Federal Rules Protecting Homeowners With Mortgages
Federal rules will better protect homeowners when getting new mortgages, dealing with existing mortgages, or facing foreclosure.
On January 10, 2014, the Consumer Financial Protection Bureau (CFPB) issued mortgage servicing rules designed to protect borrowers when it comes to mortgage loans. Keep reading to learn more about the CFPB rules and how they can help you.
The Dodd–Frank Act Imposes New Requirements on Servicers
A mortgage servicer is the company that collects monthly mortgage payments from borrowers on behalf of the owner of the loan, as well as tracks account balances, manages the escrow account, handles loss mitigation applications, and pursues foreclosure in the case of defaulted loans. (To learn the ins and outs of the foreclosure process, visit our Foreclosure Center. For information about loss mitigation, see our Alternatives to Foreclosure area.)
Why the Need for Rules Protecting Homeowners?
During the recent mortgage crisis, the number of homeowners in financial distress increased exponentially and mortgage servicers simply couldn’t keep up with the increased demands for information and assistance. As a result, servicing errors were common and egregious.(Read more about abuses by the mortgage servicing industry.)
The Dodd-Frank Act Cracks Down on Servicers
In response, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which imposed requirements on servicers and gives the CFPB the authority to both implement the requirements, as well as adopt new rules. The rules are designed to protect consumers by:
- providing borrowers with better information about their mortgage loans
- providing borrowers with assistance if they are having difficulty making mortgage payments, and
- protecting borrowers from wrongful actions by mortgage servicers.
Servicers Must Provide Borrowers With Better Information
The rules require mortgage servicers to provide borrowers with improved information about their mortgage so they are not caught off guard when an interest rate adjusts or they are charged certain fees. (To learn more about fees, see our article What Fees Can the Lender Charge If I'm Late on Mortgage Payments?)
The rules require mortgage services to:
Send Periodic Billing Statements
The mortgage servicer must provide a written monthly mortgage statement to the borrower. The statement must show:
- the amount currently due (including how much will be applied to principal, interest, and escrow)
- the total of all payments received since the last statement
- how prior payments were applied
- transaction activity
- partial payment information
- fees or other charges to the account
- account information (such as the outstanding balance and interest rate)
- contact information for the servicer and housing counselors, and
- information regarding delinquencies (if you’re behind on payments).
(However, if you have a fixed-rate mortgage and your servicer sends you a book of coupons to send in with your payments, then a monthly statement is not required.)
Send Interest-Rate Adjustment Notices
If the mortgage loan has an adjustable interest rate, the servicer must provide the borrower with a notice containing the new rate and new payment (or an estimate):
- between 210 and 240 days (7-8 months) days prior to the first payment due after the rate first adjusts, and
- between 60 and 120 days (2-4 months) before payment at a new level is due when a rate adjustment causes a payment change.
Promptly Credit Mortgage Payments
Servicers must promptly credit the borrower for the full payment the day it is received. If the borrower only makes a partial payment, that amount may be held in a special account (called a suspense account), but the servicer must inform the borrower about this on the monthly statement. Once the suspense account has sufficient funds to make a full payment of principal, interest, and any escrow, the servicer must credit that payment to the account.
Respond Quickly to Payoff Requests
The servicer must provide an accurate payoff balance to a borrower no later than seven business days after receiving a written request asking how much it will cost to pay off the mortgage.
Provide Options to Avoid Force-Placed Insurance
Mortgages require homeowners to maintain adequate insurance on the property so that the lender’s interest is protected in case of fire or other casualty. If a borrower lets this hazard insurance coverage lapse, the loan servicer can obtain insurance coverage and add the cost to the loan payment. This is called force-placed insurance.
Under the rules, the servicer:
- must send notice at least 45 days before it purchases a force-placed insurance policy (giving borrowers sufficient time to purchase their own policy)
- must send notice again at least 30 days later (and at least 15 days before charging the borrower for force-placed insurance coverage) if they have not received proof from the borrower that insurance has been purchased, and
- generally must continue the existing insurance policy if there is an escrow account from which the servicer pays the insurance bill, even if the servicer needs to advance funds to the borrower’s escrow account to do so.
If a borrower provides proof of hazard insurance coverage, the servicer must within 15 days:
- cancel any force-placed insurance policy and
- refund any premiums paid for overlapping periods in which the borrower’s coverage was in place.
Quickly Resolve Errors and Respond to Information Requests
A mortgage servicer must, in most cases, acknowledge receipt of a written information request or complaint of errors (such as misapplication of payments, improper fees, etc.) within five days and respond within 30 days. The 30-day period may generally be extended for an additional 15 days if the servicer notifies the borrower within the 30-day period of the extension and provides the reasons for delay in responding.
