Even before the Consumer Financial Protection Bureau comes out with rules this week to address servicing failures, at least one consumer group is crying foul. The National Consumer Law Center released a 90-page report Tuesday calling the CFPB's proposed national servicing standards "utterly inadequate." The consumer group wants the agency to require that all servicers offer mandatory loan modifications to help borrowers avoid foreclosure.
The CFPB, which proposed servicing rules in August, is expected to finalize the national standards soon.
A CFPB spokeswoman declined to comment. Last week, the agency released its long-awaited rule on qualified mortgages as well as final rules restricting fees and lump-sum payments for certain high-cost loans.
The law center's report, "At a Crossroads: Lessons from the Home Affordable Modification Program," suggests that regulators can learn from the successes and failures of the government's flagship loan modification program, known as HAMP, and should incorporate those lessons into national servicing standards.
The HAMP program brought a level of standardization to the loan modification process, creating a set of criteria to evaluate modifications.
But the program ultimately was deemed a failure because of "massive servicer noncompliance," the report says. Just 831,661 loans were permanent modified as of August 2012, compared with the government's initial rosy estimates of three to four million loans. The report criticizes the voluntary aspect of the program and suggests that government agencies like the CFPB may not be able to provide effective oversight or enforcement of servicing standards.
Diane Thompson, an attorney at the law center, says that left to their own devices, servicers lack the motivation to make modifications.
"Good rules on paper are not enough," says Thompson, who co-authored the report with another staff attorney, Alys Cohen. "We need national servicing standards that mandate loan modifications."
To be sure, the CFPB's servicing standards shave not come out yet and there is no way of knowing what they will say. Still, the agency's proposed rules do not mandate that servicers offer loan modifications. Rather, servicers would be required under the proposed rules to make a good faith effort to contact a delinquent borrower and inform them of their options to avoid foreclosure. They also would be required to promptly review a borrower's application and would be barred from proceeding with a foreclosure sale while a borrower pursues a loan mod, a practice known as dual-tracking.
Using HAMP compliance as an example, the law center report suggests that national servicing standards will only be effective if they are followed by servicers, and that without rigorous enforcement by regulators and a review of servicing practices in supervisory exams, consumers and the public have no way to evaluate servicer compliance.
"Without strong mandates and real consequences for noncompliance, servicers will continue to implement modifications haphazardly or not at all, leaving the economy in a tailspin," the report says.