what the fair credit reporting act should teach us about mortgage servicing

8/8/2019 What the Fair Credit Reporting Act Should Teach Us About Mortgage Servicing

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1 Center for American Progress | What the Fair Credit Reporting Act Should Teach Us About Mortgage Servicing

What the Fair Credit Reporting Act Should Teach Us About Mortgage Servicing

Progressive Recommendations to Protect Home Mortgage Consumers

Peter Swire January 2011

Introduction

Our na ion’s recen housing crisis revealed deep aws in he way mon hly mor -gage paymen s by homeowners are handled by mor gage servicers— he compa-nies ha collec mon hly mor gage paymen s rom homeowners and orward hepaymen s o inves ors in hose mor gages. Tese aws go ar beyond he recenand headline-grabbing robo-signing scandals, in which many mor gage servicingcompanies were ound complici in shoddy handling o he legal requiremen s

or oreclosure. O her major players in he housing marke are deeply dissa is ed wi h he curren sys em, including priva e inves ors in mor gages ha have been bundled in o mor gage-backed securi ies, mor gage insurance companies, and

he wo big mor gage nance gian s ha are now in governmen conserva orship,Fannie Mae and Freddie Mac.

So, oo, are he consumers o home mor gages— he more han 50 million home-owners who wri e mon hly mor gage checks o mor gage servicing companies.Tis issue brie presen s a new analysis o how consumers are sys ema ically disad- van aged by he curren sys em o mor gage servicing, in which mor gage servic-ing righ s are governed legally o pro ec he in eres s o inves ors and mor gageservicers be ore he righ s o consumers are ever considered.

As he mor gage servicing indus ry evolved in he pas decade, a major markeailure developed— hey owe heir responsibili y only o inves ors, and owe no

du y a all o consider he needs and in eres s o consumers. Amid he housingcrisis ha began in 2006 and me as asized over he nex our years, i becameincreasingly clear his ype o marke ailure precisely racks he problems ha led




o crea ion o he Fair Credi epor ing Ac in 1970—harms o consumers whenhe large nancial companies responsible or consumers’ credi ra ings served he

in eres s o heir major corpora e clien s ra her han consumers. Ta marke ailureour decades ago was correc ed by FCR, which requires he hree big credi ra ing

agencies—Equi ax, Experian, and ransUnion— o give individuals he righ osee heir credi his ory and o correc mis akes. Over ime, Congress s reng henedhese consumer pro ec ions under FCR, no ably in overhauls in 1996 and 2004.

Ta same marke ailure correc ed by FCR in consumer nance is now readily apparen in he mor gage servicing marke place. A er all, some o he biggesconsumer issues in a amily’s li e—whe her hey can s ay in heir home, on wha

erms, and paying how much in ees—is a realm o nance over which consumers boas litle o no leverage. Wha ’s more, mor gage servicing righ s are no speci -cally addressed in he nancial regula ory re orm law passed by Congress las year.

Te upsho : An e ec ive se o consumer pro ec ion rules should be a priori y o nancial regula ors, he new 112 h Congress, and he Obama adminis ra ion inhe response no jus o he robo-signing scandals bu also he crea ion o our nex

genera ion o housing nance as Congress and he adminis ra ion grapple wi hhow o replace he mor gage nance roles played by Fannie Mae and Freddie Mac.Tis issue brie o ers some progressive recommenda ions or how his could bedone o he bene o consumers and our mor gage nance sys em.

From robo-signing to investor concerns

A series o congressional hearings la e las year regarding he “robo-signing” scan-dal raised he ques ion o wha o do abou mor gage servicing righ s. Te robo-signing scandal involved employees o major servicing companies who admited

ha hey rou inely, alsely signed documen s under oa h in cour cases. OnceCongress and he press began o look under he hood o servicing prac ices, o herserious problems emerged, including he ques ion in many cases abou whe herservicers ollowed he requiremen s or endorsing he “no es” (proo o owner-

ship o a loan) as required be ore a oreclosure can legally occur.

