National Servicing Standards Emerge in New Homeowner Bill of Rights

The administration believes that the mortgage servicing system is badly broken and would benefit from a single set of strong federal standards,” the White House said in a document outlining President Obama’s vision for how a servicing shop should be run.

The president on Wednesday introduced what he’s termed the Homeowner Bill of Rights – plainly defined principles that Obama says will ensure borrowers and lenders are playing by the same common-sense rules. At the top of that list is a simple, straightforward mortgage disclosure form so borrowers have a clear understanding of their loan.

Obama told constituents in Falls Church, Virginia, where he unveiled the new Bill of Rights, that the Consumer Financial Protection Bureau is already making headway in its effort to replace overlapping and complex mortgage forms with a new shorter, simpler form to be used for all home loans.

Obama’s new set of standards mandate servicers provide homeowners with full and clear disclosure of all fees and penalties upfront, with any changes disclosed before they go into effect. It also requires servicers and investors to implement standards that minimize conflicts of interest and facilitate communication between multiple investors and junior lien holders, so that loss mitigation efforts are not hindered. Carved out within the Homeowner Bill of Rights is a series of rules to ensure homeowners at risk of foreclosure are provided with the assistance they need to save their homes.

Obama’s proposal calls for early intervention by servicers to contact every homeowner who has demonstrated hardship or fallen behind on their payments, and provide them with a comprehensive set of options to avoid foreclosure. The president’s directive states that every distressed homeowner must be given “a reasonable time” to apply for a modification. It also requires servicers to provide all homeowners who have requested assistance of become delinquent with access to a customer service employee who has 1) a complete record of previous communications; 2) access to all documentation and payments submitted by the homeowner; and 3) access to personnel with decision-making authority on loss mitigation options.

The new servicing standards would prohibit servicers from initiating a foreclosure action unless they are unable to establish contact with the homeowner after reasonable efforts, or the homeowner has shown a clear inability or lack of interest in pursuing alternatives to foreclosure. Any foreclosure action already under way must stop prior to sale once the servicer has received the required documentation and cannot be restarted unless the homeowner fails to complete a mod application within a reasonable period, is denied a modification after evaluation, or fails to comply with the terms of the modification received.

The Bill of Rights also establishes protections for homeowners against wrongful foreclosures. Servicers must explain to all homeowners any decision to take action based on their failure to meet payment obligations, and provide the homeowner with the opportunity to appeal that decision in a formal review process. In addition, prior to a foreclosure sale, servicers must certify in writing to the foreclosure attorney or trustee that appropriate loss mitigation alternatives have been considered and that proceeding to foreclosure sale is consistent with applicable law.

A copy of this certification must be provided to the borrower. “As we have learned over the past few years, the nation is not well served by the inconsistent patchwork of standards in place today, which fails to provide the needed support for both homeowners and investors,” Obama said. “A fair set of rules will allow lenders to be transparent about options and allow borrowers to meet their responsibilities to understand the terms of their commitments.”

The agencies of the executive branch with authority over servicing practices – including the Federal Housing Administration, the U.S. Department of Agriculture, the Department of Veterans Affairs, and Treasury – will each begin implementing rules in the coming months that are consistent with the standards outlined by the Homeowner Bill of Rights, according to the White House. In announcing the new set of national servicing standards, President Obama said, “Government must take responsibility for rules that are fair and fairly enforced. Banks and lenders must be held accountable for ending the practices that helped cause this crisis in the first place.”

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