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Wednesday, September 12, 2012

National Mortgage Servicing Standards: Legislation in the 112th Congress

Sean M. Hoskins
Analyst in Financial Economics

The United States single-family housing market has $10.5 trillion of mortgage debt outstanding. Servicers play an important role in this market. The owner of a mortgage loan or mortgagebacked security typically hires a servicer to act on its behalf. When loans are current, a mortgage servicer collects payments from borrowers and forwards them to the mortgage holders. If the borrower becomes delinquent, a servicer may offer the borrower an option that could allow the borrower to stay in his or her home, or the servicer may pursue foreclosure.

Following high foreclosure rates and recent allegations of abuse, mortgage servicing has attracted attention from Congress. In addition to hearings and congressional investigations, some in Congress have called for national servicing standards. The most comprehensive proposal, S. 824, the Foreclosure Fraud and Homeowner Abuse Prevention Act of 2011 (Senator Sherrod Brown et al.), and its companion bill in the House, H.R. 1783 (Representative Brad Miller et al.), contain provisions intended to protect investors and borrowers from improper servicing practices. S. 967, the Regulation of Mortgage Servicing Act of 2011 (Senator Jeff Merkley et al.), includes borrower protections in addition to those offered by S. 824 and H.R. 1783.

The servicing standards proposed in S. 824 and H.R. 1783 include provisions intended to ensure that servicers act in the best interest of investors who hold mortgage loans. The proposals would adjust the servicing compensation structure to better align servicer incentives with the incentives of the mortgage holder. Servicers would also be prohibited from purchasing services offered by their affiliates at inflated costs and passing the costs on to investors. In addition, servicers would be prohibited from choosing a loss mitigation option that would benefit their affiliates at the expense of other investors.

S. 824, H.R. 1783, and S. 967 have three major components for borrower protection. First, the three bills would require servicers to establish a single point of contact with the borrower. The single point of contact would be a case manager who is assigned to each delinquent borrower and would manage communications with the borrower. Second, the three bills would prohibit servicers from dual tracking, which means initiating foreclosure on a borrower while simultaneously pursuing a loan modification. Servicers would instead be required to determine whether the borrower is eligible for an alternative to foreclosure before initiating foreclosure. Third, S. 824 and H.R. 1783 would set minimum experience, education, and training levels for loan modification staff and limit caseload levels for individual employees.

Legislation is not the only avenue to setting servicing standards. On August 10, the Consumer Financial Protection Bureau (CFPB) issued proposed rules that would establish mortgage servicing standards that would apply to most mortgages. Servicing standards for some mortgages were also part of the national mortgage settlement and the enforcement actions taken by federal regulators in response to deficient servicing practices by some banks.

Date of Report: August 29, 2012
Number of Pages: 21
Order Number: R42041
Price: $29.95

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