Last week, the Consumer Financial Protection Bureau (CFPB) released a report detailing abuses by mortgage servicers. Despite numerous legal settlements and pledge after pledge by servicers that they follow the law, the report exposes the many ways these companies have continued to do wrong by consumers, making the case for a strong financial regulator to protect consumers from unscrupulous or incompetent financial services firms.
Mortgage servicers are the companies primarily responsible for collecting mortgage payments from borrowers and forwarding them on to the lender or, if the loan is securitized, the investors. They are also the companies in charge of foreclosing on homes or helping troubled borrowers modify their loans to avoid foreclosure. Since the start of our housing crisis, servicers have become notorious for their failure to perform even routine administrative tasks competently as well as for forging paperwork and foreclosing on borrowers even when modifying their loan would have returned more value to the loan’s owner.
Consider one example of the enforcement actions detailed in the CFPB report: The agency had to force two unnamed servicers to stop requiring borrowers to waive their legal rights in order to obtain a loan modification. These waivers typically require the borrower to waive not only their legal rights related to the modification, but also those related to actions that have nothing to do with it and for illegal actions that have yet to occur. For example, a borrower could end up waiving her right to hold her lender accountable for lying about the terms of her mortgage, and as a result, the borrower would lose an important defense against foreclosure and could end up losing her home.
Because of their pernicious effects, the government has taken firm steps to combat these waivers. The government banned them for modifications supported by its Home Affordable Modification, or HAMP, program, and Fannie and Freddie also told their servicers not to use them. Even more broadly, the National Mortgage Settlement essentially prohibited them for the servicers involved in that agreement. In fact, in a public hearing on servicing practices where the topic of waivers came up, former chairman of the House Financial Services Committee Barney Frank told servicers in the strongest terms possible he never again wanted to hear about such a waiver being used.
Despite all of this, the CFPB found that two servicing firms were still asking all borrowers, regardless of their individual circumstances, to sign such waivers. Fortunately, the CFPB has the authority to regulate this practice, and did—ordering the servicers to stop this practice and to cease enforcing the waivers that borrowers had already signed.
The CFPB’s report also detailed other abuses, such as failing to honor loan modifications after a borrower’s loan was transferred from one servicer to another, flubbing the handling of tax and insurance payments from escrow accounts, and reporting incorrect, damaging information to credit agencies. As a result of CFPB’s enforcement actions, wronged consumers have received $2.6 million between July and October 2013.
The CFPB’s report makes clear that without a regulatory cop on the beat, our nation’s financial firms will continue to abuse consumers. It’s something we can’t forget as we get further and further away from the worst of the financial crisis.
David Sanchez is a Research Assistant for Housing Finance and Policy at the Center for American Progress Action Fund.