Troutman Sanders LLP: CFPB Proposes New Rules for Mortgage Servicers

Troutman Sanders LLP: CFPB Proposes New Rules for Mortgage Servicers

By John C. LynchDavid N. AnthonyJohn F. Costello, Jr. and Virginia Bell Flynn

On April 9, 2012, the Consumer Financial Protection Bureau (CFPB) announced a proposal for mortgage servicing rules that it plans to issue this summer. Richard Cordray, Director of the CFPB, stated that "for too long, mortgage servicers have not been held accountable to their customers, and the result has been profoundly punishing to homeowners in distress.  It's time to put the 'service' back in mortgage servicing."  The CFPB, therefore, will be focusing on a lack of transparency and a lack of accountability.  A version of these rules will be adopted by January 21, 2013, after comments, with a possible implementation date of one year.

The proposed rules require that:

  • Monthly mortgage statements include detailed payment information;
  • Monthly mortgage statements for delinquent borrowers provide alerts and information about counselors who can help in avoiding foreclosure;
  • Disclosures be issued six to seven months prior to an interest rate change on an adjustable rate mortgage (ARM), including when the change will take effect and the alternatives the consumer may pursue if the new mortgage payment will not be affordable;
  • Additional rights be put into place for consumers in connection with the force-placement of hazard insurance by servicers, including a requirement that services provide advance notice and pricing information before charging borrowers for the insurance;
  • Servicers make good faith efforts to contact delinquent borrowers and inform them of foreclosure alternatives;
  • Prompt crediting of payments be instituted and accurate account information be maintained;
  • Servicers acknowledge the "notification of an error" within five days and fully complete investigation within thirty days.  Shorter timeframes will be required when it comes to foreclosures or payoffs. 

Nuts and Bolts

The broad topics for the proposed rules and preliminary degree of detail associated with these categories strongly suggests that the CFPB will be providing significant detail to and imposing significant obligations on mortgage servicers in their daily practices.  While it is clear that mortgage servicers remain at the top of the list for the CFPB, how much rule-making the CFPB will ultimately enforce remains to be seen.

Of particular concern are the specific time limits that the CFPB may prescribe for mortgage servicers to address borrowers' complaints.  According to the CFPB, mortgage servicers will have five days to answer customer complaints and 30 days to complete an investigation.  Setting those kinds of guidelines will make it hard for smaller servicers to comply, if they are subject to CFPB rules, and may be a standard that is unattainable even for larger servicers. 

Similarly, while the CFPB has made clear in the past that that consumer complaints will define how "risky" a business is, not only is a compliance program necessary in handling those complaints, but it also is apparent that counselors will need to be available for consumers.  The costs to both large and small businesses could be extraordinary.  But without these safety precautions, your financial institution could be on the CFPB's radar.

Troutman Sanders is an accomplished and experienced leader in providing litigation and regulatory advice to a broad spectrum of financial services institutions. Troutman Sanders' CFPB Team monitors the development and activities of the CFPB on its CFPB Report Blog and also advises clients on CFPB and Dodd-Frank issues. Additionally, Troutman Sanders' Financial Services Litigation Group has successfully litigated a wide number of individual and class action litigation, as well as other federal and state consumer protection laws now under the umbrella of the CFPB.

© TROUTMAN SANDERS LLP. ADVERTISING MATERIAL. These materials are to inform you of developments that may affect your business and are not to be considered legal advice, nor do they create a lawyer-client relationship. Information on previous case results does not guarantee a similar future result. Follow Troutman Sanders on Twitter.

©Troutman Sanders LLP

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