In September 2012 the Consumer Financial Protection Bureau, or CFPB, issued their notice of proposed rulemaking on mortgage servicing standards under the Real Estate Settlement Procedures Act, or RESPA. In response, the Center for American Progress submitted comments for the public record. (The Center for American Progress also signed onto a complementary comment with other groups, which can be found here). Below is a summary of those comments. The official comment letter can be downloaded here.
Providing comprehensive servicing standards for all mortgage servicers is one of the Consumer Financial Protection Bureau’s most important functions. While bad lending practices and risky products triggered the housing crisis, the abject failure of the mortgage-servicing industry to mitigate losses or to follow the law when pursuing foreclosures greatly exacerbated the damage done to homeowners, communities, the housing market, and the larger economy.
This comment letter focuses on the three overarching points that could strengthen the bureau’s proposed mortgage-servicing standards:
- The key to successful loss mitigation is helping the consumer before the foreclosure starts and before any “dual track” begins. (Dual tracking, which refers to a servicer’s attempt to conduct loss mitigation while at the same time taking steps toward foreclosure, is a widely criticized practice that confuses homeowners and reduces the likelihood of successfully avoiding foreclosure). For this reason, the Consumer Financial Protection Bureau should make sure there is a sufficient period of time for homeowners to seek help before the foreclosure process begins and that servicers review files before initiating the foreclosure to ensure the homeowner had a fair opportunity to obtain a foreclosure alternative.
- The best way to improve servicing standards is to make the process as similar as possible across all servicers and books of business.
- When a servicer fails to review a loan for foreclosure alternatives, the homeowner should have the ability to hold the servicer accountable.
Require loss mitigation before the foreclosure process begins
Helping consumers prior to the start of the foreclosure process—and even prior to default, when default is reasonably foreseeable—saves money for investors and homeowners alike and is far more likely to result in an affordable, sustainable modification or other alternative to foreclosure. For early intervention to work, however, homeowners must have an opportunity to be reviewed for loss mitigation before the servicer initiates foreclosure proceedings.
A useful model is provided by the Servicing Alignment Initiative, or SAI—an effort by the Federal Housing Finance Agency that aligned and improved the servicing practices of Fannie Mae and Freddie Mac. The initiative provides a standard 120-day “pre-foreclosure” period after delinquency, before the servicer initiates a foreclosure. During this “pre-foreclosure” period, servicers reach out to delinquent homeowners to provide every opportunity to obtain assistance. The initiative also requires a mandatory review of each file before initiating foreclosure to ensure the servicer adequately reached out to the borrower and appropriately reviewed any application for assistance. This review helps to avoid unnecessary foreclosures, an extremely important goal for this Consumer Financial Protection Bureau rulemaking.
Align the servicing process across all servicers and all books of business
No matter how good any servicing standards look on paper, they will only work if mortgage servicers and the general public understand what the standards are, how they work, and in what situations they apply. After the housing bubble burst, many homeowners lost their homes unnecessarily because they did not understand what rules governed the servicing of their mortgage and because their servicers provided them with incorrect information—in many cases, through ignorance or confusion rather than malfeasance. The best way to ensure broad understanding of the rules is to try to have as much uniformity as possible across the industry.
We acknowledge that the Consumer Financial Protection Bureau is not likely to impose extremely detailed standards across the board for all servicers and investors, and such detailed standards would not necessarily be workable. But the bureau can certainly adopt the same basic structure that already applies to the government-sponsored enterprises and the parties to the National Mortgage Settlement. (The National Mortgage Settlement is a legal settlement between 49 states, the federal government, and the country’s five largest mortgage servicers. In the settlement, these servicers agreed to strong, uniform servicing standards.)
Enable homeowners to hold servicers accountable for their failure to review a loan for foreclosure alternatives
Given the importance of loss mitigation and uniform processes surrounding foreclosure, it is of the utmost importance that homeowners have the ability to hold servicers accountable if servicers do not follow loss-mitigation requirements. To provide this accountability, a failure to review the loan for foreclosure alternatives needs to be defined as an “error” under the Real Estate Settlement Procedures Act, which would trigger error-resolution requirements that require servicers to correct their mistake or justify their action. It is also important to not define error resolution too narrowly—even if the current rule solves today’s problems, flexibility is required to prevent tomorrow’s problems.