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CFPB Examiners Find Mortgage Servicing Business Remains a Sewer

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(Greetings, readers! I’ll be pulling a John Oliver and filling in periodically for Yves during these dog day doldrums over the next couple weeks.)

By David Dayen, a lapsed blogger, now a freelance writer based in Los Angeles, CA. Follow him on Twitter @ddayen

Not that we needed additional evidence, but the Consumer Financial Protection Bureau has found more fraud and theft inside the nation’s mortgage servicing operations. CFPB has examiners in both bank and non-bank servicers; this is the first time non-bank servicers have faced such scrutiny. And their new report on Supervisory Highlights for the summer shows that extremely little has changed, despite a gauntlet of settlements that were supposed to end this conduct (OK, not really).

The problem with mortgage servicing has been discussed ad nauseum on this site (here’s just one example). This should be the simplest, most turnkey operation imaginable, as boring as it gets, basically an accounts receivable department for mortgages and accounts payable to investors. But the profit margins are so thin that servicers only stay afloat by keeping as bare-bones a staff as possible, and also by maximizing the financial potential of running up fees, which they get to keep. And it’s not just that they were “unprepared” for a foreclosure wave, or that their software platforms are antiquated, although that’s all part of it. Their compensation structure creates a mismatch in financial incentives between them and the underlying loan owners for whom they work, as they prefer foreclosure to modification, not the other way around. Servicer-driven defaults are commonplace, and these are often not the result of human error, but directed policy to make profits off of human misery.

If anything this is getting worse, because there’s been a great consolidation in the servicer space, from banks to non-banks. This is one way that servicers have been running afoul of the latest settlements: when Bank of America sells their servicing rights to a non-bank firm like Nationstar or Green Tree Servicing, the new servicer doesn’t have to follow any standards set by the settlement (and typically they sell the sub-servicing rights, keeping the master servicing rights and a small profit stream for themselves). So as a consumer, you were abused by BofA Home Loans, the government “penalized” the company, but when your servicing gets sold, you get none of those protections, and you have to start back at square one if you seek a modification. Not only that, but the notes have to pass through yet another pair of hands to get to the new servicer, creating more database problems and the potential for chain of title breaks.

If anything, servicers EXPLOIT this consolidation to push borrowers into default, according to the CFPB report. They note that “examiners found noncompliance with
the requirements of the Real Estate Settlement Procedures Act (RESPA) to provide disclosures to consumers about transfers of the servicing of their loans.” In other words, the servicer never gets around to mentioning that they’ve sold the rights, and the borrower keeps paying the wrong servicer. “In one instance, a servicer provided inadequate notice to borrowers of a change in the address to
which they should send payments,” CFPB writes. This is a clever way to facilitate late fees or delinquent fees, just don’t tell your customer where to send the money.

Here’s another example, which possibly has to do with showing a higher quarterly profit, regardless of the impact on the borrower:

As an example of concerns related to escrow accounts, one servicer decided – without notice to borrowers – to delay property tax payments from December of one year to January of the next. Instead of paying these taxes in December, which would have been consistent with past practice and the annual escrow statement, it paid the taxes in January of the following year, resulting in the borrowers’ inability to claim a tax deduction for the prior year. The servicer failed to provide notice to consumers of the change, which affected thousands of consumers. CFPB cited an unfair practice for failing to provide notice regarding the change in date for property tax payments from escrow accounts. To remedy the situation, it is directing the servicer to identify impacted borrowers and compensate those harmed by this practice.

Servicers were also found to simply pay property taxes from the escrow accounts late.

