Superintendent Richard H. Neiman, Opening Keynote at 5th Annual Mortgage Servicing Conference
April 5, 2011
Good afternoon. I appreciate this opportunity to make opening remarks today at the outset of this Annual Mortgage Servicing Conference.
It’s no secret that over the past few years many of us in government have been outspoken about servicer unresponsiveness to the reality of today’s housing market. Dramatic systemic change is needed. The importance of this conference taking place at this time cannot be understated.
For over a decade, state governments have really been the leaders on reforms to the mortgage industry. For instance, New York and some other progressive states as early as 2000 took significant actions to combat predatory lending and foreclosure abuses. New York’s new Governor Andrew Cuomo helped to lead the enforcement effort as Attorney General.
In addition, in 2008, banking departments from across the nation, including New York, came together to form the Multi-state Mortgage Committee (MMC) to coordinate supervision of large state-supervised mortgage companies and servicers. Several examinations are taking place at this moment.
Since then, states across the country have become engaged in a wide range of servicing issues. Just last week in Washington, settlement negotiations took place between five national mortgage servicers and the 50 state attorneys general and dozens of state banking departments who are conducting a joint investigation into faulty foreclosure practices. New York is one of three banking departments on the Executive Committee of that nationwide effort that has been making progress toward resolution.
In these capacities, as a bank regulator, as a member of the Executive Committee, and also as a member of the Congressional Oversight Panel for TARP, I have had the chance and unique perspective to see how far we still need to go to improve mortgage servicing practices. Today, and throughout this conference, let’s engage in an honest conversation about what reforms are still needed for a modern and responsive mortgage servicing industry.
To start, the problems that we face today are not new. It’s been several years since we first began to see homeowners struggle under the weight of subprime mortgages that they could not afford. Mortgage lenders had pushed these mortgages in large part to meet increased institutional demand for higher-yielding subprime mortgage securities. All too quickly, traditional underwriting standards were traded for the aggressive marketing of risky, alternative mortgage products such as interest-only ARMs. These products, which were originally designed for wealthy, more sophisticated borrowers, were now being pressed on borrowers with impaired and insufficient credit.
This spree of undisciplined lending led to a dramatic increase in foreclosures across the nation. States like Florida, Arizona and Nevada suddenly found themselves overwhelmed by a flood of troubled mortgages and foreclosure filings. In New York, the impact was more disproportionate. Predominately minority areas in part of Queens and Brooklyn, which had been targeted by mortgage lenders, were severely affected.
New York Reforms
Though New York State did not see the same level of foreclosures as other states, there were still serious concerns about the levels of foreclosure that we were seeing. We believed that it was important to move quickly to address the growing crisis.
At first, the reforms being considered focused primarily on underwriting issues, product terms, and the layering of risks, which appeared to be at the heart of subprime crisis. While it was important to ensure that we made a return to more traditional underwriting standards, it quickly became clear that would not be enough. To have successful reform, it would also be absolutely necessary to address the servicing of troubled loans and loans at risk of foreclosure.
In 2008, New York State passed its first legislative reforms, which focused on both the servicing and lending of subprime and high-cost mortgages. The law recognized the high costs of foreclosures both to the borrower and investor, as well as the toll it took on neighborhoods and communities. Through measures such as pre-foreclosure notices to borrowers and the scheduling of mandatory settlement conferences before a judge, the law provided servicers and borrowers additional opportunities to agree on a loan modification or other type of workout.
To help ensure that mortgage servicers were following these new regulations, the law also required that non-depository mortgage loan servicers, including bank subsidiaries, be licensed with the Banking Department. We are one of a handful states that require licensing of mortgage services that do business in our state. Since then 64 such mortgage servicers have applied for registration as required by the law. In addition, over 250 servicers that conduct their activity within a bank, national or state, have filed notices of exemption. Such banks, while exempt from licensing, are still subject to our state’s financial condition and business conduct rules. I would encourage any servicer who does business in New York State, and has yet to file an application of registration or notice of exemption, to review their status.
As we all now know, the crisis did not remain limited to subprime mortgages. What had started out as a crisis for a particular class of high-cost or subprime loans quickly spread to include more traditional mortgage products. Responsible families that had previously been able to afford their monthly housing payments were struggling under job losses brought on by the economic downturn.
