What The Consumer Protection Bureau’s New Mortgage Rules Will And Won’t Do

The Consumer Financial Protection Bureau rolled out new rules today to clean up the mortgage servicing industry, which has been at the root of several scandals, including the use of the now-infamous “robo-signers.” The new rules will provide important protections for homeowners, no longer leaving them subject to the most pernicious mortgage servicing practices. Here’s what the rules will do:

— End dual tracking. This practice involves banks starting foreclosure proceedings on a homeowner at the same time that the homeowner is being evaluated for a mortgage modification. The end result is many homeowners lose their homes when they think they are receiving a modification. Under the rule, “Servicers cannot start a foreclosure proceeding if a borrower has already submitted a complete application for a loan modification or other alternative to foreclosure, and that application is still pending review.”

— Force balance transparency. The new rules call for clearer monthly mortgage statements and more advance warnings of changes like interest rate hikes. Servicers must also “promptly” credit payments that homeowners make.

— Limit “forced place” insurance. “Forced place” insurance is the insurance that lenders purchase on behalf of borrowers if they think there has been a lapse in coverage. The policies are often far more expensive than standard home insurance, and servicers receive a cut of the payments. Abuse of forced place insurance became a big industry during and after the buildup of the housing bubble: “From 2006 to 2011, direct earned premiums for lender-placed insurance more than tripled, to $3.1 billion from $954 million.” As the New York Times noted, “the cost [of forced place insurance] more or less ensures foreclosure for a household on the brink; it can also hurt a borrower’s chances for a loan modification.” Under the new rules, servicers must warn borrowers that a forced place purchase will occur and “If servicers buy the insurance but receive evidence that it was not needed, they must terminate it within fifteen days and refund the premiums.”

However, the new rules do not create a single point of contact for borrowers (who often get the runaround at banks by being passed off between different bank employees). The California Homeowner’s Bill of Rights includes a mandatory point of contact, as does a new bill Minnesota Democrats are trying to enact. The rules will not be implemented for another year, leading one housing advocate to say that the CFPB is just “providing mortgage servicers advance notice to do their dirty work.”