Before I get to the remedies and enforcement, here are a few other examples of the misconduct:

• “Lack of controls relating to the review and handling of key documents – such as loan modification applications, trial modification agreements, and other loss mitigation agreements – necessary to ensure the proper transfer of servicing responsibilities for a loan.” (And servicers are normally such excellent document custodians!)
• “One servicer conducted some due diligence on transferred servicing data
but did not review any individual documents that the prior servicer had transferred, such as trial loan modification agreements.”
• “Examiners found excessive delays in processing borrower requests for
private mortgage insurance (PMI) cancellation,” in violation of the Homeowner’s Protection Act. Also “improper handling” of unearned PMI premiums was found (I assume they’re just not refunding them).
• “Examiners identified a servicer that charged consumers default-related fees without adequately documenting the reasons for and amounts of the fees.”
• “Examiners also identified situations where servicers mistakenly charged borrowers default-related fees that investors were supposed to pay under investor agreements.”
• Loss mitigation problems include “Inconsistent borrower solicitation and communication;” “Inconsistent loss mitigation underwriting;” “Inconsistent waivers of certain fees or interest charges;” “Long application review periods;” “Missing denial notices;” “Incomplete and disorganized servicing files;” “Incomplete written policies and procedures;” and “Lack of quality assurance on underwriting decisions.”
• “the servicer’s procedures for requesting missing or incomplete information were cumbersome and made it difficult for consumers to provide the correct documentation.”
• Not in the report, but in the press release accompanying it, CFPB added “Deceptive communications to borrowers about the status of loan modification applications, leading some consumers to faster foreclosure.”

The value of having examiners inside the companies is that CFPB can take corrective action in real time. And they claim to have done so. “In all cases where the CFPB found mortgage servicing problems, examiners alerted the company to its concerns, specified necessary remedial measures, and, when appropriate, opened CFPB investigations for potential enforcement actions.” We’ll have to see what comes of the “potential enforcement actions.” The report does explain areas where examiners alerted the servicer to particular problems, cited unfair practices and forced compliance, including refunds for borrowers or assurances that the borrower wasn’t negatively impacted. But I’m not seeing any penalties yet, beyond simple after-the-fact remediation.

CFPB also found that non-bank servicers had NO comprehensive compliance management systems, to ensure that they followed all applicable consumer protection laws. Many didn’t even have formal, written policies or independent auditors. They hadn’t been subject to any examination prior to CFPB, so this stands to reason.

Short of CFPB examiners just taking over the day-to-day operations at servicers, this is bound to be a red queen’s race. While examination is critical and appears to be having an impact, servicers have a broken business model, and that’s true even BEFORE the CFPB’s new servicing standards come into place in January 2014. They can’t even keep up with the less stringent rules applicable now, including kindergarten-level things like filing papers appropriately. That speaks to an irreparable dysfunction. Not to mention the National Mortgage Settlement monitor’s final progress report today, showing that, as expected, servicers gamed the settlement. Forget the inflated “$51 billion in consumer relief” number; well over half of that comes from short sales and extinguishing largely worthless second liens. The actual first-lien principal reduction? $10.3 billion, just a hair above the $10 billion minimum requirement. And as the LA Times says today, “Much of the relief is not being provided with the banks’ own money.”

The thing I want to know is why servicing isn’t front and center at the discussion of all these GSE reform plans. I know borrower’s rights get conveniently forgotten in discussions of the “future of mortgage finance,” but these issues hurt investors too, and you’re simply not going to lure private financing back to the mortgage market without ensuring that investors don’t get constantly ripped off. The Corker-Warner GSE 2.0 bill has vague language potentially putting servicing regulation in the hands of their new Federal Mortgage Insurance Corporation, and AWAY from CFPB, which has just arrived on the beat. That seems par for the course for our government – don’t let the actual regulators get too comfortable executing their mission.

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14 comments

  1. Conscience of a Conservative

    How could we expect the servicers to follow the settlement when there is no effective verification mechanism and the very agreement says that violations are ok as long as they don’t occur too often. Add to that the fact that servicers are often not paid very well, especially considering the costs of a troubled loan, an you end up where we are today.

  2. profoundlogic

    This has been the government response to the crisis from the beginning….Let Them Eat Task Forces.

    Sadly, there will be no real relief for homeowners until some of these wankers start going to jail. As William Black recently pointed out, the view from 40,000 feet is that this was the virgin crisis. The FBI is supposedly serious about mortgage fraud, but if the person committing it happens to be working for a TBTF bank it’s just a policy error.

