Dave Dayen on How the CFPB Punted on Servicer Reform

I know a lot of readers miss Dave Dayen, who had a solid following at Firedoglake and among other things, covered the mortgage beat ably and energetically. He’s apparently been busy reporting, and just published a story in Washington Monthly on how the mortgage standards launched by the Consumer Financial Protection Bureau fall well short of what is necessary.

Now the parts of mortgage reform that the CFPB did get sorta right, which are its qualified mortgage rules (which Adam Levitin argues are back door usury laws; they make high-spread interest rate mortgages very unattractive to originators and investors) may well be moot. Any action taken that relied on the powers that the CFPB obtained only by having a director in place could be voided, since a recent appeals court decision (which looks likely to be affirmed if taken to the Supreme Court) found recess appointments to be invalid. So this action, plus its measures to prohibit steering payments to front line lending officers, may be thrown out. Now the worst case scenario is that the CFPB could re-enact them, but that may not be as easy as it sounds. Obama would still need to get a director approved. While Republicans seem to deem the suddenly-maybe-not-a-director Richard Cordray acceptable, they are still keen to use every opportunity on offer to weaken the CFPB. They plan to revive efforts to undermine the agency by having it lead by a commission rather than a director and/or have it funded by appropriations, which was the mechanism used to hobble the SEC.

Dayen describes how the CFPB blew it on servicing reform. There seems to be a peculiar amount of denial in the Beltway as to how terrible servicing is. If you were to believe the CFPB, all you need to do is make those pesky servicers follow servicing standards and make them offer sensible mods before foreclosing. The one truly positive thing the CFPB did do was to require servicers to offer modifications. Dayen gives a high-level description:

When a borrower misses two straight payments, servicers must intervene with specific information on loan modification options. They must provide “continuity of contact” – not a single specialist tasked with following a borrower, but a set of personnel that has access to all information, so the borrower won’t need to send multiple documents (these personnel must acknowledge receipt of an application and request any specific information they need from the borrower to complete it). Servicers must go to the investors in the loan, who have typically been shut out of the process, and clarify up-front what loss mitigation procedures they can offer, while keeping investors abreast of the decisions they ultimately make. They must offer one application that includes all potential modification plans, and consider them simultaneously, checking eligibility on the “waterfall” of options provided by the investor until they find one suitable. Critically, servicers must wait 120 days before starting the foreclosure process, ending an insidious tactic known as “dual track,” where servicers would review an application for a loan modification while simultaneously starting the foreclosure process. If the borrower slips into foreclosure, they get more limited protections from dual track, and in certain circumstances, they could pause the process by submitting a modification application. Finally, rejections of modifications must be accompanied by specific reasons, with an appeal process available to the borrower.

While this looks great on paper, servicers have proven to not just be masters of gaming systems but also quite content to break rules flagrantly. As Dayen stressed: “Servicers appear to fear the loss of the profit centers in their business model more than any penalties or sanctions.”

The elephant is that servicers are paid reasonably well to service performing mortgages. They are also paid even more to foreclose, in the way of various legitimate fees that they get. Yet servicers have, consistently, cheated in a myriad of creative ways to boost their revenues during the foreclosure process: force placed insurance, junk fees, attorney fees in excess of permitted state and Fannie/Freddie/FHA/VA guidelines. The whistleblowers at Bank of America that were tasked to reviewing fees said that they found overcharges in virtually every borrower file they reviewed.

So why do they cheat? It is as much desperation-driven as opportunity-driven. With the fee structures now in place, servicers lose money if delinquencies rise above a certain level. On an individual borrower level, servicing a delinquent mortgage, even with all the permitted foreclosure fees, is a money-loser. And the margins on servicing current mortgages aren’t so hot either, so it doesn’t take all that much in the way of delinquencies to render a servicing operation plenty unprofitable. And once you start cheating, it becomes a drug. Management gets accustomed to the new margin levels and are loath to impair them unless forced to do so.

And forget about modifications. A modification is like underwriting a new loan: it takes work and individualized assessment. Servicers, by contrast, are factories. To do mods properly, you’d need specialized and better paid staff. Culturally and operationally, it’s difficult to put the two under the same roof. And that’s before you get to the fact that the margins don’t begin to cover acquiring these skills. Look at how the government has had to bribe servicers to do mods, by providing incentive payments, and it’s only when they got very juicy that they finally got any level of participation.

