In a major effort to heal the $10-trillion U.S. mortgage market, the Consumer Financial Protection Bureau has finalized rules designed to ensure financial firms offer every available option to keep delinquent borrowers in their homes.
The regulations, to be announced Thursday, address widespread complaints that loan servicers — the companies that collect mortgage payments and repossess homes — were woefully unprepared to help borrowers during the tsunami of foreclosures after the housing bust.
They are designed to complement previous settlements by major banks over allegations of widespread servicing and foreclosure abuses. But unlike earlier settlements, they will apply to all large mortgage servicers, not just banks, in all states.
Still, the rules drew immediate criticism from a prominent consumer group, which said they don't do enough to force servicers to consider easing the terms of mortgages and expressed fears that the rules might preempt stronger existing provisions.
"While the establishment of industrywide standards is important, the failure to require meaningful loan modification protections is a retreat from current safeguards under the soon-to-expire [Obama administration] loan modification program," said Alys Cohen, an attorney with the National Consumer Law Center.
The consumer bureau was created when Congress passed the sweeping Dodd-Frank financial reform act in reaction to the mortgage meltdown and the global economic crisis that ensued. The law also required lenders to ensure that they only make loans that borrowers can reasonably be expected to repay.
Last week, the bureau issued major regulations providing a "safe harbor" from lawsuits under that new requirement for lenders who make certain types of presumably sound home loans. A key requirement is that total debt payments for borrowers — including principal, interest, taxes and insurance on home loans — be no more than 43% of gross income.
The rules to be released Thursday, which take effect in a year, bar lenders from pursuing foreclosure proceedings against borrowers while applications for loan modifications are pending — the much-criticized practice of "dual tracking."
The consumer bureau said banks also must provide "direct, easy, ongoing access" to employees who are required to alert borrowers to missing information, provide status reports on modification requests and ensure documents don't get lost.
Banks also are required to inform borrowers who miss two monthly payments about options to avoid foreclosure and to wait until loans go 120 days delinquent before beginning a foreclosure — a provision that would preempt a 90-day requirement under California law.
Richard Cordray, the consumer bureau's director, said distressed borrowers had not gotten the help and support they deserved, such as "timely and accurate information about their options for saving their homes."
"Servicers failed to answer phone calls, routinely lost paperwork and mishandled accounts," Cordray said in remarks to be delivered at an industry conference Thursday.
"Communication and coordination were poor, leading many to think they were on their way to a solution, only to find that their homes had been foreclosed on and sold," he said. "At times, people arrived home to find they had been unexpectedly locked out."
The new rules don't apply to most small banks and credit unions. Bureau officials said they have had few complaints about these small institutions, which are more likely to keep loans on their books, rather than sell them, and generally devote more attention to individual customers.
Servicers often are collecting payments on behalf of loan owners, who may be the banks themselves but more often are trusts created on behalf of mortgage investors. The investors have mandated a wide range of relief programs for troubled borrowers in addition to government-sponsored programs such as the Obama administration's Home Affordable Modification Program.
In the past, servicers would sometimes not inform troubled borrowers about all the options, instead steering them into foreclosure or programs that provided the servicers with greater financial rewards, bureau officials said.
The servicers are now supposed to clearly explain all alternatives to borrowers so they can pick the best one. The new rules also establish clearer opportunities for borrowers to appeal servicers' denials of loan modifications.
In addition to worries that the bureau has not cracked down hard enough on servicers, consumer advocates expressed concern that the new rules will not take effect for a year.
"While we understand that servicers need time to implement complex procedures, we're still in the middle of a foreclosure crisis," Cohen said. "Many people will unnecessarily lose their homes if we wait a year."
scott.reckard@latimes.com