Te robo-signing hearings brough new aten ion o longs anding complain s aboumor gage servicers. Te Obama adminis ra ion’s Home A ordable Mor gageProgram, or HAMP, a mor gage-modi ca ion program or embatled bu credi -




wor hy homeowners, has been plagued by slow ac ion by servicers. For ins ance,Bank o America Corp. did no comple e a single permanen mor gage modi ca-

ion by he end o 2009, and he atorneys general in wo s a es brough a new law-sui agains Bank o America in December or numerous alleged un air or decep iveprac ices.1 Tere have been numerous complain s abou los documen s, slow

service, and servicer mis akes abou puting houses in o a oreclosure sale while adi eren par o he same servicer was agreeing o a mor gage modi ca ion.

On he nancial side, mor gage servicers are being hi by enormous claims ordamages rom a range o ac ors. Fannie Mae and Freddie Mac are seeking billionso dollars o “pu backs,” or paymen back o hem or mor gage origina ion andservicing during he housing bubble ha viola ed he legal requiremen s o he

wo hen-governmen -sponsored en erprises, bo h o which are now e ec ively governmen owned. Tose pu back demands are based on he documen ed raudand abuse commited by many mor gage origina ors and servicers during he

bubble as hey sough o crea e more and more mor gage-backed securi ies orsale o eager ins i u ional inves ors worldwide. Major lawsui s by priva e mor -gage insurance companies similarly claim ha hey paid billions o dollars ininsurance claims o inves ors in hese mor gages or loans ha were no properly origina ed and serviced.

Some o he sharpes complain s have come rom inves ors in so-called “priva e-label securi ies,” he mor gage bonds crea ed on Wall S ree during he bubble wi hou any paymen guaran ees rom Fannie Mae or Freddie Mac. Tese priva e-label securi ies were issued and sold separa ely rom he so-called “con orm-ing” mor gage-backed securi ies ha Fannie Mae and Freddie Mac guaran eed.Inves ors in priva e-label securi ies essen ially claim ha servicers have no been

ai h ul agen s or inves ors; servicers are supposed o ac on behal o he inves-ors under he con rac s ha hired hem.

Among o her concerns, inves ors worry ha servicers have been making judgmencalls o he advan age o he servicers hemselves ra her han he inves ors hecon rac s say hey are supposed o work or. O her aflia es o he major servicers,

or ins ance, hold he bulk o he home equi y lines o credi and o her junior

mor gage claims. Tis means hey are incen ivized o maximize value o hesesecond-lien mor gages over he rs -lien mor gages. Te concern is ha servicerso en make modi ca ions and o her decisions in ways ha bene he supposedly

“second-in-line” lenders ( he servicers) in ron o he “ rs -in-line” inves ors.




In he wake o he his oric housing bubble, i is en irely predic able ha majorplayers in housing nance are now poin ing he nger o blame a each o her, andsuing each o her over who should su er he unpreceden ed losses caused by housing price declines. Te robo-signing scandal and recen hearings in Congress,however, provide a eachable momen abou he need or undamen al re orm

in how mor gage servicing righ s are rea ed in he American housing marke .Indeed, in a recen hearing, Sheila Bair, chairman o he Federal Deposi InsuranceCorpora ion, called or “broad based re orm o mor gage servicing” o address

“misaligned incen ives.” Te same day, Daniel arullo, governor o he Federaleserve Board, called or “new na ional s andards or servicers.”

We may be seeing he beginning o agreemen around a simple bu crucial poin :Te nex genera ion o mor gage nance in his coun ry requires major re orm in

he way ha homeowners pay heir mon hly mor gages. Fannie and Freddie, heFederal Housing Adminis ra ion, priva e mor gage insurers, and priva e inves ors

all have expressed severe concerns abou bad incen ives in he curren sys em. oassure liquidi y or our u ure housing marke , we need beter ways or inves orsand guaran ors o be con den ha servicing is being conduc ed wi h he correcincen ives. And all his can be done while also pro ec ing he righ s o consumerso home loans—all 50 million o hem.

