Raj Date, the de facto head of the Consumer Financial Protection Bureau (CFPB), said Tuesday that misaligned incentives led to some of the major problems in mortgage servicing and still persist.

In a speech at the American Banker Regulatory Symposium, Date provided a glimpse of practices that the bureau may seek to change as it works with other regulators to develop national mortgage-servicing standards.

Though Dodd-Frank addresses some of these incentive problems, he said, consumers still cannot choose their servicer, and the current structure of servicing fees discourages ample investment in resources to handle spikes in delinquency.

"Servicers, when taking on a pool of loans, were effectively making a bet on the loans' performance and taking on risk that those loans might go bad," Date said. "And many of those loans — far more than expected — did go bad. But instead of investing in the necessary resources to properly service delinquent loans, many servicers cut corners, loosened operating protocols, and at times, violated the law."

Date, a former banker who worked for Capital One Financial Corp. and Deutsche Bank, was appointed in August to replace Elizabeth Warren as the special advisor to the Treasury secretary in charge of establishing the bureau.

Date emphasized the importance of transparency in well-functioning markets, and he highlighted the bureau's early efforts to streamline mortgage disclosures. The bureau is also working with other federal regulators to develop national mortgage-servicing standards.

Date said servicing is marked by two features — the structure of servicing fees, and the consumer-servicer relationship — that make it especially prone to consumer harm.

Mortgage-servicing rights, for example, are often bought and sold among servicers.

"So a servicer can, in a sense, 'fire' a borrower; but a borrower can't fire a servicer," he said. "That reduces the incentive for servicers to treat borrowers properly."

He said the servicing fee structure has also encouraged servicers to spend less than they might need to handle a spike in foreclosures.

"Servicing a delinquent loan costs more - dramatically more - than servicing a performing loan," Date said. "It takes one-on-one contact with borrowers, costly collection efforts and specialized staff to compare the relative value of workouts or foreclosures."

The bureau has inherited the Federal Reserve's proposed rule addressing a lender's duty to determine that consumers have a reasonable ability to repay mortgages, Date said. The bureau is reviewing the comments, and plans to issue a final rule early next year, he said.

Asked about the bureau's role in settlement talks between the top five mortgage servicers and state attorneys general, Date said he could not comment on a pending law enforcement matter.
But he reminded attendees that enforcement is a key part of the bureau's authority.

"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."

"Going forward, we will absolutely use the enforcement tool when it's appropriate," he added.

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