New mortgage rules designed to protect struggling homeowners

The government took more steps on Thursday to shore up the recovering housing market with new rules that provide broader protections and greater clarity for homeowners struggling to pay their mortgages.

The Consumer Financial Protection Bureau (CFPB) announced the establishment of a new framework requiring loan servicers to offer a fair process of evaluations along with a clear set of options, such as loan modifications, to help delinquent homeowners avoid foreclosure. 

"For many borrowers, dealing with mortgage servicers has meant unwelcome surprises and constantly getting the runaround," said CFPB Director Richard Cordray, who will announce the rules during remarks in Atlanta on Thursday. 

"In too many cases, it has led to unnecessary foreclosures. Our rules ensure fair treatment for all borrowers and establish strong protections for those struggling to save their homes.”

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The CFPB said its goal with the new rules, which underwent public scrutiny, is to make sure that homeowners aren't hit by the start of a foreclosure proceeding until all options are explored to stay in their home.

"People were trapped in a broken system, with deeply tragic consequences," Cordray will say in his remarks. 

Senior agency officials say the rules help fill in the holes of consumer protection. 

The rules, which go into effect in a year, restrict a procedure called dual-tracking, when a servicer is working toward a possible modification while, at the same time, starting foreclosure proceedings, a process that senior CFPB officials say has made it very frustrating and confusing for most homeowners seeking help. 

"In this market, as in every other, consumers have the right to expect information that is clear, timely, and accurate," Cordray is expected to say. 

"When it comes to mortgage servicing, they also deserve a fair process.  This is all the more true given the high stakes for consumers and the central importance of homeownership in our society."

Notably, servicers cannot start the foreclosure process until a mortgage loan account is more than 120 days delinquent.

The change will be felt most in states that have expedited foreclosure proceedings in place, officials said. 

Under the rule, servicers cannot start a foreclosure proceeding if a borrower has already submitted an application for a loan modification and it is still under review. 

The new rules also call for servicers to let borrowers know in writing about their loss mitigation options for certain borrowers so they have some time to consider what to do next.  

The CFPB says it is trying to prevent servicers from choosing loss mitigation options that benefit them. 

While the rules cover all mortgage servicers, it dials backs reporting and other requirements for financial institutions such as credit unions that have lower mortgage volumes — 5,000 or fewer — and have experienced very fewer delinquencies.  

“We very much appreciate the CFPB’s raising the small issuer exemption to 5,000 transactions from parts of the mortgage servicing rule, yet we remain concerned as to the ultimate regulatory costs, given that credit unions have been and continue to operate using solid, traditional lending practices and are second to none in servicing their members’ mortgages," said Fred Becker, president and CEO of the National Association of Federal Credit Unions.

CFPB officials said the threshold includes 99 percent of all banks and that raising it to a 10,000 limit would have included a number of large banks they thought should not be exempted. 

The new rules also require that servicers are prepared to provide delinquent borrowers easy access to employees who can help them. 

The servicer must also consider all foreclosure alternatives available to help the borrower retain the home, including deferment or loan modifications. 

That means a foreclosure can't proceed until all alternatives have been considered, giving the borrower time to decide how to move forward. 

In addition, servicers will be required to provide monthly statements that clearly show due dates, interest rates and fees along with faster action by servicers when errors are made such as slow payment processing or lost records. 

The new rules put into a place a 30-day process to investigate and correct any errors when asked in writing by a consumer, and servicers must have policies and procedures in place to ensure that they can provide timely and accurate information to any of those involved in a foreclosure proceedings.

The rule does allow for civil penalties and restitution against servicers who violate the provisions, a senior official said.