The fact that it has taken such a high level of incentives to get servicers to do a meaningful level of loan modification is a strong proof that the payment structures desperately need to be reformed. Investors understand that; it’s one of the big reasons the private label (non-government guaranteed) mortgage market remains dead. Having been burned, no investor wants to be victimized a second time by having his payments dependent on the vagaries of servicers. Better to leave that risk to Uncle Sam. But as Dayen points out, perversely, the big guarantors, Fannie and Freddie, which have the power to set market standards, also are dragging their feet on addressing servicer fees structures Dayen again:

The Federal Housing Finance Agency (the conservator for mortgage giants Fannie Mae and Freddie Mac, also called GSEs, short for “government sponsored enterprises”) and HUD have begun work on a joint project to address servicer compensation…

However, the FHFA/HUD servicer compensation process is showing few signs of life. They announced the initiative two years ago, and released a discussion paper in September 2011, inviting public comment on a couple broadly rendered alternatives, including a “fee for service” model where servicers would get paid a flat rate for performing loans, presumably encouraging them to keep the loans current. As is typical for these regulations, practically all of the public input on the discussion draft came from the mortgage industry. They objected to changing the system before they had new requirements in place, like the 2012 National Mortgage Settlement and the CFPB servicing standards. In addition, they made the usual complaints about undermining the market and increasing costs for borrowers.

Perhaps as a result, basically nothing has been done on servicer compensation since the fall of 2011.

So the short version of why nothing is going to get better anytime soon is that no one showed up in the regulatory process to represent homeowner or even investor interests. This is an abject failure on behalf of the housing and other consumer advocate groups. And it also seems to underscore the point Sheila Bair made when she met with Occupy Wall Street, that there are typically staff members within the regulators who will object to the snake oil the banking industry is selling, but they can’t get very far if they don’t have letters or other input from ordinary citizens and groups on the other side of the issue. I’m reminded of a joke:

A man prays to God to win the lotto. The next drawing comes and he is not one of the winners.

More desperate, he prays three times as many times as he did before, and three times as long each time. The next round comes and goes, and again the man is not among the winners.

The man goes to pray again, begging God for help. The heavens open. God pronounces, “First, you have to buy a ticket.”

Politics is like that. You can’t change outcomes unless you participate. The banks do, in a serious way. It’s time you do too. While all those little things, like writing your Congressman, writing your local newspaper, submitting letters to regulators in public comment periods, does not lead to the gratification of tangible results, narrow groups rely on the inertia of the general population to get their way. Finance has become too important and powerful to treat it as a special interest any more. We all need to roll up our sleeves if we are to curb the industry’s power.

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  1. hermanas

    For sure, “All the King’s men and all the King’s Horses couldn’t put Humpty Dumpty together again.” (See anti-dote). “We all need to roll up our sleeves…”

  2. jake chase

    Thinking through this problem one asks what purpose banks actually serve in the mortgage process? It would make more sense for the government to write mortgages on standard terms. Borrowers would walk into a government office with their bank statements and tax forms, make a statutory down payment, lose the house if they stopped making payments. Why not do this?

    Because the usury industry depends upon profits from these mortgages although it is unwilling now to take any risk of nonpayment. Therefore, you have nothing but govt insured mortgages, but profits on these risk free mortgages spread around to banks and institutional ‘investors’. And of course these ‘profits’ are funneled into executive compensation and make some putz at WF or BofA banker of the year. All this is called entrepreneurship and free enterprise.

  3. Tom

    True True – It makes a difference to input at the local and State and Federal levels. When I go to Washington for a conference or other work….I always schedule a meeting with my reps and anyone else I can pick out. Believe it or not….they would rather hear from their constituency than the stream of lobbyists. Surprise yourselves and give it a shot…it better than gloom and dooming it into apathy. The TBTFs and the servicer industry are hoping to quiet people through apathy.
    The servicer is a fraudulent interloper between the borrower and the lender. The lender was not your bank, the bank is where investor funds were tabled…your creditor is the investors in the securitized trust….you never knew that and the servicer does not want you to know that — that’s why they are using allonges.
    Table loans are violations of lending law.

  4. Brian

    Dave is shaping up to be a great reporter, but when will the sponsor-depositor-trust-underwriter to investor pathway be opened for a bit of sunshine to help prove the claims of proper origination and transfer of the loans?
    Never, it can’t be done without blowing up in the faces of the first four in this broken chain of title.

  5. diptherio

    I’m reminded of this gem from the Superior Court of Carroll County, in the great state of Georgia. Judge Dennis Blackmon didn’t mince words in his denial of US Bank’s motion to dismiss a case in which they were accused of wrongfully denying Otis Phillips a loan modification under the HAMP program. Here’s Judge Blackmon, for your edification:

    Sometimes, only the courts of law stand to protect the taxpayer. Somewhere, someone has to stand up. Well, sometime is now, and the place is the Great State of Georgia. The defendant’s motion to dismiss is hereby denied.

    – Otis Phillips is behind on his house payments and is in grave danger of foreclosure.

    -The United States Government paid taxpayer dollars to the largest of our financial institutions, and to the European Union Banks, in order to prop up those poorly run organizations.

