In a rule made final January 17, the Consumer Financial Protection Bureau established new protections for homeowners facing foreclosure, imposing sweeping new restrictions on the conduct of mortgage servicers.

Servicers, which collect mortgage payments on behalf of loan owners such as Fannie Mae and typically handle customer service, loan modifications and foreclosures, have been blamed for a range of abuses.

“For many borrowers, dealing with mortgage servicers has meant unwelcome surprises and constantly getting the runaround. In too many cases, it has led to unnecessary foreclosures,” said CFPB Director Richard Cordray in a news release. “Our rules ensure fair treatment for all borrowers and establish strong protections for those struggling to save their homes.”

Until the passage of the Dodd-Frank Act that created the CFPB, non-bank mortgage servicers were not subject to federal oversight.

The rule, which comes a week after CFPB regulations that require lenders to ensure prospective buyers have the ability to repay their mortgages, gives homeowners new protection throughout the foreclosure process.

At the first sign of trouble, when a homeowner has missed two consecutive mortgage payments, the servicer must let the homeowner know about alternatives to foreclosure. The information must be provided in writing, and describe all the options available from the loan owner – not just the ones that are most financially favorable to the servicer.

Once a homeowner submits an application for a loan modification, the servicer cannot start foreclosure proceedings until the application review is complete. To give borrowers enough time to submit such an application, the servicer cannot start the foreclosure process until a loan is more than 120 days overdue.

Even if the homeowner fails to submit an application for a loan modification within 120 days and foreclosure proceedings begin, the borrower still has a chance for a reprieve. If a belated application for a loan modification is submitted at least 37 days before a scheduled foreclosure sale, the servicer must halt the sale to consider and respond to the application.

According to the CFPB, the new rules “ensure that borrowers in trouble get a fair process to avoid foreclosure. Borrowers shouldn’t have to worry about mortgage servicers cutting corners or losing applications for relief. They should be told about their options and given time to apply and be considered for loan modifications and other alternatives.”

If servicers violate any of these provisions, they can face charges by the CFPB or the homeowner can file suit in court, according to a senior CFPB official speaking at a background briefing for reporters.

That’s not all. The rule, which goes into effect in January 2014, also requires servicers to provide clear monthly statements that show a breakdown of payments by principal, interest, fees, and escrow, as well as an early warning before interest rates change and more transparency about property insurance that is purchased by the servicer.

Also, the CFPB is instituting what it calls “common-sense policies and procedures for handling consumer accounts and preventing runarounds.”

For example, servicers must credit a consumer’s account the date a payment is received, correct errors quickly and maintain accurate, accessible documents.

Small servicers with 5,000 or fewer mortgage loans are exempt from some of the rule’s provisions.

 

Jenna Greene is a reporter for The National Law Journal, a Legal affiliate based in New York.