Proposed Rules Could Help Homeowners Avoid Foreclosure 'Surprise'

By Christopher Maag

A proposal from the government's consumer lending watchdog would protect homeowners from unexpected fees, poor service and costly errors caused by companies that collect their monthly mortgage payments. The new rules, proposed by the Consumer Financial Protection Bureau, also would require mortgage servicers to make homeowners' monthly mortgage statements much easier to understand.

"These proposed rules would offer consumers basic protections and put the 'service' back into mortgage servicing," Richard Cordray, director of the bureau, said in a press release. "The goal is to prevent mortgage servicers from giving their customers unwelcome surprises and runarounds."

The first set of rules concerns disclosure. In addition to mortgage statements that clearly explain the loan's principal, interest, fees, and the next due date, servicers would be required to warn homeowners sooner about interest rate increases on variable rate mortgages, and tell delinquent borrowers about their options before hitting them with foreclosure. Servicers have been criticized in recent years for charging excessive fees, and failing to have the documents required to prove that they have the right to foreclose.

That could become especially important in coming years, says Gerri Detweiler,'s consumer credit expert, since mortgage interest rates are currently at record lows. Rates have nowhere to go but up, which could cause problems for homeowners whose interest rates are variable and tied to indices such as the prime rate.

'Second Wave of Housing Problems'

"There's an awful lot of borrowers still sitting on adjustable rate loans," Detweiler says, "and when rates start to go up again, they are going to be in trouble. If they aren't prepared for that, it's going to create a second wave of housing problems."

The other set of rules proposed by the bureau would force servicers to improve their internal procedures. Servicers would be required to hire enough workers to answer homeowners' questions, correct errors quickly, and offer homeowners options to avoid foreclosure.

Servicers have been accused of making mistakes that incorrectly push homeowners into delinquency and foreclosure. Detweiler says that she has firsthand experience with this. In her case, her servicer incorrectly labeled two monthly mortgage payments as late, which could have made the loan delinquent had Detweiler not caught the error in time. Under the proposed rules, servicers would be required to credit a homeowner's account the same day a payment is received.

"That's required right now for credit cards, and I don't see any reason why it shouldn't be required for mortgages, too," says Detweiler.

First reactions to the proposed rules were almost universally positive. Some consumer groups like what they see of the proposal, even as they reserve final judgment to see what the final rules actually entail.

"It's a really big deal," says Ginna Green, a spokesperson for the Center for Responsible Lending. "Hopefully we'll get good rules that will help prevent unnecessary foreclosures and keep more families in their homes."

Long Overdue?

Even some groups that vociferously challenged the creation of the consumers bureau have praised it. The proposal is "an important step toward bringing certainty to our industry," David H. Stevens, president and CEO of the Mortgage Bankers Association, said in a press release. "A number of servicers are already in the process of implementing most of these standards."

Others consider the rules long overdue.

"I am glad that the CFPB has prioritized mortgage servicing because it was an extremely under-regulated industry before the CFPB," says Robert Lawless, a professor at the University of Illinois College of Law and an expert on consumer credit. Before the bureau was created, Lawless says, the banking industry and some federal regulators, including the Office of the Comptroller of the Currency, "were fighting state efforts to supervise mortgage servicers."

The proposal is based in the bureau's mandate by the Dodd-Frank Wall Street Reform and Consumer Protection Act to address problems in the mortgage servicing industry. The bureau is accepting public comments on the proposal, and the final rules will be issued in January 2013.

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