The leader of America’s consumer watchdog agency for financial products explained his view of problems plaguing the mortgage servicing industry on Tuesday, and gave some hints about what changes his agency might make to ensure that homeowners are protected in the legal system.
Raj Date, interim director of the Consumer Financial Protection Bureau, said in a speech to American Banker magazine’s regulatory symposium that the current system harms homeowners by encouraging mortgage insurers to cut costs and, when necessary, cut consumers off.
“A servicer can, in a sense, ‘fire’ a borrower; but a borrower can’t fire a servicer,” Date said. “That reduces the incentive for servicers to treat borrowers properly.”
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Mortgage servicers function as unseen but immensely powerful members of the mortgage industry. They handle the monthly payments from home buyers, pay the taxes and insurance, and pass on the rest to investors. They also are charged with handling the foreclosure process when loans go into default.
A main problem, Date said, is that borrowers and their servicers often have competing interests. In some mortgage servicing contracts, servicers actually make more money by forcing homeowners into foreclosure than by helping them modify their mortgage and stay in the home, because in foreclosure the servicer gets to charge excessive fees to maintain the property. Also, in most states, a house falling into foreclosure changes the order of payment. Instead of waiting for the lender and city property taxes to get paid, in foreclosure the servicer usually gets paid first, as we detailed here.
As a result, servicers didn’t invest in the technology and staffing required to handle the onslaught of foreclosure cases that came their way after the housing bubble burst, Date said.
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For years, federal regulators operated on the assumption that companies would play by the rules, Date said. The robosigner scandal showed that wasn’t true, since many of the largest mortgage servicing companies employed people to forge thousands of court documents a day in a last-ditch effort to cover up missing paperwork.
After that experience, regulators can no longer depend on companies’ good intentions, Date said.
“Consumer finance is a $20 trillion business, and you should not pretend that every actor in the business is playing by the rules,” he said. “If there is not adequate enforcement, you should not expect rules to be abided by.”
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Date didn’t announce any rules that the bureau is considering to rein in alleged servicer abuses. But he did point out that the bureau’s mere existence is a step in the right direction, since the previous regulatory scheme was so complicated, and varied so much from state to state and agency to agency, that it allowed corporations to shop for the cheapest regulator.
Now that the bureau’s consumer protection rules apply evenly, across all states and all major financial institutions, such shopping around should come to an end, Date said.
“During the housing bubble, our fragmented system of mortgage regulation, supervision, and enforcement produced an unlevel playing field that encouraged irresponsible lenders to shop for the most permissive legal regime. The opportunity for regulatory arbitrage accelerated a race to the bottom in lending standards,” he said. “Fortunately, the Bureau has been charged with making consumer financial markets work better for all consumers, regardless of who they do business with.”
Image: woodleywonderworks, via Flickr.com