners’ needs. Many simply had not made the investments in resources and infrastructure to service large numbers of delinquent loans. Consumers complained about getting the runaround and being hit with costly surprises. Now, with millions of homeowners in distress, many borrowers are continuing to experience serious problems seeking loan modifications or other alternatives to avoid foreclosure.
Strong Protections for Struggling Borrowers
The CFPB’s mortgage servicing rules ensure that borrowers in trouble get a fair process to avoid foreclosure. Borrowers shouldn’t have to worry about mortgage servicers cutting corners or losing applications for relief. They should be told about their options and given time to apply and be considered for loan modifications and other alternatives. Most of all, they shouldn’t be surprised by the start of a foreclosure proceeding until they have had time to explore all available options. If they act diligently to seek alternatives, they should not face a foreclosure sale before their applications have been evaluated. The new protections for struggling borrowers include:
Restricted Dual-Tracking: Under the CFPB’s new rules, dual-tracking – when the servicer moves forward with foreclosure while simultaneously working with the borrower to avoid foreclosure – is restricted. Servicers cannot start a foreclosure proceeding if a borrower has already submitted a complete application for a loan modification or other alternative to foreclosure, and that application is still pending review. To give borrowers reasonable time to submit such applications, servicers cannot make the first notice or filing required for the foreclosure process until a mortgage loan account is more than 120 days delinquent.
Notification of Foreclosure Alternatives: Servicers must let borrowers know about their “loss mitigation options” to retain their home after borrowers have missed two consecutive payments. They must provide them a written notice that includes examples of options that might be available to them as alternatives to foreclosure and instructions for how to obtain more information. Direct and Ongoing Access to Servicing Personnel: Servicers must have policies and procedures in place to provide delinquent borrowers with direct, easy, ongoing access to employees responsible for helping them. These personnel are responsible for alerting borrowers to any missing information on their applications, telling borrowers about the status of any loss mitigation application, and making sure documents get to the right servicing personnel for processing.
Fair Review Process: The servicer must consider all foreclosure alternatives available from the mortgage owners or investors – those with decision-making power over the loan – to help the borrower retain the home. These options can range from deferment of payments to loan modifications. And servicers can no longer steer borrowers to those options that are most financially favorable for the servicer.
No Foreclosure Sale Until All Other Alternatives Considered: Servicers must consider and respond to a borrower’s application for a loan modification if it arrives at least 37 days before a scheduled foreclosure sale. If the servicer offers an alternative to foreclosure, they must give the borrower time to accept the offer before moving for foreclosure judgment or conducting a foreclosure sale. Servicers cannot foreclose on a property if the borrower and servicer have come to a loss mitigation agreement, unless the borrower fails to perform under that agreement.