At the start of this year, nearly one in four mortgages was underwater and 4.5 million mortgages were seriously delinquent. And today, some studies estimate that as many as 10 million borrowers are at risk of defaulting on their mortgages in the coming years.
One of the problems that has made things even harder for struggling homeowners is the state of the mortgage servicing industry, which collects payments on behalf of the owners of the loans. This industry has never had a requirement, or a strong incentive, to meet the needs of consumers. Even before the crisis, there were already problems with bad practices and sloppy recordkeeping.
When the financial crisis hit, however, things got much worse. When millions of borrowers started to fall behind, many servicing businesses that had been built and focused primarily on the good times began to crumble under the weight of the growing crisis. To borrow a moral from Aesop’s fables, the servicing industry was all grasshopper and no ant, for it was simply not prepared to weather the lean periods of the financial cycle. The earlier problems with recordkeeping and other systems made it harder to sort out borrower problems. And instead of investing in new personnel and processes, too many mortgage servicers took shortcuts that made things far worse for homeowners in trouble.
The problems that resulted from these shortcuts are virtually unbelievable unless you have experienced them for yourself. I have heard the same kinds of stories from hundreds and hundreds of people from my days in Ohio where we created dozens of county “Save Our Homes” task forces to work directly with homeowners as they dealt with these frightening and overwhelming situations.
Picture every bad customer service experience you have ever had: calls going unanswered, glacially slow processes, mistakes made and not fixed, a kaleidoscopic cast of human beings who never seem to deal with you more than once, your paperwork submitted and lost repeatedly. Now, multiply that mountain of frustration exponentially, and you can begin to get an inkling of the scope of the problems that Americans face: house by house, neighborhood by neighborhood and community by community.
Consider for a moment the impact of these problems on families. We are not talking here about a $10 overcharge on a utility bill. We are talking about the largest single investment that people will make in their lifetimes, and a matter that goes far beyond a mere economic investment. We are talking, specifically, about people’s homes. A place consecrated by a deep bond that only the passage of time—and the precious enjoyment of time—can create in an enduring way. The swing-set your children loved. The deck you built with your own hands. The door that swung shut behind you every day you went to work, to earn the money to make the payments to keep the place you called your own.
And it is not just consumers who suffer. Mortgage investors do not benefit from a broken system where servicers do not fulfill their obligations or make reasonable efforts to mitigate losses. And this failed business model widened the pain of the housing crisis and destroyed an incalculable measure of consumer trust in financial businesses, perhaps in a lasting way.
The severity of the problems people have experienced is further compounded by the fact that consumers often have no say in choosing their mortgage servicers. At the time they take out the mortgage, they usually know who is lending them the money, but later the servicing rights may have been bought and sold, perhaps multiple times, perhaps with scant notice to the consumer. If the service is shabby and the servicer is indifferent, their customers have no ability to vote with their feet and select another provider who will treat them better.
Abraham Lincoln once said, “The legitimate object of government is to do for a community of people whatever they need to have done but cannot do at all or cannot do so well for themselves in their separate and individual capacities.” And so today the Consumer Financial Protection Bureau is launching our effort to protect consumers where they do not have the power to protect themselves.
The mortgage servicing rules we are considering reflect two basic, common sense standards—no surprises and no runarounds. They would apply to all mortgage servicers regardless of how they are organized, including banks, thrifts, credit unions and nonbank servicers.
We envision a world where homeowners can expect fair and reasonable treatment when they fall behind in their payments, and genuine efforts are made to help them stay in their homes. Simply put: We intend to require mortgage servicers to put the “service” back in servicing.
Our first set of rules would address the root problem that transparency is often lacking in the mortgage servicing market. These rules are designed to arm consumers with the information they need to avoid costly surprises. We want to make sure that at all times consumers know how much they owe, what they are paying, and how their payments are being applied. And if consumers fall behind on their mortgage, we want them to know what their options are to make the best of a difficult situation. Unfortunately, too many consumers today do not have the right information at the right time.
Our rules would change that by requiring servicers to send every customer a clear monthly mortgage statement, summarizing the key terms like the interest rate and principal obligation; the amount of and due date for the next payment; and recent transaction activity, including itemization of fees and charges. It may seem amazing that we would have to impose such basic requirements, but in this market we do. Other rules we are considering would require servicers to provide earlier warnings before interest rates change on adjustable-rate mortgages.
In addition, if consumers find that their mortgage servicers are trying to force expensive insurance on them, they would have the ability to head off this unnecessary result. We have heard horror stories about people whose foreclosures were accelerated by having force-placed insurance imposed on them without notice. Even when this is clearly a mistake, you cannot get it corrected unless you can get a live human being who is willing to work with you to rectify the error. With many of the servicers, that was simply not possible. To address this unacceptable dilemma, we will be considering new rules to ensure that servicers do not unjustifiably, and without notice, charge consumers for property insurance purchased by the servicer.
