WASHINGTON – The government's consumer lending watchdog proposed new rules Friday aimed at protecting homeowners from unexpected costs and shoddy service by companies that collect their monthly mortgage payments.
Mortgage servicing companies would be required to provide clear monthly billing statements, warn borrowers before interest rate hikes and actively help them avoid foreclosure under the proposal by the Consumer Financial Protection Bureau. The rules also require companies to credit people's payments promptly, swiftly correct errors and keep better internal records.
"The major failures in this industry demonstrate that all servicers need to meet basic standards of good customer service," CFPB Director Richard Cordray said in a call with reporters. He said the proposal reflects "two basic, common-sense standards — no surprises and no runarounds."
Mortgage servicers are central players in the nationwide housing crisis because they are responsible for foreclosing on homes when people fail to make payments. They have faced withering criticism for practices including charging excessive fees, foreclosing without completing the required paperwork and failing to help people stay in their homes by changing their loan terms.
Under the rules, companies would be required to provide billing statements that explain how much of a payment is going to pay down principal, how much to interest and how much to fees. If an interest rate was set to adjust, the borrower would receive an early estimate of the new payment amount. That would allow people to consider refinancing if they don't like the new rates.
The rules also help guarantee that borrowers aren't forced to pay excessively premiums on homeowners' insurance that servicers require them to carry. In the past, servicers tacked on insurance when they believed someone's coverage had lapsed. The premiums could be several times bigger than on a typical policy.
The rules would require servicers to notify borrowers twice before charging them for insurance. They would have to cancel the insurance within 15 days if borrowers proved that they already had coverage.
The new agency has focused on mortgage servicers in part because borrowers can't shop around and choose a mortgage servicer. Instead, servicers buy the right to collect payments from the original lenders. Servicing rights can be lucrative because they permit servicers to collect fees, for example on late payments.
Under the new proposal, companies would be required to connect delinquent borrowers with staff who are dedicated to helping them avoid foreclosure.
The rules have been a priority for the new agency, which was created under a 2010 law that overhauled financial oversight. The same law required the CFPB to set new standards for many corners of the mortgage industry.
The proposal is open for public comment until Oct. 9. The agency will finalize the rules in January 2013.
Daniel Wagner can be reached at www.twitter.com/wagnerreports