New York Creates Borrowers' Bill of Rights

Just how much trouble are mortgage borrowers having with their loan servicers? These are the companies that send the monthly bills, foreclose when the payments don't come, and too often make it really hard for many borrowers to get loan modifications when they can't afford to keep up.

According to New York State Banking Superintendent Richard H. Neiman, borrowers are having a lot of trouble –- so much, indeed, that this week he issued a borrowers' bill of rights to make sure that servicers are dealing fairly and responsibly with customers. Neiman serves on the Elizabeth Warren-chaired Congressional Oversight Panel on TARP, where he heard an earful from homeowner advocates about consumers' problems with their servicers, especially about long delays in processing loan modifications while the foreclosure clock is ticking.

So what else will consumers be protected against?
There are many, many more ways that servicers can and do make borrowers miserable even when they're not seeking a modification, from arbitrary fees to misplaced checks (which then lead to more fees, when consumers get billed for late payments). Sometimes servicers neglect to forward property taxes they're responsible for. Servicers get paid through a teeny percent of the interest on your mortgage. When they want more money, that's where the fees come in.

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Neiman appears to be the first state regulator to actually do something to make sure servicers, well, serve borrowers as well as themselves and the mortgage investors they funnel money to. He used his power under state banking laws to introduce some pretty strong and legally binding rules. For one thing, servicers operating in New York State now have a "duty of fair dealing," meaning that they have to have enough staff to answer the phones, produce a loan statement promptly on demand, and wherever possible try to be helpful to the customers they're dealing with. (I know, it's absurd that this stuff has to be put into regulations.) Fees borrowers might incur have to be clearly disclosed, including on the servicers' websites.

Then there are Neiman's new rules for loan modifications. In New York, servicers now must talk to all borrowers who are 60 days or more late on their payments, and who request help, about their loan modification options, then negotiate a modification with that borrower in good faith. And get this: "Loan modifications should be structured to result in payments that are affordable and sustainable for the borrower." Most permanent modifications so far have been done outside of the federal Home Affordable Modification (HAMP) program, and more and more often these are just delaying debt payments – which increases overall debt over time – without lowering interest rates. Now, if a servicer tries to stick a borrower with a raw-deal modification, lawyers will have leverage to force a better deal.

As for what this means for homeowners who don't live in New York: more than you might think. Now that servicers have to start posting standardized fees on their websites and hiring enough phone help, those resources will help borrowers across the country. And Neiman hopes other states – and federal regulators - will be inspired to draw strict lines with servicers. He issued a brief statement along with the new rules: "We would like for the regulation of mortgage servicers in New York State to serve, not only as a model for other states, but also as a model for national minimum standards that can be enforced across the country."

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