CFPB Focuses on Mortgage Servicers’ Compliance with Consumer Financial Laws

On January 17, the Consumer Financial Protection Bureau (CFPB) issued a statement emphasizing its ongoing efforts to ensure that mortgage servicers comply with federal consumer financial regulations. The bureau’s action follows a review of the industry, which revealed troubling practices, particularly among certain servicers who have failed to send periodic statements to homeowners with loans that have accrued interest and fees. These loans are often part of a category known as “zombie second mortgages,” which homeowners mistakenly believed had been forgiven or resolved years ago.

The CFPB’s concern stems from the fact that many of these problematic loans are concentrated in the portfolios of a few mortgage servicers, and they largely involve loans that were last paid on in 2015 or earlier. These mortgages, despite no longer being actively paid, continue to generate issues for homeowners who have not received necessary communications from their servicers regarding the status of their loans.

The Rise of “Zombie Mortgages” and Consumer Complaints

The CFPB has introduced the term “zombie second mortgages” to describe the growing issue of loans that homeowners believed had been settled or discharged but still remain active in collections. As home prices have risen, some homeowners—who have paid down their primary mortgages—are now unexpectedly facing foreclosure notices and payment demands. These notices often come from companies asserting ownership of, or the right to collect on, these lingering second mortgages.

According to CFPB Supervision Director Lorelei Salas, the increase in home values has inadvertently led to this issue, as homeowners may be unaware that a second mortgage continues to exist despite previous attempts at paying off the debt. “As home prices have increased and homeowners have paid down their first mortgages, some are facing foreclosure notices and payment demands from companies claiming to own or otherwise having the right to collect on these second or so-called zombie mortgages,” Salas wrote in the post.

Moreover, the CFPB has noted that it continues to receive consumer complaints about these loans. Many homeowners report being subjected to collections and foreclosure actions despite years of not receiving any communication from servicers. This lack of communication has raised alarm, and the CFPB is focused on ensuring that these practices are rectified.

Ensuring Compliance with Federal Regulations

In response to these troubling practices, the CFPB is actively monitoring mortgage servicers to ensure their compliance with several key consumer protection laws, including the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). These regulations require mortgage servicers to provide regular periodic statements to homeowners, including notices about any changes in loan ownership or servicing. Servicers are obligated to continue providing these statements even if a loan has been charged off or is no longer active.

Additionally, mortgage servicers must make diligent efforts to establish live contact with homeowners who are behind on their payments. This is especially important in situations where loans have been in collections for a long time, as homeowners may not be aware of the ongoing debt and the potential for foreclosure. The CFPB is closely watching the industry to ensure that these rules are followed and that servicers are doing everything required to engage with delinquent homeowners in good faith.

Targeting Industry Malpractices: CFPB’s Broader Role

The CFPB has also been actively addressing other consumer protection issues in the mortgage industry, including illegal “junk fees.” In a report released in April, the bureau highlighted how some mortgage servicers were charging homeowners unauthorized fees for services such as property inspections and late payments. The report found that these fees often exceeded the amounts outlined in the homeowners’ loan agreements.

In addition to the issue of junk fees, the CFPB has raised concerns about servicers sending deceptive notices to homeowners and violating rules intended to help struggling borrowers keep their homes. The regulator has been vocal about its commitment to tackling these issues and ensuring that homeowners are treated fairly throughout the mortgage servicing process. Through its ongoing oversight, the CFPB aims to protect consumers and uphold the integrity of the mortgage servicing industry.

The CFPB’s increased vigilance in monitoring mortgage servicers is crucial in safeguarding homeowners against deceptive and illegal practices. As “zombie second mortgages” continue to affect homeowners who are unaware of their lingering debts, the bureau’s focus on ensuring compliance with federal regulations is more important than ever. With ongoing efforts to curb unlawful fees and improve communication between servicers and homeowners, the CFPB’s actions aim to create a more transparent and accountable mortgage servicing environment. The regulator’s continued scrutiny of the industry will be essential in addressing these longstanding issues and protecting consumers from unnecessary financial burdens.