4 Things We Learned About Why Mortgage Servicers Continue To Stink

More than two years ago, the Consumer Financial Protection Bureau enacted rules about the ways mortgage servicers could operate and interact with borrowers, but a new report finds that many of these servicing companies continue to go about (bad) business as usual, using failed technology that has already harmed American homeowners.

The CFPB’s special edition supervision report [PDF], released on Wednesday, focuses specifically on mortgage servicers, finding that these companies are in violation of regulations [PDF] for the use of outdated and deficient technology creating process breakdowns.

Mortgage servicers play a critical role in the housing industry. When a consumer purchases a home, they don’t simply make monthly payments to the loan issuing bank — or the company that takes over ownership of the debt.

Instead a mortgage servicer handles most — if not all — of the consumer-facing duties: collecting payments from the mortgage borrower, forwarding those payments to the owner of the loan, and providing customer service such as collections, loan modifications, and foreclosures.

While these duties appear to be straightforward, regulators have found rampant problems within the industry, including problems with bad practices and sloppy recordkeeping.

These issues were exacerbated during the housing crisis when millions of borrowers fell behind on their loans, and servicers were unable to provide the level of service necessary to meet homeowners’ needs.

Despite creating rules aimed at cleaning up these issues, the CFPB found problems are still abound in the industry. Here are four things we learned from the new report.

1.) Not enough investment in compliance — While the mortgage servicing industry has taken some steps to be in compliance with CFPB servicing rules, they simply aren’t enough.

CFPB examiners found that outdated and deficient technology poses risks to consumers across a number of mortgage servicers. Several companies were also found to lack proper training, testing, and auditing of these computer systems and software.

2.) Late, incorrect information — These insufficient technology and training processes have resulted in servicers providing customers with late, incorrect, or deceptive information on their loans and modification options.

The CFPB found one or more servicers failed to send any acknowledgement notices due to a repeated processing platform malfunction over a significant period of time. These breakdowns caused delays in converting trial modifications to permanent modifications, resulting in harm to borrowers, according to the CFPB.

Examiners found that some servicers also sent statements that deceived consumers into thinking their homes were safe from foreclosure before a certain time, but then foreclosed on the home before that deadline.

3.) Lack of protections during sales — While mortgages are frequently bought and sold among servicers, doing so during a loan modification process can be especially risky to borrowers — paperwork can be lost, the modification process delayed, or otherwise adversely affected.

Still, the CFPB found that a number of servicers had incompatible technology to ensure that their newly acquired mortgages that already had modification agreements in place carried over.

4.) Incomplete loan modification denial notices — Under the CFPB’s rules, servicers are required to provide modification denial notices with a specific reason for denying the application.

One or more servicers’ notices also stated “Not Available*” as the reason for denying loss mitigation applications. The asterisk elaborated: “Not Available means this program was not considered due to an eligibility requirement or requirements not met.”

Additionally, these notices are required to provide the borrower with information on their right to appeal the decision. However, the CFPB found many servicers also failed to do this.

As a result of the report’s findings, the CFPB announced on Wednesday that it would update its Supervision and Examination Manual to provide additional guidance to financial institutions and mortgage companies.