    -Twenty Billion of those dollars were handed over to the defendant, U. S. Bank

    -U. S. Bank agreed to participate in the U. S. Government’s HAMP program to help struggling homeowners.

    -U. S. Bank signed a Service Participation Agreement (SPA), in which the bailed out bank agreed to comply with the HAMP Guidelines for loan modification.

    -The HAMP guidelines require U. S. Bank to perform modification services for all mortgage loans it services.

    -Otis Phillips applied to modify his mortgage with U. S. Bank.

    -U. S. Bank denied the request, without numbers, figures, or explanation, reasoning, comparison to the guidelines, or anything. U. S. Bank would not reveal to Mr. Phillips how his income, or his house, or his expenses would make him ineligible according to HAMP guidelines.

    (This court cannot imagine why U. S. Bank will not make known to Mr. Phillips, a taxpayer, how his numbers put him outside the federal guidelines to receive a loan modification. Taking $20 Billion of taxpayer money was no problem for U. S. Bank. A cynical judge might believe that this entire motion to dismiss is a desperate attempt to avoid the discovery period, where U. S. Bank would have to tell Mr. Phillips how his financial situation did not qualify him for a modification. Or, perhaps he was qualified, yet didn’t receive the modification, in violation of U. S. Bank’s Service Participation Agreement (SPA). A cynical judge might think that, if the guidelines clearly prevented Mr. Phillips from getting his modification, then U. S. Bank would have trotted out that fact in mathematic equations, pie charts, and bar graphs, all on 8 by 10 glossy photo paper, with circles and arrows and paragraphs on the back explaining each winning number1. U. S. Bank’s silence on this issue might heighten the suspicions of such a cynical jurist. I, on the other hand, am sure that nothing of the sort could be true. Maybe U. S. Bank no longer has any of the $20 billion dollars left, and so their lack of written explanation might be attributed to some kind of ink reduction program to save money. I’m sure there is a perfectly reasonable explanation for why the U. S. Bank will not print out the ONE page of figures that show Mr. Phillip’s financials compared to the HAMP guidelines to clear all this up.)

    Clearly, U. S. Bank cannot take the money, contract with our government to provide a service to the taxpayer, violate that agreement, and then say no one on earth can sue them for it. That is not the law in Georgia. In fact, since no administrative review is provided within HAMP, the courts are the only recourse. The Bank claims that the intended beneficiaries of HAMP are the very people who CAN’T sue. Such argument is absurd. [emphasis in original]

    1. dolleymadison

      Thank you for this, Dip. The thing that has had my heart in my chest the most is the denial of justice and adherence to the rule of law in these foreclosure hearings. I read some of these decisions (Dobson in NC and Pino in Fla come to mind) where the judges basically say you are in default and if the bank says they own your loan then they must own your loan. case closed. So on those rare occaisions when I read a ruling by a judge who is actually standing up for America – like Judge Schack in Brooklynn and now Judge Blackmon, and not the criminal banksters, it lifts some of the despair…going to write this man a thiank you letter TODAY! Thanks again…

  6. Brooklin Bridge

    Buying a ticket…

    I called Ms Warren at her Massachusetts office number, (617) 565-3170, (the one I found on her Washington Web Site – not her campaign web site). I got a recording. Of course? And I left a message in which I mentioned the recent string of posts by Yves Smith on NakedCapitalism and said I want to hear her reaction to the extraordinary cover-up and mismanagement fiasco these posts detail so carefully. I gave my phone number and said I am expecting a return call. Well, hoop-ti-do for me…

    But I seriously think I should leave writing to the editor of the Boston Rag Globe to those with more than one operative brain cell, particularly cells with domain knowledge, and there are many of those on this site.

    It’s wonderful God left such explicit instructions. I must remember to go out and buy one of those ticket things even though I don’t expect such a windfall; merely that by tomorrow morning everyone will have their homes back…

  7. JGordon

    That’s strange about your comments on Dave Dayan’s career at FDL. I seem to only be able to recall him lusting after more and more Fed printing in post after post.

    Of course I tried to point out to people time and again that more printing would naturally drive the economy further done the rathole, not improve, but oh well. But ah well; for fanatics like this, even when you can say “I told you so,” they’ll still imagine somehow that they weren’t wrong.

  8. Nathanael

    The appeals court ruling which claimed that recess appointments are invalid *cannot* be upheld.

    Most likely the Supreme Court will overturn it. If the Supreme Court upholds it, the ruling will be overturned by executive action.

    In the wake of Congress’s abdication of its responsbilities, the executive *will not allow* the functions of government to stop operating. If recess appointments are necessary for that, they will happen, and their actions will stick, whatever the “courts” think.

    John Roberts recognizes the calculus of power, and I believe he will not diminish the power of the Supreme Court by making a ruling which must be ignored. He’s no John Marshall (“John Marshall has made his decision; now let him enforce it”).

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