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Fearing foreclosure crisis, U.S. watchdog cracks down on mortgage servicers

The U.S. consumer watchdog is scrutinizing mortgage servicers’ compliance with pandemic relief programs amid concerns struggling homeowners are not getting the help they need to avoid foreclosures, or are being discriminated against, said a dozen people with knowledge of the regulatory effort.

The Consumer Financial Protection Bureau (CFPB) crackdown by its policy, supervision and enforcement divisions could result in stiff penalties for those mortgage servicers found to have hurt borrowers, the regulatory officials, lawyers and industry executives said.

In recent weeks, the agency has sent data requests to mortgage servicers, usually a company or a bank that processes mortgage repayments. It is seeking data on how they are handling mortgage holiday or “forbearance” programs and whether the temporary debt relief is likely to get borrowers back on their feet, said three people with direct knowledge of the matter, some of whom asked to remain anonymous because aspects of the discussions are private.

The agency has also opened probes into a handful of mortgage servicers over their handling of forbearance requests, three other people with knowledge of the matter said.

“We are very concerned and we’re watching closely,” said one of the people. “Our supervision team is robustly asking for more data than ever from servicers.”

The effort underscores the tougher stance the new Democratic leadership of the consumer watchdog is taking towards the financial industry as it executes President Joe Biden’s priorities to help Americans recover from the pandemic, boost fair housing and address systemic racial injustice.

“Part of that work is using our supervisory authority to ensure mortgage servicers are treating borrowers fairly and meeting their responsibilities under federal law.”

‘VERY CONCERNED’

To help Americans weather pandemic lockdowns, Congress last year gave many struggling homeowners the right to pause mortgage repayments and imposed a moratorium on foreclosures. Both safeguards have since been extended several times and are due to expire later this year.

As of April 4, an estimated 2.3 million homeowners were in forbearance, according to the Mortgage Bankers Association.

Last year, as servicers battled a flood of forbearance requests, the CFPB cut firms slack, but it is now taking a much tougher stance as it aims to prevent a foreclosure crisis, the sources said.

“It already has started drilling down in its examinations and investigations of firms’ activities, and the pace will only increase,” said Quyen Truong, partner at law firm Stroock & Stroock & Lavan.

According to the six sources, the agency is examining a range of issues: how many and which borrowers are in forbearance; whether loan modifications will succeed in getting borrowers repaying; if servicers have been obstructing or delaying forbearance requests or granting only partial relief; and if some servicers have been discriminating against borrowers based on race or ethnicity, whether deliberately or inadvertently.

Home equity loan delinquencies rose 1.65 percentage points to 5.82% in the fourth quarter of 2020, the first rise since April 2020, the latest American Bankers Association data shows.

“We remain very concerned about a potential wave of borrowers seeking assistance after the emergency protections expire later this year, and we will use our regulatory, enforcement, and supervisory authorities to prevent avoidable foreclosures,” said the CFPB spokeswoman.

Pete Mills of the Mortgage Bankers Association pointed out that “record numbers” of Americans had so far exited forbearance without losing their homes and said he hoped the CFPB uses the data gathered from servicers “to guide, rather than penalize, the industry” on how to best help homeowners in forbearance.

STAVING OFF A FORECLOSURE CRISIS

The CFPB was created after the 2009 financial crisis to police the type of predatory lending that drove the sub-prime mortgage and subsequent foreclosure crisis, penalizing dozens of mortgage firms in its early years.

Former President Donald Trump’s administration weakened the agency’s enforcement and some protections, say consumer groups, but the pendulum has quickly swung back as the new leadership has moved to bolster fair lending protections.

This month the agency warned servicers to take “all necessary steps” to prevent a wave of foreclosures and rattled the mortgage industry by proposing to bar foreclosures until next year.

According to a January report, the CFPB found during 2020 examinations that some servicers gave customers “incomplete or inaccurate information” on their forbearance rights, delayed processing requests, or erroneously charge late payment fees.

The CFPB complaint website has hundreds of testimonies from borrowers detailing problems with, or issues resulting from, their forbearance plans.

One borrower, writing on the website last month after allegedly receiving misinformation on their plan, accused their provider of “very bad faith and trickery.”