On Jan. 17, the Consumer Financial Protection Bureau (CFPB) revealed new rules prohibiting all large U.S. mortgage servicers from "dual tracking," or trying to foreclose on borrowers who are awaiting a response on a loan modification application. The CFPB says it issued these rules in response to consumer complaints about serious problems in the loan modification and foreclosure processes. "Many borrowers have complained about getting the runaround and being hit with costly surprises. Many have also complained that they have had problems seeking loan modifications or other alternatives to avoid foreclosure," the CFPB says in an official statement on its website.
Here is an overview of the CFPB’s new rules and what you can expect when they become effective next January.
Clear Notice of Delinquency and of Foreclosure Alternatives
After a borrower misses two consecutive monthly payments, the servicer must officially notify the borrower of the delinquency on his or her monthly mortgage statement. The notification must provide the date the borrower became delinquent and the amount the borrower must pay to bring the loan current.
Servicers also must provide delinquent borrowers with information about housing counseling and notify them in writing of what options, if any, are available to them to avoid foreclosure. This notice should state whether the lender is willing to modify the interest rate, extend the loan term, forgive principal or otherwise alter the borrower’s repayment obligations.
No Foreclosure Proceedings While Loan Modification Applications Are Pending
The new regulations require servicers to provide delinquent borrowers with "direct, easy, ongoing access" to personnel who are required to help them avoid foreclosure. This rule is supposed to improve problems borrowers have experienced when trying to communicate and negotiate with servicers, such as lost documents and unknown loan modification application status.
Servicers must offer borrowers a single application that lets them be considered for all of their loss mitigation options at once, and servicers can’t proceed with a foreclosure until the application has been approved or denied. Also, if the servicer and borrower agree to a loss mitigation option, the servicer cannot start foreclosure proceedings unless the borrower doesn’t comply with the terms of the loss mitigation agreement.
Fair Review of Loan Modification Applications
The investors in a mortgage, not the servicer, actually determine whether a homeowner will be approved for a loan modification. The investor could be Fannie Mae, Freddie Mac, the Federal Housing Authority or a private owner. Each investor has different requirements for modifying a loan, and the new law requires servicers to know what these requirements are so they don’t offer borrowers modification options that will never be approved.
Servicers also can’t steer borrowers toward the option that best suits the servicer’s or investor’s needs. If the servicer rejects a borrower’s loan modification application, it must specifically state the reasons for denial and notify the borrower of any right of appeal.
A Longer Waiting Period Before Foreclosing
The new law requires servicers to hold off on foreclosures until a mortgage payment is 120 days past due. This delinquency period is longer than that required by some states, such as California.
Early Notification of Interest Rate Adjustments
Servicers must notify borrowers with adjustable rate mortgages of their new interest rate and payment and how it compares to their current interest rate and payment before the payment actually adjusts. This notice must state when the new rate goes into effect and how the new payment is determined as well as when the interest rate will adjust again. The servicer must also notify the borrower of his or her options in the event the new mortgage payment is unaffordable.
The Bottom Line
This is just a partial overview of the CFPB’s new foreclosure avoidance rules. Other components of the regulations affect force-placed insurance, the crediting of payments and the resolution of errors in customers’ accounts. Furthermore, the rules only apply to large mortgage servicers who handle more than 5,000 mortgages. Will these new rules really provide the "strong protections" the CFPB claims they will when they become effective next January? We’ll have to wait and see.