(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.