Another fundamental principle to help eliminate unpleasant surprises is to require that servicers reach out early to struggling borrowers. This requirement would ensure that servicers make a good-faith effort to inform borrowers, when they first fall behind, about options that can help them avoid foreclosure. And servicers would be required to state clearly how to pursue and exercise those options, which would include the prospect of refinancing and finding available avenues for loan modification (such as forbearance, interest rate modification, and principal reduction, all of which are tools that show promise in particular circumstances of helping to keep people in their homes while optimizing the situation for investors).
All of these rules would give consumers accurate and relevant information so they can understand what their servicer is doing, identify problems as early as possible, and take follow up actions before things start to snowball. The idea is to bring transparency back to the day-to-day transactions between servicers and their customers—so that borrowers know what is going on and can make better choices from a more informed perspective.
The second set of rules would address the root problem of lack of accountability in the mortgage servicing market. The rules that we are considering are designed to ensure that servicers do not give consumers the runaround. We want a system where payments are credited immediately after they arrive; where errors are fixed when they occur; where the borrower’s documents and records are maintained; and where borrowers can actually reach someone to help when they are in trouble.
But for too many consumers all over the country, these things do not happen now. And when borrowers are trying to save their homes, getting the runaround can turn a difficult situation into a disaster. Time after time, people have told us that they submitted the information necessary to be considered for a loan modification. Time after time, they have had the infuriating experience of being told, by yet another customer service representative, that the information cannot be found or that still more documents must be sent.
The rules we are considering would require all servicers to maintain records that are accessible and up-to-date, minimize errors, and make corrections quickly when errors occur. They would also require servicers to improve the loan modification process for consumers. Servicers would have to do things like notify the borrower about loan modification options, the types of documents the borrower would have to provide, and how long it could take to get a modification. And they would have to give their employees full access to all customer documents so they can answer questions promptly and accurately about the current status of the matter at any given time. If a consumer notifies the servicer of an error—whether orally, electronically, or in writing—the servicer would be required to acknowledge receipt of the notice and respond to it within appropriate time frames.
Many people speak eloquently about their bewilderment and confusion in the face of inconsistent advice they have received from an array of different people speaking on behalf of their mortgage servicers. So we are considering a rule where servicers would be required to provide direct and ongoing access to designated servicer foreclosure prevention staff. The servicers would need to have systems in place so that a consumer can call real human beings with access to all relevant documents in the consumer’s loan file, including records of all prior contacts with the customer.
This continuity of contact would stop people from getting the runaround—talking to a dozen different representatives, each time telling their story anew, and each time getting a different answer. And it would help with the maddening situation, which is all too common, where the servicer’s left hand has agreed to a trial modification of the mortgage while the servicer’s right hand is actually closing in on your foreclosure, but the left hand and the right hand do not seem to know what each other is doing.
People need real human beings with the right information to help them deal with something as monumental and life-changing as a prospective foreclosure. This is not a radical idea. It is what community banks that keep their loans in their own portfolios have done every day for decades to help troubled borrowers. It is what HUD-approved housing counselors have stepped into the breach to do for so many homeowners around the country because the mortgage servicers have failed them so fundamentally. It is common sense. It is common decency. And it should be the law of the land for all mortgage servicers.
At the Consumer Bureau, we are already using all of our tools to extend new protections to consumers against the kind of shabby customer service and law-breaking by mortgage servicers that has been so thoroughly documented: by considering new rules, by examining servicers’ compliance with the law, by investigating and resolving enforcement matters as they arise, and by responding to individual customer complaints. As we continue to engage in this work, we will collaborate with our sister regulators to fashion more complete solutions. We recognize that we share a common interest in reforming the mortgage servicing market from the standpoint of the financial institutions as well as on behalf of consumers.
So the rules we are considering on mortgage servicing are just the beginning of our push for a better mortgage market. What we envision is a world in which consumers know what is happening, in which errors are less frequent and more readily corrected, and in which all reasonable efforts are made to help enable responsible homeowners who fall behind in their payments to stay in their homes.
By fixing these root causes of mortgage servicing problems—and securing transparency and accountability for borrowers—consumers would have clearer information about their options to keep their homes and would be in a better position to hold servicers accountable for their decisions.
If we look across the range of consumer harm that occurred before, during, and after the recent financial crisis, the harms spawned by the problems in mortgage servicing may be the greatest of them all. If we are going to make life better for the American consumer and strengthen the future course of the American economy, no task is more important for us right now.
We simply must dedicate ourselves to improving how homeowners are treated in these most vulnerable moments of their lives. That fact weighs heavily upon my mind; it is making a deep imprint upon our daily work at the Consumer Bureau; and we are determined to make a difference for so many American families who deserve better treatment at the hands of their mortgage servicers.
