Louder Outcry for U.S. Standard in Loan Servicing

WASHINGTON — Two leading policymakers on Tuesday joined the call for the creation of nationwide mortgage servicing standards, citing problems with foreclosures.

Congressional Oversight Panel Chairman Sen. Ted Kaufman and New York Banking Superintendent Richard Neiman said regulators should draft a federal standard to address lapses in current loan modification programs.

"The problem is it didn't turn out as simple as Treasury thought and now servicers are in the middle of conflicts of interest. … Clearly some kind of regulations should be developed, some way to eliminate conflict of interest," Kaufman said in an interview.

His remarks came after the release of a report from the oversight panel that declared the Treasury Department's Home Affordable Modification Program a failure. Kaufman said Hamp has been plagued by conflicts of interest and that the only way to eliminate that is through servicer guidelines.

"There has to be some rules. There has to be … a plan or guidelines," he said.

Separately Tuesday, Neiman suggested that the new Consumer Financial Protection Bureau should establish servicer standards similar to those of states.

"Servicers have been largely unregulated in the past, but states like New York have taken steps to bring greater accountability," Neiman said in a speech to Women in Housing and Finance. "The CFPB should establish similar baseline rules where other states fail to act."

Neiman said the CFPB should use state servicer guidelines as a blueprint for national guidance.

In 2009, New York passed legislation that required servicers to register with the state. In 2010, the state followed up with business contact regulations. Those rules went into effect in the fall. They require servicers to establish an explicit duty of care, consider a modification prior to foreclosure, and report mortgage performance data on delinquencies.

"Such protections can serve as a guide for an industry standard nationwide," Neiman said.

The issue was first raised at a Dec. 1 Senate hearing, where Federal Reserve Board Gov. Dan Tarullo said "it seems reasonable at least to consider whether a national set of standards for mortgage servicers may be warranted." Other regulators have supported such a standard.

Kaufman said the standards are needed to deal with conflicts of interest currently in servicing standards that prevent successful modifications. For example, even though Hamp offers incentives for servicers to perform permanent modifications, some servicers stood to make a much bigger profit from foreclosure fees.

The oversight panel also criticized the Treasury for failing to hold servicers accountable for lost paperwork and their refusal to perform loan modifications. It said the Treasury outsourced its oversight responsibility to Fannie Mae and Freddie Mac, both of which have business relationships with the servicers, calling into question their willingness to do proper oversight.

"Treasury should first acknowledge the conflict of interest and say what it is going to do about it," Kaufman said.

He also said the Treasury has refused to address the conflicts of interest of second-lien holders, many of whom are resistant to modifications by first-lien holders.

The Treasury announced a program in April to provide incentives for second-lien holders to release the loans and allow a modification on the first lien, but it has sputtered. Kaufman said there should be guidelines instead of incentives for second-lien holders.

"If there is a second lien with a permanent modification, what chance is there of paying a second lien off?" he said. "What's the chances? The program hasn't gotten off the ground."

He said a second-lien program alone was never going to be enough to fix Hamp. Instead servicers need to be held responsible for failing to comply with the program's terms, he said. Kaufman also said the Treasury should concede Hamp was a failure.

In the report released Tuesday, the oversight panel said that Hamp will ultimately prevent only 700,000 to 800,000 foreclosures, instead of the 3 million to 4 million that the Treasury originally estimated.

The Treasury continues to defend Hamp. "This program, in less than two years, has already provided critical support to struggling homeowners," a Treasury spokesman said. "Hamp will continue to help many more avoid foreclosure. The success of the administration's efforts must also be measured in how it transformed the mortgage servicer industry. Prior to Hamp, there were few, if any, modifications taking place. Hamp was a game-changer."