With 10M at Risk of Default, CFPB’s Primary Focus Is Mortgages

As many as 10 million homeowners are at risk of default, according to Richard Cordray, director of the ""Consumer Financial Protection Bureau"":http://www.consumerfinance.gov (CFPB).

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In ""an op-ed piece"":http://www.politico.com/news/stories/0212/72769.html for _Politico_, Cordray recounts the type of behavior and practices that put so many Americans in danger of losing their homes.

It's what he describes as ""the wild West of lending"" during the years leading up to the mortgage meltdown â€" a time when consumers were steered into high-priced mortgages, first-time buyers opted for balloon loans without understanding the risks, and lenders with little regard for a borrower's ability to repay were ascending the ranks in terms of market share.

""Few people realized how dangerous or widespread the problem was. Neither did we, though we could plainly see that something was very wrong,"" Cordray admitted, referring to his time as a state and local treasurer in Ohio.

According to Cordray, the ""tragic error"" underlying the housing crisis was the fact that no single federal government agency was looking at the market from the perspective of the consumer. Enter the CFPB.

While the CFPB is charged with overseeing all consumer-facing financial products and services - including credit cards, checking accounts, and payday loans - Cordray says the agency's greatest focus is on the mortgage market, and servicing in particular.

The mortgage market ""was, after all, the house of cards that crashed our economy and caused so much pain for millions of Americans,"" Cordray wrote, noting that in addition to the 10 million homeowners at risk of default, there are currently 4 million who are already behind on their payments by more than 90 days and nearly a quarter of all mortgage borrowers who owe more than their home is now worth.

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""There is much that needs to be fixed in this broken market - from the moment a prospective homeowner starts shopping for a loan all the way until the loan is finally terminated, which for too many people these days comes about through foreclosure,"" Cordray said.

He pointed out that independent, nonbank institutions which tend to specialize in the servicing of subprime or delinquent loans are now subject to the CFPB's watchful eye, whereas before they had little or no oversight.

""[F]or the first time, the federal government will have the authority to look into the entire mortgage servicing market,"" Cordray said. ""This is a critical improvement: We will be able to monitor all players to make sure they abide by federal consumer financial laws.""

The CFPB plans to issue a rule requiring all mortgage servicers to provide consumers with better information in their billing statements, he explained.

This week, the agency is releasing a prototype of what such a statement would look like on ""its website"":http://www.consumerfinance.gov. Cordray is seeking input from the public and mortgage industry professionals on the statement prototype.

In the future, the CFPB will also issue new consumer protections around ""force-placed insurance"" - the hazard insurance that mortgage servicers secure at the borrower's expense when they believe a borrower's previous hazard insurance has lapsed.

The agency plans to draft the rule in a way that prevents servicers from charging for force-placed insurance unless there is a reasonable basis to believe the borrower has failed to maintain their own insurance. The rule will require servicers to provide consumers an opportunity to obtain their own insurance, which Cordray says is generally less expensive than force-placed insurance.

The CFPB will also issue new disclosures for hybrid adjustable-rate mortgages (ARMs), which Cordray describes as “complicated loans” that usually start with a teaser interest rate before resetting to a much higher rate.

He explained that consumers will be notified months ahead of their first interest rate adjustment and will receive a good-faith estimate of their new monthly payment, along with a list of alternatives they may pursue to head off the higher rate, such as refinancing or renegotiating the loan terms.

“The CFPB is implementing rules and helping to articulate standards so we never again end up in the mess we still see around us today,” Cordray said.