By Ylan Q. Mui, Published: February 13

The government’s new consumer watchdog on Monday outlined the first steps of its plans to regulate mortgage servicers, which have come under fire for fraudulent foreclosure practices.

The Consumer Financial Protection Bureau will revamp the billing statements sent to homeowners and the disclosures required for some complicated mortgages. It also is drafting new rules to prevent servicers from improperly charging consumers for homeowner’s insurance.

The massive financial reform legislation passed in 2010 that established the CFPB also required it to take steps to retool the mortgage servicing industry. The plans outlined Monday will apply not only to servicers operated by banks but also to those run by other financial institutions that were previously not subject to federal supervision.

The Mortgage Bankers Association, which represents servicers, said it supports the CFPB’s efforts to create more transparent disclosures and create a single set of standards across the industry.

“There’s so much uncertainty about the rules of engagement for the housing system going forward that credit has become more constrained,” said Dave Stevens, the group’s chief executive. “There’s an opportunity to help put balanced yet meaningful balances in place on a national scale to allow the markets to move forward.”

The CFPB’s announcement comes on the heels of last week’s $25 billion settlement between state and federal agencies and five of the nation’s biggest bank-run mortgage servicers. The agreement — the largest in corporate history since the settlement with tobacco companies in the 1990s — was prompted by outrage over banks’ use of forged and shoddy paperwork to foreclose on homeowners, a practice known as “robo-signing.” Nonbank servicers were not included in the settlement.

Meanwhile, President Obama recently created a new investigative unit to focus on subprime mortgage lending, and nearly a dozen financial institutions have received federal subpoenas so far this year.

On Monday, the CFPB released a draft of the homeowners’ new mortgage billing statement. It includes not only the principal loan amount and interest rate, but also the date the rate could reset and a description of any late payment or penalty fees. One section addresses consumers “experiencing financial difficulty” and includes information on housing counselors. The statements include a phone number and e-mail address to contact the servicer.

The agency also highlighted plans to address the practice of pushing consumers into high-cost insurance known as “forced-place insurance.” If homeowners fall behind on insurance payments, servicers can place them in a new, often more expensive program. That increases the monthly payments, and homeowners often end up in an even deeper hole.

The CFPB said it will prohibit servicers from charging for new insurance unless there is a reasonable belief that homeowners have fallen behind on their payments. It also plans to allow consumers to find their own replacement insurance, rather than rely on the more expensive option from the servicer.

Alys Cohen, staff attorney for the National Consumer Law Center, an advocacy group, said the moves were a strong first step. Eventually, she said, she hopes the CFPB will require nonbank servicers to determine whether homeowners are eligible for a loan modification before moving to foreclosure. The settlement with bank servicers prohibits the firms moving forward on a loan modification and a foreclosure at the same time.

“This is a crucial moment and we hope they can step in more fully,” Cohen said.

In an op-ed published Monday in Politico, CFPB Director Richard Cordray said that a lack of government oversight contributed to the collapse of the mortgage market and that creating new standards will take “careful thought and time.”

“For the first time, the federal government will have the authority to look into the entire mortgage servicing market,” Cordray wrote in the article, which outlined the agency’s mortgage servicing plan. “This is a critical improvement: We will be able to monitor all players to make sure they abide by federal consumer financial laws.”

By: Brian Collins

FEB 10, 2012 2:57pm ET

Federal banking agencies seem to be making little progress in promulgating regulations that will set the ground rules for a revival of the private-label MBS market.

The Dodd-Frank reform bill passed in 2010 created two interrelated rules to regulate mortgage lending. One sets an "ability to repay" standard for lenders and the other determines which "qualified residential mortgages" are exempt from risk retention.

Six regulatory agencies working on the QRM rule issued a proposed rule in March 2011, but the measure immediately ran into a buzz saw of criticism because it would require MBS issuers to retain 5% of the credit risk if the underlying loans don’t have a downpayment of at least 20%.

The Mortgage Bankers Association and National Association of Realtors are only two of the many groups that want the regulators to withdraw the QRM proposal and return to the drawing board.

The current QRM proposal will restrict access to credit for working-class borrowers, including teachers, policemen and firefighters, unless the 20% downpayment requirement is eliminated, MBA chief executive David Stevens told a meeting of U.S. Mayors in late January. The downpayment restriction is “a direct attack on first-time homebuyers, African-American borrowers and Latinos,” Stevens said.

Some industry officials estimate the markup on a non-QRM loan would be 300 bps higher than a QRM loan. (The Dodd-Frank Act exempts Fannie Mae, Freddie Mac and the Federal Housing Administration from the QRM rule.)

In early December, acting Comptroller of the Currency John Walsh told a Senate panel the regulators are still "grappling" with a set of issues related to the QRM rule. Nearly two months later, Walsh told an American Securitization Forum conference the regulators are still weighing several issues, including drafting a new proposal instead of issuing a final rule.

Sources told National Mortgage News the regulators are going to pull the QRM proposal and issue a new proposed rule for public comment.

"There are signs the QRM rule may go back to the drawing board," Stevens told reporters last week.

Meanwhile, the Consumer Financial Protection Bureau is working on the "ability to repay" standard which is called the “qualified mortgage” or QM rule.

The Federal Reserve Board issued a QM proposal last spring before the CFPB was up and running. Now the CFPB has assumed sole jurisdiction over the QM rule, which will determine the kind of loans (and loan features) lenders can offer without facing potential legal liability of up to $100,000 per loan.

The rule likely will eliminate no-documentation, stated-income, nonamortizing loans, option ARMs and balloons from the marketplace.

The CFPB is working toward finalizing the QM rule during the second quarter. The QM establishes the outer boundary of lending standards while the QRM rule determines which QM loans are exempt from risk retention.

In other words, Walsh and his fellow regulators need to have the QM rule in front of them before they can finalize the QRM rule.

However, CFPB director Richard Cordray and his staff still need to make key decisions regarding lender liability.

The MBA, American Bankers Association and other groups are calling for a safe harbor provision that will shield lenders from lawsuits if they fully comply with QM rule. "Without a safe harbor, no lender will go anywhere near the line that is established in the QM rule," Stevens said.

The Fed’s QM proposal included a "rebuttable presumption" alternative that is not as airtight and would make lending more risky.

Last week, Cordray told the Senate Banking Committee that he is considering this issue. "I don’t have an outcome for you today," Cordray testified. He noted that most lending institutions would like a safe harbor so the rule does not create litigation risk and uncertainties. "Others have taken a different point of view."

He noted that the QM rule "intersects" with the QRM rule. Other regulators are waiting to see what language he comes up with. "We know we need to move it along," Cordray said.

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