The Consumer Financial Protection Bureau's latest mortgage servicing proposals have the residential lending industry seeing dollar signs -- and not the good kind.
The regulations, which the agency plans to formally propose this summer, would require mortgage servicers to expand disclosures and implement new policies to resolve errors and assist struggling borrowers.
While not unexpected, industry observers said the plans could require significant technology upgrades, translating to higher compliance costs that could trickle down to borrowers.
"My initial thought is a concern that the CFPB is going to make mortgage servicing even more expensive," said Robert Cook, a partner with HudsonCook LLP. "And to the extent they do, that's just going to drive up the cost of financing people's homes in this country."
The proposals, which the CFPB outlined earlier in the week, are currently in the pre-rulemaking stage and must be finalized by January 2013.
They would require servicers to provide clearer monthly periodic statements and advance notice of interest rate increases for adjustable rate mortgages, and impose new limits on force-placed insurance. They also call for servicers to improve the way they handle consumer accounts by immediately crediting payments, acknowledging and fixing errors within 30 days and providing direct access to foreclosure prevention teams, among other policies.
Director Richard Cordray, who outlined the proposals at a financial literacy center in Washington, said the rules would prevent costly surprises and help consumers avoid the runaround they often get from servicers. The servicing industry has never had a requirement or strong incentive to meet the needs of consumers, and bad practices and sloppy record-keeping were problems even before the financial crisis, Cordray said.
"The earlier problems with recordkeeping and other systems made it harder to sort out borrower problems" after the housing market collapsed, he said. "And instead of investing in new personnel and processes, too many mortgage servicers took short-cuts that made things far worse for homeowners in trouble."
The CFPB has made it clear that mortgage market reforms are a top priority for the agency. Congress mandated in Dodd-Frank that CFPB write new rules to improve mortgage servicing and origination - some of which are included in the latest proposals — and it authorized the bureau to supervise all mortgage lenders, banks and nonbanks, regardless of size.
The agency is also working on developing separate mortgage servicing standards in conjunction with the other banking regulators that are likely to dovetail with standards established under the $25 billion settlement between the five largest servicers and state and federal officials.
Given the upheaval in the servicing market, observers said the CFPB proposals aren't surprising.
