The Consumer Financial Protection Bureau (CFPB) has proposed a series of new rules it says will to protect homeowners from “costly mistakes” by the mortgage servicers responsible for collecting payments on behalf of the loan's owner.

The Dodd-Frank Act imposes various requirements on servicers and gave the CFPB statutory authority to write rules. The proposals, announced on Friday morning, would go into effect in January 2013. Among the stipulations is that the “servicer would not be able to actually foreclose on the consumer without fully considering borrowers' timely and complete applications for alternatives to foreclosure.”

A statement from the CFPB adds: “The servicer would only be able to proceed with foreclosure if: a borrower does not qualify for options to avoid foreclosure; the borrower rejects a servicer's offer of such options; or the borrower fails to keep up his or her end of a deal for such an option.”

The proposed rules are divided into two groupings by the CFPB. The first focuses primarily on transparency issues and includes the following:

Servicers would be required to provide regular statements which would include: a breakdown of payments by principal, interest, fees, and escrow; the amount of and due date of the next payment; recent transaction activity; and warnings about fees.

Servicers would have to provide earlier disclosures before the interest rate adjusts for most adjustable-rate mortgages. This disclosure would include information about alternatives and counseling resources if the new payment is unaffordable. Existing disclosures for interest rate adjustments that cause a change in mortgage payments would be amended to include improved information and arrive earlier so that borrowers can anticipate consequences of payment changes.

Servicers have the responsibility to ensure that borrowers maintain property insurance. If they do not, the servicer has the right to purchase insurance to protect the lender's interest in the property. This “force-placed” insurance is typically more expensive than the insurance a borrower could privately purchase. The CFPB's proposed rule would provide more transparency in this process, including requiring servicers to give advance notice and pricing information before charging consumers. The servicer would also be required to terminate the insurance, and refund premiums, within 15 days if it receives evidence that the borrower has the necessary insurance.  

Servicers would be required to make good faith efforts to contact delinquent borrowers and inform them of their options to avoid foreclosure.

A second set of proposed rules would impose requirements for handling consumer accounts, correcting errors, and evaluating borrowers for options to avoid foreclosure. These so-called “no-runaround” rules include:

Servicers generally would have to credit a consumer's account as of the date a payment is received.

Servicers would be required to establish reasonable policies and procedures to provide accurate and current information to borrowers and minimize errors. They would have to submit accurate legal documents that comply with applicable law, help borrowers on options to avoid foreclosure, and provide oversight of their contractors and foreclosure attorneys.

If a consumer notifies the servicer that she thinks there has been an error, the servicer would be required to acknowledge receiving the notification, conduct a reasonable investigation, and, in a timely manner, inform the consumer about the resolution.

Servicers would be required to provide delinquent borrowers with direct, easy, ongoing access to employees who are dedicated and empowered to help delinquent borrowers.

Servicers that offer options to borrowers to avoid foreclosure, such as loan modifications or other payment plans, would be required to promptly review applications for those options. Servicers would be prohibited from proceeding with a foreclosure sale until the review of the borrower's application is complete. Servicers would also be required to let borrowers know when applications are incomplete and to allow borrowers to appeal certain servicer decisions.

The public will have 60 days, until October 9, 2012, to review and provide comments on the proposed rules. The CFPB will review and analyze the comments before issuing final rules in January 2013.

A summary of the proposals is available online, as is a fact sheet.

The Bureau also announced on Friday that it is working with the Cornell University e-Rulemaking Initiative (CeRI) to make it easier for the public to comment on the proposed rules through a pilot project called Regulation Room (www.regulationroom.org), an online environment for people and groups to learn about, discuss, and react to selected rules proposed by federal agencies. Individual contributions to Regulation Room will not become formal public comments on the CFPB's docket, but it expects contributions will be incorporated into a public report prepared by CeRI researchers and submitted for use in preparation of a final rule.