The switch to a new mortgage servicing market

As re orm proposals are developed or inves ors in home mor gages and guaran-ors o hose loans, i is cri ical o re orm he sys em so ha i works beter or

ano her group— he homeowners o America. More han 50 million Americanamilies pay heir mor gage each mon h. Un il qui e recen ly, ew o hem were

harmed by bad servicing. oday, in con ras , he modern shape o he servicingindus ry means ha amilies are open o harm rom servicers, wi h essen ially nocon rol by legal remedies or marke discipline.

Tis harm o homeowners is a recen phenomenon. His orically, mos mor gageloans were made locally by hri s or commercial banks. Even i he loans were

la er sold, he lender o en handled he mon hly mor gage paymen s, which meanha he lender had he usual marke incen ives o rea borrowers well becausehe local lender hoped o provide o her banking services o he amily, such as a

deposi accoun or a new mor gage loan in he u ure.




Over ime, his local lending and servicing gave way o servicing by specializedhird par ies, especially a er crea ion o hose priva e-label securi ies on Wall

S ree in he la e 1980s. By he la e 1990s and early 2000s, he economics o heservicing marke led o wo rends. Firs , a much larger propor ion o local lenderssold o he mor gage servicing righ s ra her han keeping hem in-house. Second,

marke concen ra ion in he servicing indus ry skyrocke ed. Te 10 larges servicers had an 11 percen marke share in 1989, climbing o 40 percen a decadela er, according o he Handbook o Mor gage-Backed Securi ies. oday, he op

our servicers have more han 70 percen o he marke . As a resul , he policies o a small number o nancial gian s now govern how mos homeowners are rea edi here is any difcul y in paying he mor gage.

Te s eady rise o housing prices un il recen ly masked he e ec s on consumerso he new marke s ruc ure or mor gage servicing righ s. When home pricesare rising, here is an easy way ou or homeowners who lose a job or o herwise

ace problems in paying he mor gage—jus sell he home or a pro . As longas house prices s ay even or go up in he meanwhile, he amily can pay back hemor gage and move o a ren al uni . Tings were even easier during he easy-credidays o he housing bubble. I a amily s ar ed o all behind on he rs mor gage,rising housing prices mean ha he amily could “ ap heir equi y” in he homeand ge a second mor gage o keep curren wi h he rs mor gage paymen s. Or,during he same easy-credi period, many amilies could pu he mon hly mor -gage on heir credi cards, and avoid de aul ha way.

Te housing price collapse ha began in 2006 exposed he problems in he mor -gage servicing indus ry. Te ra e o delinquen mor gages climbed rapidly, romless han 2 percen o mor gages o more han 10 percen oday. Te easy cures

rom yes erday were no longer usually available, such as second mor gages or largeloans on a credi card. Ins ead, more han 10 million homeowners ound hem-selves “under wa er” in a home hey could no sell wi hou losing money and husin a new posi ion—nego ia ing wi h mor gage servicers abou whe her hey coulds ay in heir homes, on wha erms, and wi h wha ees.

The precedent of the Fair Credit Reporting Act

Tis his ory o mor gage servicing shows he new ways ha mor gage servicershold power over many homeowners as he s ruc ure o he mor gage marke has




changed and i s e ec s have become visible or he rs ime. Tis s ruc ure urnsou o parallel exac ly he problems ha led o crea ion o consumer pro ec ionsunder he Fair Credi epor ing Ac . (see able)

Tis able shows he parallel s ruc ure o he credi ra ing marke and he mor -gage servicing marke . For credi repor s, he hree major credi repor ing agen-cies—Equi ax, Experian, and ransUnion—domina e he marke or consumers’

credi his ories. Mis akes and decisions abou credi can have a large impac ona amily, whe her a mor gage or au o loan is approved, or ins ance, and on wha

erms. Te clien s o hese credi agencies, however, are no consumers. Ins ead,he agencies make heir money by selling credi repor s o lenders, insurers,

employers, and o hers. Te marke incen ives or hese companies are o give heircorpora e clien s wha hey wan , ra her han o worry abou how a mis ake a ec san individual consumer.

