WASHINGTON -- The government's consumer lending watchdog finalized new rules Thursday aimed at protecting homeowners from shoddy service and unexpected fees charged by companies that collect their monthly mortgage payments.
Mortgage servicing companies will be required to provide clear monthly billing statements, warn borrowers before interest rate hikes and actively help them avoid foreclosure, the Consumer Financial Protection Bureau said. The rules also require companies to credit people's payments promptly, swiftly correct errors and keep better internal records.
In a departure from proposed rules released in August, the agency said that mortgage companies will not be allowed to seek foreclosure on a person's home while that person is trying to arrange lower monthly payments or otherwise avoid losing the home. The change will end the practice of "dual-tracking" -- pushing a borrower into foreclosure while discussing a loan modification with that borrower.
The rules "will provide a fairer and more effective process for troubled borrowers who face the potential loss of their homes," CFPB Director Richard Cordray said in remarks prepared for a public event in Atlanta Thursday.
The changes are part of a sweeping overhaul of mortgage rules by the CFPB, which was created by Congress in 2010 to police the kind of risky lending that contributed to the financial crisis. Congress charged the agency with rewriting the rules for how mortgage companies do business.
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 been criticized widely for practices like charging excessive fees, foreclosing without completing the required paperwork and failing to help people stay in their homes by changing their loan terms.
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. Without the threat of customers abandoning them, critics say, servicers have less incentive to serve customers well.
In the past, the companies "failed to provide a basic level of customer service that borrowers deserve, costing them money and dumping them into foreclosure," Cordray said. "Dealing with sloppy mortgage servicing became a frustrating nightmare."
Under the final rule, companies will 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 is set to adjust, the borrower will 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 excessive 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.
Another change from the August proposal concerns an exemption for smaller mortgage companies. The agency had originally proposed an exemption from some rules for companies that service 1,000 or fewer loans. Under the final rules, the exemption would cover companies servicing up to 5,000 loans.
However, the exemption is limited to companies that originate the loans, such as community banks and credit unions. It would not cover small companies that exist solely to buy the rights to collect mortgage payments.
For borrowers who fall behind, servicers covered by the rules will have to begin a notification process after two missed payments. They will be required to outline foreclosure alternatives like reduced monthly payments. Borrowers will be able to apply for lower payments using a single form provided by the mortgage company.
Servicers also must provide information about housing counseling services. The rules are set to take effect in January 2014.