The Consumer Financial Protection Bureau's (CFPB) latest mortgage servicing proposals have the banking industry seeing dollar signs — and not the good kind.
The regulations, which the agency plans to formally propose this summer, would require mortgage servicers to expand disclosures and implement new policies to resolve errors and assist struggling borrowers.
While not unexpected, industry observers said the plans could require significant technology upgrades, translating to higher compliance costs that could trickle down to borrowers.
"My initial thought is a concern that the CFPB is going to make mortgage servicing even more expensive," said Robert Cook, a partner with HudsonCook. "And to the extent they do, that's just going to drive up the cost of financing people's homes in this country."
The proposals, which the CFPB outlined on Monday, are currently in the pre-rulemaking stage and must be finalized by January 2013.
They would require servicers to provide clearer monthly periodic statements and advance notice of interest rate increases for adjustable rate mortgages, and impose new limits on force-placed insurance. They also call for servicers to improve the way they handle consumer accounts by immediately crediting payments, acknowledging and fixing errors within 30 days and providing direct access to foreclosure prevention teams, among other policies.
Director Richard Cordray, who outlined the proposals at a financial literacy center in Washington on Tuesday, said the rules would prevent costly surprises and help consumers avoid the runaround they often get from servicers. The servicing industry has never had a requirement or strong incentive to meet the needs of consumers, and bad practices and sloppy record-keeping were problems even before the financial crisis, Cordray said.
"The earlier problems with recordkeeping and other systems made it harder to sort out borrower problems" after the housing market collapsed, he said. "And instead of investing in new personnel and processes, too many mortgage servicers took short-cuts that made things far worse for homeowners in trouble."
The CFPB has made it clear that mortgage market reforms are a top priority for the agency. Congress mandated in Dodd-Frank that CFPB write new rules to improve mortgage servicing and origination - some of which are included in the latest proposals — and it authorized the bureau to supervise all mortgage lenders, banks and nonbanks, regardless of size.
The agency is also working on developing separate mortgage servicing standards in conjunction with the other banking regulators that are likely to dovetail with standards established under the $25 billion settlement between the five largest servicers and state and federal officials.
Given the upheaval in the servicing market, observers said the CFPB proposals aren't surprising.
Andy Dunn, a lawyer with Wolters Kluwer Financial Services, said the bureau is formalizing some the servicing changes that are already taking place in the market under federal programs such as the Home Affordable Modification Program and Home Affordable Refinancing Program (HARP).
"While on the one hand we can read this press release and get completely freaked out about it, I think that's premature at this point," he said. "To me this is par for the course where the bureau is carving out its territory and laying down the gauntlet that, 'We're serious about protecting consumers, and the perceived ….lack of transparency and the perceived lack of accountability by the industry cannot continue.'"
Edmund Mierzwinski, the consumer program director at the U.S. Public Research Interest Group, said he was encouraged by the early proposals, as well as Cordray's commitment to use enforcement and supervision procedures to ensure the rules are implemented.
"I think the fact that the director made the announcement, that the director made it clear that it would be comprehensive, these are all very important points," Mierzwinski, who attended Cordray's announcement in Washington, said after the event.
Still, Dunn and others in the industry agreed the rules will put continued pressure on servicers.
"I think there will be a knee jerk overreaction, which is somewhat kind of the mode of operation these days when something doesn't work," said Jeff Taft, a partner with MayerBrown LLP. "The pendulum swings way back the other way and it makes it very, very difficult for those entities to do business and stay in business. And then people scratch their heads when there are so few providers and bigger providers out there."
Under the Small Business Regulatory Enforcement Fairness Act, the bureau must consider the impact the rules will have on smaller servicers. Cordray acknowledged Tuesday that "we realize that a one-size-fits-all approach may not be appropriate, particularly for smaller institutions like community banks and credit unions," but emphasized that the rules would apply to both banks and nonbanks.
David H. Stevens, the president and chief executive of the Mortgage Bankers Association, said in a statement Tuesday that the process used to develop servicing standards should include servicers of different sizes and business models.
"It is important that the final rules don't give preference to one business type over any other, nor should they inhibit innovation or discourage new companies from entering the marketplace," he said.
Much of the compliance expense comes down to technology, observers said. Some servicers have systems that don't allow them to print on the back of a periodic statement, for example. Some still use low-tech coupon books that require borrowers to tear off the coupon and mail it in with a check each month.
Cook said the timeline for implementation will be a major issue. How soon would servicers be required to comply with the rules? And how much flexibility will they be given to meet the requirements laid out in the proposals?
"Reprogramming the large servicing systems is an expensive and timely process, and the more you rush it the more expensive it gets," Cook said. "Any time you have compliance rules that have to be addressed by technology, it tends to drive the smaller players out of the market."
