Home Mortgage Consumer Protection

§1. What’s going on here?

This is a summary of discussion on the “For Borrowers in Trouble: Options for Avoiding Foreclosure” post from August 10 to October 3, 2012. (On that date, the post was closed to further discussion.) It was written by the Regulation Room team. This version is a DRAFT. Please help make sure that nothing is missing, wrong, or unclear. You can propose changes to this version until October 8.

The goal is to give CFPB the best possible picture of the different views, concerns, and ideas that came out during the discussion. This is NOT the place to reargue your position or criticize a different one. Focus on whether anything is missing or unclear, not whether you agree or disagree.

On October 9, the Final Summary will be posted on Regulation Room and submitted to CFPB as a formal comment in the official rulemaking record. (October 9 is the last day of the official commenting period.)

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§2. Calls for regulating the terms on which LMOs are offered

As in the Adjustable Rate Mortgage discussion, a theme in comments here was that, while disclosure is important and generally supported by commenters, there are underlying problems that the proposed rule doesn’t address.

Many commenters complained about what they considered substantively unreasonable or discriminatory behavior in making loan modification decisions. As one consumer commenter put it: “What is being proposed is that we continue to allow the ‘fox in the hen house’ making their own decisions on who gets a modification or gets foreclosed.” (It was not always clear whether the complained-of behavior was actually authorized by the owner of the mortgage. This problem is covered in the next section.)

One commenter (consumer with personal or family experience with foreclosure) recounted his/her experience:

“From 2001-2009 I made all my payments on time. In early 2009 I asked for a 3 month deferment on the payments while awaiting my disability to go through and payments to begin. I was then told I qualified for a ‘loan modification’ and that it would reduce my payments and interest rate and make them more affordable. I was advised not to send any payments during the modification. The bank would not accept them. They would let me know when to start making payments again. … In 2009 and 2010 I was put on temporary payment programs. I made all the payments on time. For six months they were elevated payments and [I] made all the elevated payments on time. Then back to the modification process and no payments accepted again by the bank. In June the modification process was closed because I could not furnish a letter from SS [Social Security] on how long I would be on disability. That’s like asking someone how long do you plan on being employed at your job. There is no timeline I told them. Social Security’s answer with regards to this is ‘indefinite.’ I am on it till I get well, which doesn’t look anytime soon. I sent them a Dr. note outlining a time frame as much as possible. That’s all I can get to do so. I am now over $45,000 in debt over a three-month deferment and am in imminent threat of losing my home.”

Another consumer (personal or family experience with foreclosure, whose household income is less than $100,000/year) recounted his/her experience:

“I bought my home in 2005 and took out a fixed rate loan. I put $100,000 down and in 2005 it was worth $267,000.00. Now it is worth $144,000.00. [The commenter had started his/her own business, a title company, the year before buying.] In 2007, when the market tanked, we were able to stay afloat for 3 years. During this time period, we were on the equity acceleration program and were making 2 payments a month. We were attempting to get the loan paid off as quickly as possible. In 2009, I closed my company due to a lack of business. I was lucky to get a job a month after I closed the company and started making payments again. I was only behind on my mortgage 2 months. I tried to work with Chase later in 2010 to see if I could get the 2 months added to the back of the loan and was told that I could not afford the home. I told the rep that I was and had been making the payment. I am losing my home this year simply because the servicers of the loan would not work with me. I am not asking for a complaint to be filed because I have come to terms with what has happened to me and the fact that I am losing the home. What I want you to do is put regulations in place that will make these lenders work with homeowners.”

A third commenter (consumer whose household makes less than $100,000/year) argued that offering loan modification only when there is negative equity has become “the new industry practice.” This commenter appeared to be arguing both (1) that there is inconsistent treatment of LMO applications with similar loan-to-value ratios, and (2) that it is unreasonable and a lack of good faith for lenders to limit the availability of LMOs to troubled borrowers in a negative equity situation.

A fourth commenter (consumer who got or refinanced a mortgage in the past 10 years) argued for substantive LMO regulation and also raised the enforcement concern that appeared in discussion of various parts of CFPB’s proposals:

“This … does not take into account the fraud perpetrated by many lenders. While they manipulated LIBOR rates and charged outrageous interest, lying to homebuyers about the loans and ignoring phone calls and pleas for workouts until it was too late to fix the problem. The lenders were required to write modifications by our government, however it was not legally enforceable so they played games with borrowers by dragging out the modification process until the borrower missed a payment or became dismally discouraged or lost a job. Many of these lenders are still playing games with the homebuyers and not working with them, but foreclosing with impunity. I think that lenders should be forced to include principle write-downs as part of their ‘workout’ to prevent foreclosure.”

Another consumer commenter (got or refinanced a mortgage in the last 10 years and personally had, or had family who had, a hard time making mortgage payments) complained about lost paperwork (“[Servicers] need to be held to mortgage modification offers. If they lose paperwork, it needs to be on them, not the homeowner”) and argued: “The main problem with HAMP and the other programs is that they are voluntary on the part of the servicers and banks. These programs need to be mandatory. The taxpayers bailed out the banks. Now the banks need to bailout the taxpaying homeowners.”

An industry commenter (regulatory compliance officer at mortgage servicer/originator whose customers come from all over the country and/or other countries) responded, emphasizing the complexity of the mortgage crisis, but agreeing on the importance of enforcement:

“The servicers aren’t non-profit organizations. They were hit with an influx of loans that were defaulting for various reasons from job loss, bankruptcies, medical emergencies, etc. But recall that some people used their homes as ATM machines and that was another part of the problem. There is definitely enough blame to go around. But going forward, adding ‘expectations’ and regulations doesn’t really add up to a solution. Fair and reasonable enforcement needs to be part of the solution.”

