Hosts of federal agencies and regulators, along with the 50 state attorneys general, are hard at work on laying out new rules for banks and mortgage servicers. Those rules will likely require servicers to transform their approach to handling homeowners facing foreclosure.
But this wouldn't be the first time the government tried to lay down the law. The administration's mortgage modification program has a 170-page handbook of servicer guidelines. What's been missing is enforcement. Servicers have broken the rules without fear of any penalties.
Will things be different this time?
The answer to that so far is...maybe. On two different tracks, government officials are developing rules that, they say, will have clear penalties attached. But crucial details remain unclear, including when these reforms will go into effect.
There have been lots of headlines lately about one of the two tracks, the negotiations to settle claims related to the largest servicers' foreclosure abuses. The state attorneys general, together with a number of federal agencies, sent the servicers a proposal last week. The document was obtained and posted by American Banker.
The terms would require the servicers to review each struggling homeowner for a modification and provide one when doing so would bring a higher return to investors. But they go much further than that. Over 27 pages, the terms describe how a servicer should behave -- just about the opposite of how they have behaved over the past couple years. It would be a different world for the homeowner seeking a modification.
In the world we live in, if you're a customer of one of the biggest servicers, you call in to a 1-800 number and are connected with a poorly trained employee who knows nothing about your file, can't tell you why you haven't yet received an answer after months of waiting, but then says you should fax your documents (again) to another 1-800 number, where they will likely be lost.
In the world imagined by these proposed terms, you're never in the dark. You submitted your documents through the online portal provided by the servicer, and you can track your modification application's progress there the whole time. The servicer responds to all your submissions and queries within a strict time frame -- certainly no longer than a month. And if you do choose to call your servicer, you just ring up your specially designated contact, a well-trained employee who has handled your case from the beginning.
But this mortgage mod paradise would happen only if the terms were enforced. And there are a number of question marks. The proposed settlement says that servicers breaking the rules would face "monetary penalties," but it doesn't say what they are. And while enforcement would ultimately be in the hands of both the attorneys general and the newly formed Consumer Financial Protection Bureau, the proposal essentially leaves the details of how violations would be handled for a later date.
One detail that's been under discussion but that doesn't actually appear in the draft settlement is language making it clear that homeowners could go to court to stop a foreclosure if the servicer violated the agreement. One ongoing issue with the administration's Home Affordable Modification Program is that this right isn't apparent. The program is based on contracts between servicers and the Treasury Department, but homeowners aren't explicitly included, creating an additional legal hurdle for homeowners who go to court to address a violation of the program's rules. "Some level of accountability from private individuals often changes corporate behavior," Alys Cohen, of the National Consumer Law Center.
Another open question is when the settlement will happen -- and when the changes will actually go into effect. The proposed terms are just the first move by the government -- and there are already plenty of signs that servicers see a lot they don't like. Speaking earlier this week, Iowa Attorney General Tom Miller said he hoped to come to an agreement within two months. The settlement also relies on the CFPB, which was formed by last year's financial reform bill and is still in its ramp-up stage. It won't gain many of its authorities until July.
Even after an agreement is struck, some requirements likely won't kick in immediately, said sources familiar with the discussions. Given the sweeping changes envisioned by the proposal, servicers might be given as long as a year to meet some of the terms.
Meanwhile, while these negotiations are occurring, federal regulators are pursuing servicer reforms on a separate, but related, track. They're considering issuing new regulations that would affect all servicers, not just the largest, and are likely to incorporate aspects of the final terms of the settlement agreement. Draft outlines produced by the two big banking regulators, the Federal Reserve and the Office of the Comptroller of the Currency, show many similarities to the proposed settlement terms. Regulators have an unambiguous authority to financially penalize banks when they break federal rules.
A person involved in the rulemaking process said the regulators hoped to produce their proposed rules by the middle of this coming summer and have them in place by the end of the year. Along with banking regulators, the CFPB and a number of federal agencies are also involved.
With the new federal rules in place, homeowners would have a much better shot at getting fair treatment from their servicer, said Kathleen Keest of the Center for Responsible Lending. (The Sandler Foundation is a major funder of both the Center and ProPublica, which operate independently of each other.)
Currently, if a servicer is threatening to wrongfully foreclose on a homeowner, the homeowner's options to stop it are limited. First, it's often not clear where to go to complain. For the biggest banks, the homeowner can file a complaint with their regulator, the OCC, but dozens of homeowners have told ProPublica that hasn't been effective. The OCC has often been criticized for going easy on the banks. The Treasury Department has also set up a help hotline for homeowners, but since the program is voluntary and servicers face no penalties, its authority is decidedly limited.
Once new servicing regulations are actually in place, said Keest, homeowners would be able to complain to the CFPB or their own state's attorney general about servicer abuses. (One of the CFPB's central purposes is to be a center for consumer complaints.) Both would have the authority to enforce the new federal rules. Instead of the bank-"coddling" OCC, she said, "You're going to a regulator whose job is to protect the consumers and not the banks, and where the states can act as a back-up."
That's the idea, at least. It all depends on the possible settlement and future new federal regulations.