Responding to signs of regulatory voids that the housing downturn has laid bare, the Consumer Financial Protection Bureau (CFPB) is putting together regulations geared to providing better protection for consumers in the mortgage market.
While the CFPB -- a regulatory body set up in the aftermath of the crisis to provide better consumer protection -- has proposed a multitude of changes on everything from credit card fees to student loans, we're going to concentrate on three current proposals that could change the way you get a mortgage.
No. 1: Rules for servicer accountability
The CFPB has proposed two sets of rules that seek to improve the transparency of costs and customer service.
"These proposed rules would offer consumers basic protections and put the 'service' back into mortgage servicing," said Richard Cordray, director of the CFPB, in a recent press release. "The goal is to prevent mortgage servicers from giving their customers unwelcome surprises and runarounds."
"The proposal is an effort to truly formalize a level of service and transparency that had not previously been codified," says Michael Waldron, a partner with the Washington, D.C., law firm Ballard Spahr's mortgage banking group.
Here is the CFPB's first set of proposed rules:
- Provide consumers with clear and easy-to-read monthly mortgage statements
- Adjustable-rate customers must be warned of pending interest-rate adjustments and informed on how the adjustment will impact their monthly payment
- Before "forced-based" insurance is applied, servicers must notify customers of inadequate insurance and provide pricing options
- Servicers will be asked to "make good faith efforts" to contact delinquent borrowers to discuss their options to avoid foreclosure
While the CFPB's first set of rules are more procedural changes, the second set of proposed rules are described as "common-sense requirements" for servicers:
- Payments would be credited on the date a payment is received
- Maintain clear, accurate and accessible documents
- Errors must be corrected quickly
- Provide delinquent borrowers with direct access to personnel who specialize in foreclosure assistance
- Servicers must reach out to struggling homeowners and provide them with options to avoid foreclosure. Servicers must review loan modification applications closely, notifying borrowers of any errors or inaccuracies, and cannot foreclose if the application is not complete
"The very explicit ban on moving to a foreclosure sale before all opportunities for a borrower to get any modification have been exhausted is huge," says Barry Zigas, director of housing policy with the Consumer Federation of America, a consumer-advocacy organization in Washington, D.C.
"At the end of the day, the overarching theme is the same, and that is to make certain that the industry at every turn is making it as easy as possible, as digestible as possible, as uniform as possible, to keep folks in their home when it is appropriate," says Waldron.
No. 2: No-point, no-fee option
Since it's often difficult for consumers to compare loans with different interest rates, points and fees, the CFPB has proposed a rule that requires lenders to make a no-point, no-fee loan option available to borrowers who qualify.
The proposed loan option will help consumers better compare different loan offerings from competing mortgage lenders and also decide if they find it worthwhile to pay upfront points and fees in order to reduce their monthly payments. The proposal also seeks to ensure that the consumer receives a legitimate benefit when paying any upfront points and fees.
Richard Andreano Jr., also a partner with Ballard Spahr's mortgage banking group, is concerned that the consumer may ultimately have less choice as a result of this proposal. "Effectively, they may limit loan products that lenders offer if they have to constrain it to offer no-points, no fees, particularly if a lender is operating in a higher-cost area where the cost of their operations are higher," he says.
No. 3: Copy of appraisal report
Finally, the CFPB has proposed an appraisal-related rule that calls for lenders to inform prospective homebuyers of their right to receive a free copy of the home-appraisal reports within three days of applying for a mortgage. Also, the lender will have to make a copy of the appraisal reports available to the buyer at least three days before closing.
"When looking to buy a home or refinance a mortgage, consumers need the best available facts and data," said Cordray in a recent press release. "This rule would guarantee consumers receive important disclosures on how a lender determines the value of the home, making it easier for loan applicants to make informed decisions."
Open for comment
Consumers have until Oct. 9 to comment on the proposed rules. The CFPB will review comments and finalize the rules in January 2013.
Poonkulali Thangavelu is a financial writer who has covered real-estate finance topics for several years. Her work has appeared in leading industry publications National Mortgage News, National Real Estate Investor, Asset Securitization Report, Multi-Housing News and HousingWire. She has also been published on Seeking Alpha and Yahoo! Finance.