As a result, in 2009, we enhanced the 2008 reform law to address the changes that we were seeing. The protections that were originally established for just subprime and high-cost loans were now expanded to cover the broad range of mortgage loans. Distressed borrowers with traditional mortgages were also now entitled to be notified of their options in a pre-foreclosure notice, and to have another workout opportunity during a judicial mandatory settlement conference. I am particularly pleased with the early results of these mandatory settlement conferences. Prior to the law requiring settlement conferences in foreclosures, there was a 90% default rate – meaning 90% of actions went to foreclosure because the homeowner failed to appear. Since the law has been in effect, the default rate has come down to 20% according to a report issued last November by New York’s Office of Court Administration.
Despite these reforms and initial successes, too many preventable foreclosures were still going forward. Although loan modifications were often in the best interest of both the investor and the borrower, they were rapidly outpaced by the number of foreclosures that was going through. The simple truth: servicers’ operations were not designed to properly handle a large volume of troubled loans and servicers were not making needed changes. They lacked the staffing, training and technology needed to analyze delinquent loans and determine which could be saved through a sustainable modification.
Despite repeated calls from state and federal regulators for servicers to ramp-up their resources and efforts in these areas, the changes were too slow and too few for many. Hundreds of thousands of borrowers went into foreclosure after months and months of miscommunications with their servicers and missing documents.
Mortgage Servicer Business Conduct Rules
To combat the confusion and operational issues that were preventing these loan modifications, the Banking Department established the most comprehensive set of business conduct rules for mortgage servicers in the nation under the authority granted by our 2008 mortgage reform law. As of October 2010, our new rules went into effect giving mortgage servicers clear standards and guidelines for the servicing of mortgages in New York.
These rules cover many of the day-to-day aspects of mortgage loan servicing, such as how payments should be credited, what fees are permissible and the servicer’s obligation for providing payoff statements and payment histories. The heart of the rules, though, addresses the servicer’s responsibilities with respect to loss mitigation. The rules are an attempt to address widespread complaints about servicer unresponsiveness, lost documents and failures to engage in appropriate loan modifications for borrowers who have the desire to stay in their homes and ability to make reduced monthly payments.
The new regulations are applicable to all servicers handling New York-based mortgages. Let me highlight six key provisions:
- The rules establish a general “duty of fair dealing.” Servicers must act in good faith with borrowers on loan transactions and provide them with clear, accurate communications on their accounts;
- Servicers must pursue appropriate loss mitigation efforts with homeowners, such as loan modifications or short sales to avoid preventable foreclosures, and to make these decisions within specified timeframes;
- Servicers must have adequate staffing, written procedures for handling consumer inquiries and complaints, and methods for making sure that homeowners are not required to submit multiple copies of required documents;
- Servicers are also expected to avoid a foreclosure action if a homeowner is being considered for, or currently in, a trial or permanent modification;
- Approvals must provide “clear and understandable written information explaining the material terms, costs and risks of the option offered”; and,
- Denials must state with “specificity” the reasons for the denial, contact information for a person who can reconsider the denial and any other foreclosure prevention alternatives.
Now from the moment a mortgage is signed in New York State to the time it comes to its end, a loan must now be handled at every step of the process by individuals and companies that are accountable to the Banking Department and homeowners.
Need for National Servicing Standards
Fast-forward a few months to today. We are still facing a whole host of issues that need resolution. There are questions about how to best address and settle cases of foreclosure documentation irregularities, how to ensure the sustainability of proprietary loan modifications, and how to responsibly conduct foreclosures in the those unavoidable cases. It’s clear that there is still much more to be done. These crises are highlighting an urgent need for a nationwide system of rules for mortgage servicing standards – a new set of standards for operating in a modern mortgage market with all its complexities.
States like New York, Maryland and North Carolina have already led the way on this issue by addressing consumer protection issues in mortgage servicing; the time has now come to address this on a nationwide level. While I believe the content of our state servicing regulations can form a strong template for such rules, there are other challenges that we must consider.
First and foremost, regulators across jurisdictions must be on the same page in developing and enforcing national standards for mortgage servicers. My message today is the same as it has always been. We need to ensure that we have a renewed level of coordination and cooperation at all levels – between states, state and federal financial supervisors, and between federal agencies. This type of Cooperative Federalism makes the highest use of the resources and expertise available, while minimizing any potential gaps in regulation.
