New Rules to Protect Mortgagors

The Consumer Financial Protection Bureau (“CFPB”) released new rules to protect consumers from mortgage servicing companies. The new rules have nine major topics that cover periodic billing statements, interest-rate adjustment notices for adjustable rate mortgages, prompt payment crediting and payoff statements, force-placed insurance, error resolution and information requests, general servicing, early intervention with delinquent borrowers, continuity of contact with delinquent borrowers, and loss mitigation procedures. CFPB Director Richard Cordray said that the new rules “will provide a fairer more effective process for troubled borrowers who face the potential loss of their homes.”

Mortgage servicing companies have been targeted by the CFPB because they are responsible for foreclosing on homes when people fail to make payments. Servicers buy the right to collect payments from the original lenders. Borrowers have suffered from servicers charging excessive late fees, foreclosing without completing the required paperwork and failing to help people stay in their homes by changing their loan terms. The new rules aim to eliminate some of the problems between servicers and borrowers.

Servicers will not be allowed to seek foreclosure on a person’s home while that person is trying to arrange lower monthly payments. Servicers have been beginning foreclosure proceedings on borrowers that were actively seeking a loan modification. The new rules provide that servicers cannot file the first foreclosure notice until the borrower is 120 days or more behind on payments. Servicers must consider all alternatives for loss mitigation, not just those favorable to the servicer.

Also, servicers must 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, which would allow them to consider refinancing if they don’t like the new rates.

Additionally, borrowers won’t be forced to pay excessive premiums on homeowners’ insurance that servicers require them to carry. Servicers were charging excessive premiums when they believed the homeowner’s coverage had lapsed. Now, servicers must notify homeowners twice before charging them the insurance premium and have to cancel the insurance within 15 days if the homeowner proved the insurance was not needed.

The new rules take effect January 10, 2014. Their implementation will provide consumers with better tools and information when dealing with mortgage servicers.