CFPB focuses on mortgage servicing overhaul

The Consumer Financial Protection Bureau began participating with federal regulators working on a new set of mortgage servicing standards earlier this year and on July 21 it will begin work to realign an industry in turmoil. “In creating the CFPB, Congress vested the agency with sufficient jurisdiction and powers to protect consumers in all mortgage servicing activity — regardless of the servicer’s charter or locale,” said Raj Date, associate director for research, markets and regulation at the CFPB, in prepared remarks before a House Financial Services Committee hearing to be held Thursday morning. Since weaknesses in the foreclosure process surfaced late last year, regulators and the 50 state attorneys general began investigations. They continue work to settle claims of a mishandled and overwhelmed system that servicers are struggling to repair. According to the Government Accountability Office, one unnamed servicer increased the amount of employees handling the foreclosure process from five to 80 after an investigation into its processes. “Under the prevailing market standards for servicer compensation, taking on the servicing of a loan is something of a bet on credit. If a loan remains performing, then servicing the loan remains a quite profitable affair. But if the borrower becomes delinquent, then the cost of servicing the loan is likely to be many times greater than the revenue from servicing that loan,” Date said. Mortgage Bankers Association CEO David Stevens also stressed in prepared remarks the need for the multitude of agencies working to reform the system to align it as well. New guidelines are coming down from the government-sponsored enterprises and the Treasury Department. They are also coming via Dodd-Frank proposals such as risk retention, federal consent orders and settlement talks with the 50 AGs. Laws already vary state-to-state. Processes even differ among judicial and nonjudicial states alike. “We believe a national servicing standard would be beneficial to streamline and eliminate overlapping requirements. However, a national servicing standard must be truly national in scope and not simply another standard layered atop the already overwhelming number of servicer requirements,” Stevens said. But there are signs the slew of requirements is aligning. New payment guidelines under the Home Affordable Modification Program are being adopted for all Fannie Mae and Freddie Mac servicers. Bloomberg reported Wednesday the 50 AGs are nearing a settlement with the largest servicers and are working to align those requirements under recently signed consent orders with other regulators. There are many differences to be worked out. Alabama AG Luther Strange said in prepared testimony current proposals on the table such as mandatory principal writedowns and new servicing practices overstep the boundaries of an AG’s jurisdiction. “I am concerned that what started out as an effort to correct specific practices harmful to consumers has evolved into an attempt to establish an overarching regulatory scheme that fundamentally restructures the mortgage loan industry in the United States an effort which is well beyond the scope of responsibility of Attorneys General,” Strange said. Strange’s predecessor Troy King was the last the join the 50 state AG coalition last year. When the CFPB officially opens it will set out “to promulgate consumer protection standards for the entire mortgage servicing industry,” Date said. The bureau will receive rulemaking authority from the the Federal Reserve, the Department of Housing and Urban Development, the Federal Trade Commission, the Dodd-Frank Act and other federal laws. Not only will the CFPB have oversight over the servicing shops located with larger financial institutions but independent nonbank servicers as well. While Date said the bureau will continue working with other regulators when forming rules and regulations, the entire servicing industry will eventually answer to the CFPB. “Although the CFPB does not yet have rulemaking or supervisory authority over mortgage servicing, our staff is working hard to prepare to assume these responsibilities when the agency becomes fully operational,” Date said. Write to Jon Prior. Follow him on Twitter @JonAPrior.