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Fed's Proposal Targets Servicers Too
By Ted Cornwell
The Fed's recent action to rein in risky lending is targeted primarily at loan originators, but the Fed's sudden interest in closer regulation of the mortgage business delves into the servicing arena as well.
The Fed's proposed changes to its Regulation Z, which reflects the Truth in Lending Act and the Home Ownership Equity Protection Act, is designed to enhance consumer protections against unfair or deceptive home mortgage lending and advertising. But the Fed seems to have taken umbrage at some purported loan servicing abuses as well.
For instance, the Fed proposes to require that servicers credit payment to a consumer's mortgage account as of the date the payment is received. It also would punish servicers for failing to provide a payoff statement "within a reasonable period of time after the request." The Fed also would prohibit the practice of "pyramiding" late fees.
In a staff summary of the proposed rule changes, the Fed noted that "concerns have been raised about abusive practices by servicers, including practices that may allow servicers to obtain unwarranted fees from borrowers."
Servicers would also be required to provide consumers with a "schedule of fees" upon request.
The inclusion of loan servicing practices in the proposed rule apparently stems from advocacy by consumer groups. The Fed did not solicit comment on loan servicing in connection with hearings last year and earlier this year that led to the proposed regulatory changes.
Some of the Fed's proposals on the origination side may prove beneficial over the long run by increasing the credit quality of "high cost" home loans made to borrowers with weak credit histories.
For instance, the Fed proposes that first-lien, high-cost home loans have a mandatory escrow account for insurance and taxes, which should help limit tax and insurance advances that have to be made by servicers. Clear minimum underwriting standards also could reduce uncertainty over credit quality and help bring capital flows back into the mortgage market.
In a statement about the proposed regulatory overhaul, Federal Reserve Board chairman Ben Bernanke said the Fed's goal is to "promote responsible mortgage lending."
He said that the rapid pace of financial innovation that fueled the boom in mortgage lending in recent years came with a price: a breakdown in market discipline affecting some parts of the market.
And Fed governor Randall Kroszner, who oversaw the mortgage reform effort, said the Fed strove to balance the need to rein in "unfair or deceptive" lending practices while not constraining lending or limiting consumer choice. And he made it clear that blame for the collapse of subprime lending credit quality does not lie with one particular cause.
"Our analysis of the data suggests that troubles in the mortgage market generally arise not from a single practice in isolation but instead from the complex ways that risk factors and underwriting practices can affect each other," Mr. Kroszner said.
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