Dual-Track Foreclosures Limited Under U.S. Consumer Bureau Rules

Mortgage servicers will face greater limits on their ability to foreclose on a borrower while simultaneously negotiating a loan modification under new rules issued by the U.S. Consumer Financial Protection Bureau.

The rules, some of which are required under the 2010 Dodd-Frank law that created the agency, go further than the bureau’s initial proposal in limiting the practice, known as dual-tracking. They will apply to major banks including Wells Fargo & Co. and Bank of America Corp. as well as non-bank servicers including Ocwen Financial Corp.

“For many borrowers, dealing with mortgage servicers has meant unwelcome surprises and constantly getting the runaround,” Richard Cordray, the agency’s director, said in an e-mailed statement. Cordray is scheduled to explain the new policy at a field hearing in Atlanta today.

Attorneys general from 49 states concluded a $25 billion settlement with major bank servicers last year that aimed to end abusive servicing practices around foreclosures. That agreement, which included only Wells Fargo, Bank of America, JPMorgan Chase & Co., Citigroup Inc. and Ally Financial Inc., didn’t apply to all loans they serviced.

The CFPB’s rule against simultaneous foreclosures and modifications is a turnaround from the bureau’s initial proposal, issued Aug. 10, which didn’t directly address dual-tracking, according to a senior CFPB official who briefed reporters in advance of the release and asked not to be named.

Americans for Financial Reform, an umbrella group of consumer groups, civil rights organizations and labor unions, asked the agency to scrap the proposal, in part over the dual-tracking issue.

Not Prohibited

The final rules stop short of prohibiting dual-tracking. Instead, they limit lenders’ ability to drive the foreclosure process forward without giving borrowers a chance to complete every step of a loan modification, according to the senior CFPB official.

To create time to work with the servicer, a company cannot initiate a foreclosure until 120 days after a borrower falls delinquent. Nor can they start a foreclosure if a borrower has a pending application for a loan modification. Servicers must also give borrowers written notice of alternatives to foreclosure and examples of those options.

In some circumstances, a borrower could face foreclosure despite seeking a loan modification. For example, if a borrower sought a modification after the 120-day delinquency period, the foreclosure process could still go forward.

The rule contains exemptions for small servicers that handle 5,000 or fewer mortgage loans. These companies are mostly community banks and credit unions, according to the e-mailed statement.

‘No Runarounds’

Other rules finalized by the CFPB are designed to fulfill Cordray’s pledge to ensure that borrowers face “no surprises and no runarounds.”

To avoid unwelcome surprises, the CFPB is requiring clear monthly mortgage statements and warnings before interest rates adjust. Another rule requires them to warn consumers in advance if they end up taking out insurance on the borrower’s home.

In an effort to improve customer service, the rule requires servicers to credit a consumer’s account on the date payment is received and respond promptly to requests for payoff balances or to correct errors.

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