§3. Servicer misbehavior in resolving LMO applications

A commenter affiliated with an advocacy group raised the problem of conflicting interests of servicers and mortgage owners. (His/her comment also raises the issue of different treatment of similarly situated borrowers):

“I am on the phone with servicers large and small every day. While foreclosure education is always needed, I think a more pressing issue is regulation of servicers who misrepresent their own investors and who deceive borrowers for their own financial gain. In several of our firms’ cases, major servicers have claimed they could not offer a loan modification to our clients’ because there was an ‘investor restriction.’ This would be valid if it were true, as investors are not required to consent to a modification. However, oftentimes this is just an excuse the servicers use to keep a client in default and to keep raking in fees that benefit themselves (investors usually receive principal and interest, while servicers receive all the late fees, and other fees associated with servicing an account).

“There are few cases when there is a legitimate investor restriction. Anytime a servicer cites one, I ask for the name of the investor and the name and series of the trust the mortgage was probably pooled into. Then, if the trust is public I look it up on the SEC website http://www.sec.gov. Then I open the Pooling and Servicing agreement section which pertains to modifications. In 95% of cases the agreement between the investor and the servicer gives the servicer the ability to recapitalize loans, reduce interest and/or reduce principal as they see fit. Oftentimes the servicer is already modifying other loans within the portfolio in the same trust. We prove this by pulling up investor reports banks issue to their investors regarding each trust.

“When confronted with written proof that there is in fact no investor restriction, or that the restriction has been waived, servicers will often retract their claim that there is a restriction. But then they often come up with another illegitimate excuse such as a modification denial due to NPV (when it’s actually positive), or that the client needs to have their second mortgage subordinated (in cases where they don’t). … If the investors found out that their servicers were tanking their portfolio by not agreeing to profitable modifications (as opposed to foreclosure) they would be outraged…

“So yes, having servicers educate homeowners to their options is a great idea. But even when they are educated they will still lose their homes if the servicers are not further regulated. Unfortunately many homeowners were deceived by many profit-driven companies at origination (originator, broker, appraiser, sometimes all together in “one stop shops”), and now they are being deceived on the back end when they need some real assistance to save them from losing their home. If the CFPB wants to do something about this, penalties against deceptive servicers would be a start.”

This commenter urged that the “Not providing accurate information” covered error be defined specifically to include these kinds of deceptive practices.

§4. Importance of disclosing all terms

One commenter (consumer who got or refinanced a mortgage in the past 10 years and has had personal or family experience with foreclosure, in a household making less than $100,000/year). emphasized the importance of requiring accurate disclosure of all important elements in LMO decision:

They notified me of LMOs but then hid the fact they applied extra risk percentage of 2.5%, meaning the NPV calculated by my using the HAMP site did not match the NPV value they came up with, since Wells Fargo was adding unbeknown to consumers 2.5% risk to the prime. Telling them all the LMOs means nothing if they do not have full disclosures on the numbers used in the NPV model their calculations, and their determinations. They should not be able to disqualify anyone from a LMO unless they fully disclose all the calculations used to determine that disqualification.

§5. Need for enforcement

In addition to the comments described above, some commenters were emphatic about the need for more vigorous enforcement.

When asked by the moderator about CFPB’s proposal, one of the consumers who recounted losing his/her home responded: “I do think it would have helped if these rules had been in place” but emphasized the importance of enforcement: “We can create rules all we want along with fines… but I don’t see that money fines are going to make a difference… They will just pay the fine and move along. They need to serve jail time.”

This same commenter recounted a different kind of personal experience:

“I have been a negotiator that assists homeowners with their homes for the last 2.5 years and was working with homeowners and the banks before the [National Mortgage] settlement as well as after the settlement, and I can tell you that nothing has changed. The lenders do not call back, they are always loosing documents. And you cannot get a response in 30 days even if your life depended upon it, but again, nothing is being done. I am sure the mortgage settlement has done some good for many homeowners, but for many it has not. But yet, you don’t hear about the lenders/servicers receiving any fines or even jail time. They need to be prosecuted in court just like everyone else or else they will continue the same behavior. Make some rules that make sense and hold them accountable.

“You are on the right track with what has been done, but we are far from there. We will never get there if the servicers and lenders are not prosecuted for violating the laws.”

Another commenter, self-identified as a researcher, was more critical:

“Right now your proposed rules for Avoiding Foreclosure presume every foreclosure is lawful, which is absurd. Unlike the national foreclosure fraud settlement, your proposals do not address wrongful foreclosures. However, even though the national foreclosure fraud suit alleges deceptive practices in wrongful foreclosures, the administration of the settlement will not stop them. Your proposed rules … need to add a provision to stop an unlawful foreclosure in progress and you need to enforce the national foreclosure fraud settlement because the state attorneys general have no intention of doing so. … Error Correction only corrects errors, not deceptive practices. A substantive response from the CFPB would have addressed Page 27 of the multi-state lawsuit and advised when homeowners will be able to call their state attorney general or the CFPB to stop a deceptive foreclosure in progress.”

§6. Other comments

Two commenters debated larger solutions to the mortgage crisis including fundamentally changing the availability of government mortgage subsidies and the structure of the home mortgage tax deduction. This debate was sufficiently outside the scope of CFPB’s proposal that it is not summarized further. Similarly, one commenter called for development of a centralized web-based system of information and resources.