Thursday, April 12, 2012

Consumer Financial Protection Bureau adopting ultra transparency for mortgage servicing benefits consumers and investors

In a NY Times Dealbook article, Richard Cordray, director of the Consumer Financial Protection Bureau, outlines the principles for mortgage servicing regulation and the goals of bringing ultra transparency to mortgage servicing.

The way that CFPB is going to bring ultra transparency is by requiring observable event based reporting.  Under observable event based reporting, every observable event, like a payment or delinquency, is reported on the business day it occurs or as soon as possible thereafter.

In addition, observable event based reporting requires accurate tracking of all the paperwork related to the mortgage -- signing the loan documents or transferring it to a covered bond or securitization trust is a reportable event.

Bringing ultra transparency to mortgage servicing through observable event based reporting has benefits both consumers and investors.

For example, investors benefits from having current data on the underlying mortgage performance on which to base their valuation of an RMBS security.  In addition, observable event based reporting allows market participants to monitor servicer performance for compliance with the Pooling and Servicing Agreement. 

The proposed CFPB rules include

  1. Proper handling of documentation including obtaining all signatures required for conveyance of the mortgage and note to the trust.
  2. Servicers would have to take a series of steps designed to optimize recovery to avoid foreclosure.  Each step must be documented as they are taken.  These steps would assure fair and equitable treatment of borrowers and investors while preserving rights at seniority levels.
  3. Removing structural disincentives to loss mitigation including conflicts of interest between first and second lien where same servicer is involved with both loans.  This includes alignment of servicer compensation and incentives with investors’.
From the NY Times Dealbook article,
The Consumer Financial Protection Bureau on Tuesday outlined preliminary plans to address a lack of transparency and accountability among mortgage servicers. 
The new scrutiny will take aim at the industry’s aggressive tactics and sloppy record keeping that bedeviled homeowners in the aftermath of the financial crisis. The companies, typically arms of the nation’s biggest banks, collect payments and handle customer service for mortgage lenders. 
“The mortgage servicing rules we are considering reflect two basic, common-sense principles — no surprises and no runarounds,” Richard Cordray, director of bureau, said in a statement. “For too long, mortgage servicers have not been held accountable to their customers, and the result has been profoundly punishing to homeowners in distress.” 
The new regulation, Mr. Cordray said, would mandate “clear” monthly mortgage statements that break down a homeowner’s obligations by principal, interest, fees and the due date of the next payment. 
Under the plan, servicers would have to take a series of steps to avoid foreclosure. They would, for instance, need to warn a homeowner before their interest rate adjusted. And they would need to provide a list of alternative options for consumers who cannot afford their new bill.... 
The bureau’s proposals aim to take a proactive approach to preventing a repeat of those abuses. 
In a nod to consumer complaints, the bureau also hopes to address issues in mortgage bill processing. The plan would mandate that servicers credit bill payments immediately, keep “up-to-date and accessible” records and correct any errors promptly. The bureau would require mortgage servicers to respond to a consumer complaint within five days and complete an internal investigation within 30 days. 
“All of these rules would give consumers accurate and relevant information so they can understand what their servicer is doing, identify problems as early as possible, and take follow up actions before things start to snowball,” Mr. Cordray said.

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