Consumer bureau proposes mortgage servicer overhaul

By Peter Schroeder - 08/10/12 12:08 AM ET

The Consumer Financial Protection Bureau (CFPB) has proposed a sweeping set of rules that would overhaul an oft-criticized industry: mortgage servicers.

The CFPB announced Friday that it was proposing two sets of rules, aimed at requiring mortgage services to provide information to homeowners about their mortgages in a more timely, straightforward and easily understood way, aimed at ending "unwelcome surprises and runarounds."

Among the range of new requirements proposed by the agency, the new rules would also block services from foreclosing on struggling homeowners before homeowners have had a chance to apply for alternative ways to stay in their homes. Foreclosures could only advance if borrowers do not qualify for alternatives, reject those alternatives or fail to meet the requirements.

"Millions of homeowners are struggling to pay their mortgages, often through no fault of their own,” said CFPB Director Richard Cordray. “These proposed rules would offer consumers basic protections and put the ‘service’ back into mortgage servicing."

Other changes suggested by the new bureau, a creation of the Dodd-Frank financial reform law, would require servicers to provide clearer monthly mortgage statements and give more advance notice of interest rate changes on adjustable rate mortgages, which would also come with information on counseling services if a spiking interest rate makes a mortgage payment unaffordable. Servicers would also be required to quickly correct errors in their documentation highlighted by consumers, provide easier access to staff for delinquent borrowers, and ensure it is easy to access documents and information tied to mortgages.

The proposed rules are now open for public comment until Oct. 9, and are set to be finalized in January of 2013.

The new rules target an industry that has been plagued with problems, as complaints have mounted over shoddy servicing as the number of homeowners struggling to avoid foreclosure skyrocketed after the housing bubble burst. The industry has found itself under fire from lawmakers and the White House, and widespread problems with mortgage servicing resulted in a $25 billion government settlement with some of the nation's largest banks, wherein they agreed to pay out billions to help cover refinancing costs for homeowners and reimburse them for haphazard foreclosure practices.

Problems in the industry were highlighted by the practice of "robo-signing," in which services would speedily sign off on foreclosure documents without reviewing or verifying their contents. The practice, which came to light following the financial crisis, has been described by President Obama as "plainly irresponsible."