We have already seen examples of this coordination at the state level, with state attorneys general and banking regulators working together to investigate and sort out foreclosure irregularities and other mortgage servicing issues. By working with the attorneys general, the Multi-State Mortgage Committee of banking regulators has been able to identify clear trends from servicer to servicer, and state to state. We have found many instances of incomplete files, inadequate recordkeeping, and inaccurate loan data to suggest that the anecdotes we hear are not isolated incidents but are symptomatic of larger operational issues.
As a result, it is even clearer to me that we need national mortgage servicing standards. As effective as the work of the states has been, it is better for consumers and for the industry that we adopt a comprehensive approach in this area. I applaud the federal regulators for addressing servicing standards within their Qualified Residential Mortgage rules proposed last week, but again only an interagency comprehensive approach can effectively tackle the breadth of the problem. My preference would be that the CFPB take an early lead here and perhaps look to New York’s rules as a model. By cooperating on developing such national standards, we can ensure that there are no gap, no opportunities for regulatory arbitrage and a level playing field for the industry.
A consistent concern expressed by all stakeholders is that complete information on existing mortgage loans is simply not currently available. As a member of the Congressional Oversight Panel, I can attest that this frustration was stressed repeatedly. Unfortunately we have seen little new information as result. Once a new mortgage has been reported to HMDA, it drops off the data radar screen.
The other sources of data currently available each have serious drawbacks. The HOPE Now data is based on a survey. The OCC/OTS mortgage metrics report is missing data for a third of the market as is aggregated at a high level due to its confidential supervisory material. While our New York servicing rules require reporting by servicers, any broad impact is limited due to federal restrictions on state visitorial powers.
What this unfinished business shows at least is that diverse public and private interests have all recognized the need for complete performance data. There is a real consensus forming, and the next step is to move from these provisional approaches into a formal and consistent data reporting requirement. Performance data should be required to be reported at the federal level and in a standardized format as part of any comprehensive set of national minimum standards for servicers. We need a national mortgage performance reporting requirement for loan servicing, just as HMDA requires reporting on loan originations, with a unique identifier to track mortgages throughout the life of the loan.
Servicers’ Role in Setting Best Practices
While I’m glad that regulators at both the state and federal levels have taken steps toward national servicing standards, I would strongly encourage industry members not to wait for these rules to make the changes that we need today. You are on the day-to-day frontlines of these issues and make positive changes necessary for bringing the needs of borrowers, investors and your companies into balance.
It’s important to make operational and process changes to ensure that your companies are in compliance with existing rules, such as the ones that we have in New York State. Along with addressing those existing standards, it’s critical that servicers look to addressing those standards yet to be formed. Just last week, for example, federal regulators issued proposed rules incorporating servicing standards as a requirement for designation as a Qualified Residential Mortgage. Clearly, there will be responses from all sides to the proposal’s request for comments. I encourage you to review the proposed rule starting on page 133, not only to provide feedback, but also to reassess servicer conduct relating to some of the basic principles outlined there, such as a modifying loans that are NPV positive and servicing duties that travel with the loan through securitization.
The writing is on the wall for other changes at the federal level. The blue print is clear:
- Servicers will have to update processes and employee training, to end logjams in loss mitigation efforts;
- Servicers have to take greater responsibility in the foreclosure process – blindly rubberstamping hundreds of foreclosures cannot be the norm;
- Servicers have to take a critical look at the fees they impose on borrowers and whether those fees are fair and justified;
- Servicers have to look at their compensation structures with the understanding that more expertise and training of staff is necessary for the proper conduct of business. The FHFA has taken a lead in this area and I would hope servicers take initiative and offer feedback.
- Finally, servicers should heighten their consideration of creative incentive-based ways to keep at risk homeowners in their homes, including possible reward programs for continuing to make monthly payments when underwater.
I mentioned that in New York we have taken similar action. Therefore, I encourage servicers not to wait for final federal regulations, legislative action by states or Congress, or proactive enforcement. Rather, I encourage servicers to address these issues today. Waiting not only disservices homeowners and investors, but it also may result in actions that cost the industry more.
In short, the future of the mortgage servicing industry depends on regulators and the industry working together to create a strong new regulatory foundation – one which addresses and balances the needs of borrowers, investors, industry members and regulators.
The mortgage servicing industry has been largely unregulated in the past, and the current foreclosure has shown the importance of high standards in this area. I encourage everyone here to work to modern the mortgage servicing industry. By addressing the issues we face, you can help lead the industry away from its current reputation, toward a reputation of excellence and consumer protection. And by working together to set these best practices, we can restore the confidence of the public and investors.
Thank you again for the opportunity to speak with you today.