The three-year-old U.S. consumer protection agency said it discovered that the largest mortgage servicers have been mishandling loan modifications and harming borrowers since new rules came into effect in January.
Consumer Financial Protection Bureau supervisors have made spot checks to examine the books and practices of bank and nonbank servicers, the agency said in a report yesterday, without naming the firms. Supervisors found "substantial delays" in modifying loans that resulted in "negative consequences," such as higher mortgage payments and unjustified blemishes on borrowers' credit reports, the report said.
"All borrowers should be treated fairly by loan servicers, and through our supervision program, we intend to hold them accountable," Richard Cordray, the CFPB director, said in a statement.
The consumer bureau, created by the Dodd-Frank law and empowered to rid the mortgage industry of abusive practices, rolled out regulations that took effect this year. The bureau is examining the compliance of the rapidly expanding servicing industry as a New York regulator bears down on its biggest nonbank participant, Ocwen Financial Corp., whose shares have plunged this year.
"The CFPB had tread lightly, relatively speaking, in mortgage servicing enforcement thus far as the rules went effective in January," Isaac Boltansky, an analyst with Compass Point LLC in Washington, said in an email. The report suggests that the agency is "re-emphasizing mortgage servicer compliance which means that the regulatory environment is unlikely to improve in the near-term."
Robert van Raaphorst, a spokesman for the Mortgage Bankers Association, declined to comment about the report.
The CFPB was created after Wall Street lobbied against it, warning that a new agency would impose regulations that would constrict the flow of credit to consumers. Elizabeth Warren, now a Democratic senator from Massachusetts, helped set up the bureau, in part by arguing that the mortgage banking posed a threat to ordinary homeowners. During the housing boom between 2004 and 2007, lenders provided about $2 trillion in subprime loans, many to unqualified borrowers that later went bad.
Today, the business of collecting mortgage payments is undergoing a transformation as large banks retreat from the $9.4 trillion market, selling servicing rights to nonbanks such as Ocwen and Nationstar Mortgage Holdings Inc. Ocwen has more than tripled the number of loans it services in the last two years to $426 billion, or 4.3% of the market.
The consumer bureau reached a $2.1 billion settlement with Ocwen in December over its allegations that the company "took advantage of borrowers at every step of the process." CFPB alleged that Ocwen failed to apply payments made by borrowers in a timely manner and didn't provide accurate information about loan modification options. Ocwen didn't admit or deny wrongdoing.
Walter Investment Management, and its Green Tree Servicing unit, faces a possible enforcement action from CFPB as well, the company reported in February.
The agency is now monitoring the largest servicers for compliance with rules that require them to abide by safeguards to keep people in their homes. More penalties could be imposed as a result of the supervision, Boltansky said.
After the rules were enacted in January, Steven Antonakes, the deputy director and head of supervision at CFPB, warned loan servicers that they had to improve their practices.
"Too many customers continue to receive erratic and unacceptable treatment," he said in a February speech at a Mortgage Bankers Association conference. "Our nation's mortgage servicers manage a debt portfolio of nearly $10 trillion for millions of American homeowners. This kind of continued sloppiness is difficult to comprehend and not acceptable."
The bureau's supervisors found that an undisclosed number of servicers didn't convert trial mortgage modifications into permanent ones in a timely fashion.
Borrowers apply for — and servicers grant — modifications to reduce their monthly payment and interest rate, avoid foreclosure and keep mortgage assets performing. A trial modification, which often lasts three months, is a chance for homeowners to demonstrate they can meet the payments consistently, which results in a permanent change.
When servicers delayed such conversions, borrowers accrued interest at the original higher rate. The servicers then added that interest into the principal balance, raising the ultimate cost of the loan, CFPB found.
The servicers also reported to credit agencies, such as Equifax, TransUnion and Experian, that mortgages were delinquent during the period in which the companies delayed converting them to permanent modifications.
At least one servicer sent permanent loan modification agreements to borrowers who signed and returned them, only to find they later received new agreements with "materially different" terms.
"These misrepresentations about the available terms affected the ultimate payment the borrowers would make, influencing both whether they would accept the modification and how they could subsequently budget based on their expected payment," according to the report.
Douglas Harter, an analyst with Credit Suisse AG, said CFPB statements like those in the report increase uncertainty for mortgage investors because they don't know whether the agency has identified new, systemic problems.
"Everyone is going for the same zero-defect outcome, but I don't think anyone comes close to achieving that," Harter said. "What is the pervasiveness of the errors, or is it a one-off?"
The bureau reached a $37.5 million settlement with Troy, Mich.-based Flagstar Bank in September over allegations it blocked borrowers' attempts to save their homes. The agency barred Flagstar from acquiring new mortgage servicing rights until it complies with regulations, making good on an August promise to scrutinize rights transfers. Flagstar didn't admit or deny wrongdoing.
Benjamin Lawsky, the New York superintendent of financial services, is probing several parts of Atlanta-based Ocwen's business, including possible conflicts of interest. On Oct. 21, Lawsky said in a letter that he was examining Ocwen's backdating of letters to struggling borrowers, making it impossible for them to appeal denials for loan modifications.
Ocwen has said it is cooperating with Lawsky's several probes. In an Oct. 24 letter to homeowners, the company apologized for what it called the inadvertent backdating and said it was investigating the cause and would ensure that no borrower would suffer as a result of the mistake.
An Ocwen spokesman declined to comment on the bureau's report.
After reaching a record high of $59.97 in 2013, Ocwen's shares are down 65% this year.