Servicers Must Provide Homeowners With Assistance
Mortgage servicers are supposed to work with borrowers who are having trouble making monthly payments.
The Servicer Must Contact the Borrower - Early Intervention Requirements
If the borrower falls behind in payments, the servicer must attempt to make contact to discuss the situation no later than 36 days after the delinquency. No later than 45 days after missing a payment, the servicer must inform the borrower in writing about mortgage workout options that may be available.
The mortgage servicer must also assign personnel to help the borrower by the time he or she falls 45 days delinquent. Personnel should be accessible to the borrower by phone and able to advise the borrower about the status of any loss mitigation application and applicable timelines.
If you are having trouble making your payments, call your mortgage servicer and let it know you are interested in a loan workout. The servicer will ask you to submit an application that includes certain information. Once submitted, under the new rules the servicer has five days to tell you whether it needs more information (so long as you submit the application 45 days or more before a foreclosure sale) and, if so, what information it needs. Generally, the servicer is required to evaluate the application for all loss mitigation options within 30 days (as long as the complete application is submitted more than 37 days before a foreclosure sale).
Rules Restrict Dual Tracking
The rules restrict “dual tracking” where a servicer is simultaneously evaluating a borrower for a loan modification or other alternatives while at the same time pursuing a foreclosure on the property.
Restrictions on Starting Foreclosure
Mortgage servicers generally cannot start a foreclosure until a mortgage loan obligation is more than 120 days delinquent, which provides time for the borrower to submit a loss mitigation application. If the borrower does not submit an application, the foreclosure can begin.
Mortgage servicers are allowed to send certain early delinquency notices that may provide information related to counseling, legal help or other resources during the first 120 days a borrower is delinquent. However, the servicer cannot officially start a foreclosure -- that is, make the first notice or filing required by state law -- until you are more than 120 days delinquent on payments. (In a judicial foreclosure, this means the foreclosing party cannot file a court document to start the foreclosure until you're after you're more than 120 days behind. If the foreclosure is nonjudicial, the lender cannot begin the foreclosure by recording or publishing the first notice until you're more than 120 days late in payments.)
Even if a borrower is more than 120 days delinquent, if that borrower submits a complete loss mitigation application before the servicer has made the first notice or filing required to initiate a foreclosure process, a servicer may not start the foreclosure process unless:
- the servicer informs the borrower that the borrower is not eligible for any loss mitigation option (and any appeal has been exhausted)
- the borrower rejects all loss mitigation offers, or
- the borrower fails to comply with the terms of a loss mitigation option such as a trial modification.
To learn more about how foreclosure works in your state, visit our Summary of State Foreclosure Laws.
Restrictions on Continuing Foreclosure After the Borrower Requests Help
If a complete loss mitigation application is received more than 37 days before a foreclosure sale, the servicer may not move for a foreclosure judgment or order of sale, or conduct a foreclosure sale, until one of the three conditions mentioned above has been satisfied.
A borrower may appeal a loan modification denial so long as the complete loss mitigation application was received 90 or more days prior to a scheduled foreclosure sale.
Servicers Are Not Yet Complying With the Rules
Unfortunately, a CFPB report released in the summer of 2015 shows that even though these rules are in place, certain servicers continue to dual track and give borrowers the runaround when it comes to foreclosure avoidance prgrams. This means you should be aware of your rights and keep an eye out for violations. (If you think your servicer is not complying with the rules, you may want to speak to an attorney who can help you enforce your rights.)
More Rules to Come
On August 4, 2016, the CFPB finalized new rules on mortgage servicing. These rules include, among other things:
- requiring servicers to provide certain borrowers with foreclosure protections more than once over the lifetime of a loan if a borrower becomes current after a previous delinquency (under the current rule, a mortgage servicer must give you certain foreclosure protections, including the right to be evaluated for a loss mitigation option, only once during the life of the loan)
- clarifying the live contact requirements and written notice requirements for early intervention (a servicer must establish or make good faith efforts to establish live contact so long as the borrower remains delinquent and must provide multiple early intervention written notices in certain circumstances), and
- ensuring that surviving family members and others who inherit or receive property have the same protections under the CFPB’s mortgage servicing rules as the original borrower.
Most of the new rules go into effect in October 2017, while others, including the successor-in-interest requirements, are effective April 19, 2018.
For More Information
To learn more about the rules, go to www.consumerfinance.gov/regulations and click on “2013 Real Estate Settlement Procedures Act (Regulation X) and Truth in Lending Act (Regulation Z) Mortgage Servicing Final Rules.”