  3. dejavuagain

    Morgagae holders/orgiinators “sell” servicing to servicers – in order to extract more upfront income from the mortgage transaction, in part to boost up earnings of the mortgage holders/originators and bonuses of their executives. Thus, the funds to pay for quality service are stripped off the top of the deal. The “servicers’ [over]pay for the right to service – and it would appear overpay if the servicer intended to truly provide quality servicing. So, the issue to address is allowing servicing to be sold, or even more, allowing the originator/holder of the mortgage to avoid he responsibility of servicing by claiming that it has “sold” its right to service. Buying and selling servicing is the “normal” in the mortgage business, but from an objective view, is abnormal.

  4. Marcel

    What I really don’t get is what this whole construction with servicing is about. In the Netherlands you simply have and automated payment to the mortgage lender and there are no other parties involved, why is this construction necessary in the US? Why do payments have to be rerouted through a second party and do you not have any control over the process?

  5. drb48

    It appears that all of the referenced problems get back to not requiring that the loan originator retain all the responsibility for servicing and ownership of the loan. That would seem to eliminate the whole 3-card monty con the lenders have been playing with the paperwork and by eliminating the middle men also eliminate their financial incentive to screw the borrower.

  6. Paul Tioxon

    The breaking down of a complex financial process into discrete, easy to manage components is the extension of Taylorism, of the scientific time management of the factory assembly line applied to mortgage banking. The originator, the loan officer packages the paper work for approval. Once approved, the securitization process takes over. This process is called commodification, which at the point of intake, the origination, has to be turned over to another stage of the process for capital to circulate, to be traded more efficiently in open markets with standards that allow quick and easy pricing.

    When there were over 25,000 separate, local Savings and Loans, mortgages were held locally in small numbers at each bank, scattered across the nation. With the increase of surplus capital, and no place to go, the S$L industry became a target for commodification by creating not a limited equity product but a more liquid easily transacted. One with upside, enough so to absorb all of the profits from the booming industrial sector, which was not about to be re-invested in with their own profits. Hence, GM makes car, home and credit card loans with money made from auto sales. Etc.

    The challenge of successful capitalists is where to put all of the money made in order to make more money in a rapidly expanding new market. The local, state bound S&L industry was a sitting duck waiting for this tidal wave of capital to take it over and remake it into a more efficient industry with all of the centralization necessary to do so. Hence, less than 7,000 banks left from 25,000 in the 1980′s and thousands of fragmented mortgage and title report depositories in county courts across 50 states have been consolidated into MERS. High Frequency mortgage management replacing the stake in society for citizens to feel like they belonged in the nation they built and fought wars for. Apparently, that is too much to ask for anymore. Decent wages leading to human dignity which includes a roof over your head is just way to expensive for what we are worth to corporate America.

  7. abee crombie

    hmmm potential problems for Ocwen, NationStar and Walter, some stock market darlings.

    Btw servicers to take on financial risk (default and they dont earn servicing fees) prepayment risk and operational risk. Their profit margins are not very high but it a volume business. You need them b/c what happens when someone doestn pay.

  8. Brooklin Bridge

    With apologies in advance for asking specific advice in a general thread, regarding re-financing (my own home), I read frequently that finding a bank that will own both servicing and the loan (and register title with the state in the traditional way) is the way to go. RBS Citizens has told me this is how they operate. Do they not have the right nevertheless to sell their loan any time they want or can it be put into the contract? Is it truly a preferable way to go in terms of consumer/borrower protection than a bank that securitizes the loan but retains servicing rights?

    Also, does anyone know any horror stories about Royal Bank of Scotland?

    1. Nathanael

      You have to find a bank which is willing to write non-transferrability into the loan contract as a condition of the contract.

      That is difficult. Perhaps impossible. Some credit unions will do it.

  9. DJF

    Until we nationalize the servicers, or at least put all of them into conservatorship, we will never be able to reform housing finance. It’s devolved into a huge racketeering operation on the scale of organized crime.

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