Te his ory o he credi repor ing agencies parallels he recen his ory in mor -gage servicing. Te credi repor ing indus ry consolida ed grea ly during he1960s. A series o congressional hearings showed ha individual consumers o enhad serious mis akes in heir credi his ories, bu he credi ra ing agencies hadno good procedures o handle consumer complain s. For ins ance, he hearingsshowed ha consumers lacked any pro ec ion when a lender incorrec ly repor ed

hey had paid la e, and individuals were urned down or loans and jobs as a resul .

In ligh o hese problems, Congress passed he Fair Credi epor ing Ac o 1970, which gave individuals he righ o see heir credi his ory and o correc mis akes.Over ime, Congress s reng hened consumer pro ec ions under he FCR, no a-

bly in overhauls in 1996 and 2004.

Te same problems now plague he mor gage servicing marke . Firs o all, hena ional marke has consolida ed in o he hands o a ew servicers. Secondly,

hese servicers make vi al decisions abou consumers, such as whe her o orgive

A key disconnect

At present, the Fair Credit Reporting Act does not apply to mortgage servicing companies

Fair Credit Reporting Act Mortgage servicing

The companies that afect consumers Credit reporting agencies, or CRAs Mortgage servicers

The clients o those companies Lenders, insurers, etc. Investors in mortgages

Protections or consumers Fair Credit Reporting Act None currently




a la e paymen , modi y a mor gage, or oreclose on he house, and wi h wha(o en large) ees paid by he homeowners. Te clien s, however, are nancialcorpora ions, such as inves ors or mor gage guaran ors. Tese clien s have heirown complain s abou he curren sys em, as discussed above. Te clien s, how-ever, a leas have pro ec ion by con rac s ha say he servicers are supposed o

ac on he clien s’ behal , and hese con rac s are he basis or curren lawsui sagains servicers.

Consumers have no similar pro ec ions. Tey are simply “ hird par ies,” people who are a ec ed by he con rac be ween he inves or and he servicer bu play nopar in dra ing he con rac . As wi h he credi ra ing agencies, consumers have nochoice abou which servicer handles heir mor gage. Consumers choose a mor -gage origina or when hey ge a mor gage bu he origina or now rou inely sells hamor gage o an ou side servicer wi h no choice in he mater or he homeowner.

In shor , consumers exer no marke pressure on servicers. A servicer can providelousy service and he homeowner has no way o exi . Even i he consumer ries

o re nance he mor gage, he new origina or can sell he servicing righ s o hesame lousy servicer as be ore.

What to do next

Tis simple poin has no been par o he public deba e o da e abou mor gageservicing companies. Te Uni ed S a es has long required e ec ive consumer pro-

ec ion rules under he Fair Credi epor ing Ac bu he same sor s o problemsin mor gage servicing curren ly lack any similar consumer law. Qui e simply, hereis a large marke ailure. Consumers are subjec o bad service and large losses, wi h no e ec ive marke checks or legal redress in place.

Te poin o his issue brie is o poin ou he marke ailure ra her han o pro-pose he ull se o possible policy responses. Ye here are some common hreads

ha should in orm he coming deba e. New consumer pro ec ions could comerom a varie y o sources. Firs , i migh use ully be par o he re orm o Fannie

and Freddie ha Congress is scheduled o consider his year. Te logic or xinghe mor gage servicing program hrough his legisla ive avenue is s rong—any

new sys em o housing nance mus rs have an e ec ive paymen sys em soconsumer mor gage paymen s will ow correc ly hrough he sys em o inves ors.




