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The Consumer Financial Protection Bureau on Friday unveiled a much-anticipated proposal to better police the way banks and other lenders treat troubled borrowers facing the prospect of losing their homes.
The CFPB announcement is the government’s latest response to the so-called “robo-signing” scandal that emerged at the end of 2010 when allegations first surfaced that mortgage servicers, many of them large banks, were taking shortcuts when trying to quickly move borrowers through the foreclosure process.
The bureau’s proposal would set new standards for servicers whose job it is to collect monthly payments and manage the foreclosure process.
Under the proposed rules, clearer information would have to be provided to borrowers about their payments and servicers would be required to make sure a troubled homeowner is aware of all the options, such as loan modifications, to avoid a foreclosure.
“Mortgage-servicing issues are sensitive and important because they involve the frightening prospect of people losing their homes,” CFPB Director Richard Cordray told reporters on Thursday afternoon in advance of the public announcement. “The inadequate performance of many mortgage servicers has widened the misery for many Americans.”
After the robo-signing scandal broke, Democrats and Republicans reacted angrily and pushed regulators to come down hard on the servicing industry.
Democrats cheered the CFPB proposal, but some warned that servicers will still have to be watched closely.
“In the past, we’ve seen that this industry is simply unwilling to make the investments required to actually comply with new rules, so it will be essential that federal regulators closely monitor servicers and strongly enforce the new requirements,” Rep. Maxine Waters of California, the number two Democrat on the House Financial Services Committee, said in a statement.
Large banks, including Bank of America and Citigroup, have already reached settlements worth billions of dollars over the past year with federal regulators and state governments. The deals require that they reform their mortgage-servicing practices.
The 2010 Dodd-Frank financial oversight law made the CFPB the lead agency in setting standards for the entire mortgage-servicing industry, which is what Friday’s proposal is meant to accomplish.
Cordray dubbed his agency’s approach “no surprises and no runarounds.”
The first goal is to arm consumers with tools that will allow them to easily obtain information on how much they owe, what they’re paying and how their mortgage payments are being applied. Servicers will also be required to provide earlier warnings to customers before their interest rates change and to reach out promptly when borrowers are delinquent on payments.
The proposed rules would also ensure that customers receive timely decisions on applications for loan modifications and are given assurances that servicers are working to minimize errors.