Consumer agency takes heat on mortgage plan — from consumer groups

The Consumer Financial Protection Bureau (CFPB) is receiving heat from an unexpected source — the consumer groups advocating for people the agency was created to protect. 

ADVERTISEMENT
The agency, a creation of the Dodd-Frank financial reforms, is no stranger to being in the line of fire. It weathers consistent criticism from the financial industry and Republican members of Congress. 

But after it rolled out one of its biggest initiatives to date — proposed rules aimed at helping homeowners struggling with their mortgages — consumer groups cried foul.  

“We do have some serious concerns,” said Margot Saunders, of counsel to the National Consumer Law Center. “We’re very disappointed.”

ADVERTISEMENT
Last Friday, the CFPB proposed rules that would streamline the mortgage servicing industry, a much-maligned sector of the housing market that has come under heightened scrutiny since the bubble burst. 

Troubles in the industry, including the haphazard “robo-signing” of foreclosure documents, have led to criticism from Congress and the White House. They also resulted in a $25 billion settlement with federal regulators and the nation’s largest banks that included billions to help homeowners harmed by those issues.

Richard Cordray, director of the CFPB, said shoddy servicing had “widened the misery” of struggling homeowners. He touted the new rules as “putting the ‘service’ back in mortgage servicing.”

But consumer backers looking at the rules see missed opportunities to help keep homeowners in their homes.

A primary bone of contention for consumer groups in the CFPB’s proposal is its continued allowance of “dual tracking” — the industry practice of simultaneously evaluating efforts to modify a mortgage while taking steps towards foreclosing and selling off the home if those efforts fail.

The bureau puts the brakes on the practice in its proposed rule, but does not stop it outright. 

Under the proposal, if a borrower has submitted an application for a loan modification, a servicer cannot foreclose and sell off the home without considering it. Borrowers even have the chance to appeal a decision to reject a loan modification before facing foreclosure.

As far as the consumer groups are concerned, this first draft is a positive step, but one that does not go far enough. 

Instead, they believe the bureau should require servicers to stop foreclosure proceedings at any point as soon as a borrower begins trying to get a mortgage modified. Foreclosure work should resume only when those modification efforts have been exhausted, the groups say.

“If somebody is sending in their paperwork and applying … the servicer can continue going ahead with the foreclosure process — like having the court declare a person is in default, setting the date for the foreclosure sale,” said Michael Calhoun, president of the Center for Responsible Lending. “That just cuts it way too close.”

Calhoun said that servicers often outsource foreclosure processing to companies devoted to the practice, and that those companies’ “foreclosure assembly lines” can be tough to halt if a problem emerges or a homeowner is late in submitting a modification application.

“Those systems just aren’t built to handle somebody calling in and saying, ‘Oh, stop this foreclosure,’ ” he said. “We need more cushion.”

The CFPB’s proposal allows borrowers to notify servicers of potential errors and requires a quick follow-up on potential problems. But Saunders noted that it can be all but impossible to undo a home that has already been sold.

“It’s like saying you can complain about the fact that they cut off your leg after they cut it off, but you can’t put it back,” she said.

Industry advocates say they are fully supportive of modification efforts, as “virtually all” major servicers offer options for struggling homeowners to adjust their loans.

“Taking the home back is not something [banks] want to do,” said Paul Leonard, senior vice president of government affairs for the Financial Services Roundtable’s Housing Policy Council.

But at the same time, Leonard said the foreclosure process can be lengthy and costly. Halting every step to wait for a modification application to be considered, no matter its odds of success, is not viable, he said.

“Saying that any step in the foreclosure process has to stop until they’re evaluated is not realistic,” he said.

Housing giants Fannie Mae and Freddie Mac are required to consider only foreclosure alternatives for the first four months of delinquency for any mortgages they back, but after that allow the foreclosure process to proceed while continuing to look into modifications.

Leonard said his group plans to file public comments on the proposed rules before the CFPB finalizes them early next year, as will the consumer groups. 

He said the industry’s main concern with the proposal is ensuring the CFPB’s rules are consistent with other regulators’, avoiding confusing conflicts for industry members.

“A number of the major points in there, servicers are already doing,” he said.

While consumer advocates have their gripes about the proposed rule, they remain strong backers of the CFPB’s overall mission. Saunders said the bureau did a “terrific job” on recent rules pertaining to international currency transfers, and Calhoun praised other portions of the rule and the CFPB’s attention to the issue.

“I don’t know if there’s another issue that Director Cordray has singled out as much as this one to be a priority,” he said.

Nonetheless, the proposed rules makes clear that even while the CFPB and consumer groups may be on the same page much of the time, those groups will make their dissatisfaction known when they diverge.

“We’re greedy,” said Saunders. “We want them to be right on all the rules.”