Second, and more immedia ely, consumer pro ec ion rules can be cra ed in o any setlemen ha he s a e atorneys general and ederal regula ors may reach soon wi hservicers in he robo-signing scandal. Tird, he new Consumer Financial Pro ec ionBureau migh consider dra ing mor gage servicing regula ions once he Bureau is upand running nex year. In addi ion, here have been press repor s ha nancial regula-

ors may include some consumer pro ec ions rela ed o servicers in he proposed ruleabou “Quali ed esiden ial Mor gages” ha he Dodd-Frank Ac manda ed.

In erms o speci c consumer pro ec ions, consumer and indus ry exper s should weigh in on wha he overall approach should include. o begin he discussion, hereare hree radi ional ca egories o consumer pro ec ions o consider:

• Disclosure• Decep ion• Con ic s o in eres

Le ’s consider each in urn.

Disclosure

Mor gage servicers should disclose heir ee schedule, including or he con rac orshey hire in he oreclosure process. For credi and debi cards, we have seen new

consumer pro ec ion rules around ransac ion and la e ees. Te risk o problems iseven grea er in mor gage servicing, where consumers have no op ion o exi rom anabusive servicer.

Servicer ees are o en paid ou o he proceeds o a oreclosure, and a recurringcomplain has been ha such ees give oo grea an incen ive o oreclose ra her

han work ou a modi ca ion. Disclosure o a servicer’s ees, perhaps bo h o hehomeowner and o consumer pro ec ion en orcers, is an impor an rs s ep owardreducing abuse.

Deception

Te new lawsui agains Bank o America’s mor gage servicing aflia e allegesemployees were rained o mislead consumers who called wi h complain s aboumor gage servicing. egula ors already have general powers o en orce agains

“un air and decep ive prac ices” by servicers. Tey should do so.




More speci c rules abou common ca egories o decep ion are wor h considering. As wi h FCR, consumers perhaps should be en i led o modera e-sized s a u ory damages where a servicer has engaged in a patern o decep ion.

Conflicts of interest

Mos mor gage servicing oday is done wi hin he larges nancial holding compa-nies. One major concern abou he curren sys em is ha he large servicers may bepro ec ing aflia es who hold second liens on homes in he orm o home equi y loans, a he expense o he rs -lien holders— he inves ors—who hey supposedly work or. When con ic s o in eres exis , consumers come hird, a er he inves orsand servicers, and he servicer has no legal du y o ac in he consumers’ bes in eres .

O her aspec s o banking regula ion have s ric con ic -o -in eres disclosures and

regula ions, such as he limi s on ransac ions be ween an FDIC-insured bank and i s aflia es. New measures should be considered o ensure ha servicers areac ing on behal o inves ors and consumers, ra her han or he bene o heirlending aflia es.

The way forward

Te recen his ory o mor gage servicing highligh s an impor an new develop-men —only rarely does such a large, concen ra ed indus ry arise in ways hacan have such impor an nega ive e ec s on ens o millions o consumers. Tereis litle reason o hink he sys em ha developed during he housing bubble is

he correc sys em going orward. FCR provides a model or showing ha herigh s and needs o consumers should no con inue o be ignored in our sys em

or mor gage servicing.

Peter Swire is the C. William O’Neill Professor of Law at the Ohio State University and aSenior Fellow at the Center for American Progress. Until this August, he served as specialassistant to the president for economic policy and worked extensively on housing policy.

Endnotes

1 Andrew Martin and Michael Powell, “Two States Sue Bank of America Over Mor tgages,” The New York Times , December17, 2010, available at http://www.nytimes.com/2010/12/18/business/18mortgage.html .

http://www.nytimes.com/2010/12/18/business/18mortgage.html

http://www.nytimes.com/2010/12/18/business/18mortgage.html

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