Borrowers Facing Foreclosure Should be Dancing in the Streets Over ‘X’ and ‘Z’ and Here’s Why



Four years ago this January, I was invited to speak at the American Bar Association’s (“ABA”) Conference on Consumer Financial Services, which was being held that year in Park City, Utah.  In attendance, I was told, would be several hundred attorneys representing essentially all of the banks, lenders and servicers we’ve all come to know and love.  (I wrote about it at the time, and the link just above will take you to my article from January 23, 2010.)

When I got the call from the individual recruiting and coordinating speakers for the conference, and he said that I was being invited to be one of them, to be honest, I thought it was some sort of gag.

“Okay, very funny… who put you up to this?” I said after hearing why he was calling.

But he assured me that it was not a gag, they really wanted me to come and speak about the foreclosure crisis from the homeowners’ perspective.  I would be part of a panel of experts that would include Tom Pahl, an attorney, who at the time was a director of enforcement at the FTC.

Tom would be talking about the prevalence of “scammers” that were offering to help borrowers at risk of foreclosure get their loans modified, and the FTC’s response.  This was the beginning of what would become the MARS (”Mortgage Assistance Relief Services”) Final Rule that would take effect about a year later.

“Do you know who I am?”  I asked the caller from the ABA.  “I mean, have you read my blog?”

He assured me that he was quite familiar with my blog.

I inquired, “And you think bank attorneys want to hear what I have to say?”

“We think they can handle hearing opposing views,” he replied.

I laughed… I mean, I really laughed.  “Well, this should be interesting, I’ll give you that.  At least it won’t be boring.  Are you sure that I’m not being invited so that my body can be buried in the snow and not found until the Spring thaw?”

He laughed, but not quite as convincingly as I would have liked.


I spoke for an hour the first morning of the conference.  I made fun of the servicers like Bank of America for not being able to answer the phone (In understand, all those buttons can be so confusing), of Wells Fargo (I wondered where all the lost paperwork was being stored) and of Chase for apparently not being able to hire enough people when unemployment was running right around 12 percent.

I also talked about the difficulties homeowners were having contacting their banks directly or getting assistance from HUD counselors… and I assured the audience that not everyone offering to help homeowners were scammers.

Then I got very serious about the treatment of borrowers facing foreclosure.  I told the large banquet hall full of lawyers working for banks and servicers that although they probably all felt confident that in the battle between banks and delinquent homeowners, the banks would prevail… they were, in reality, experiencing a false sense of security.

I said that it was predictable that the banks would take the early lead, but that if everything remained on the current path… if servicers continued treating borrowers the way they were treating them… soon the pendulum would snap back the other direction and knock them out of their comfortable desk chairs.

With my last words, I explained how the story would most assuredly end, because it was a story that history had told many times before… I said that in the end, they’d either storm the Bastille, dump tea in the harbor, or shoot the Romanovs and we’d all wonder what happened to Anastasia.

Whatever the specifics, I promised my audience that the story of homeowners being mistreated in the foreclosure and loan modification processes, would not end well for them or anyone else, for that matter.  I said that everyone involved would have to do better going forward, and thanked them for listening… and they all applauded, with many even giving me a standing ovation.

That was in January of 2010.  During the years that followed, it seemed that none in the audience had taken me seriously enough, because little changed for borrowers at risk of foreclosure.

Fast forward to 2012 and the National Mortgage Settlement being announced by President Obama as he stood in front of a couple dozen from his administration who he was crediting with the settlement’s success.  The media touted the size of the settlement, comparing it with the largest settlements in history, but most everyone covering the foreclosure crisis criticized it for not having gone nearly far enough.


In part, I agreed.  Sending out checks for up to $2,000 to those who had been foreclosed on improperly was more an insult than any sort of compensation for wrongdoing.  But my article, written the day the settlement was announced, focused on the new servicer standards that were included as part of the settlement’s terms.  I said that there wasn’t enough money in the world to compensate homeowners for what they’d been through, but if the new rules that servicers were agreeing to follow were enforced, then the settlement would ultimately be great news for homeowners.

I can’t think of anyone that agreed with me at the time, but that was nothing new, so I just went about my business of writing about what I believed mattered at the time.

Another year passed with little changing for the better, and then came the California Homeowner Bill of Rights.  The legislation was made up of several bills that essentially transformed the new servicing standards from the National Mortgage Settlement into state law, complete with a private right of action and some statutory fines that allowed borrowers to turn to the courts for a remedy when the laws were broken.

It was clear to me that the winds had shifted and the pendulum was about to swing, and I wrote about precisely that shift at the time, saying that servicers had better heed the call and change, although it was probably already too late to change what would come.

Within days, the media was reporting that there were 26 states considering adopting similar legislation, and I pictured hundreds of banking industry lobbyists packing their garment bags and heading for airports from coast to coast as they would attempt to scare as many state legislators as possible out of voting for anything similar.

And while these lobbyists were telling scary bedtime stories to elected officials at the state level… stories of how such legislation would signal the end of lending in their states or at least dramatically increase the costs of loans to all borrowers, the public relations firms leapt into action too, and “news” of our soon-to-be-recovering housing markets started making headlines everywhere one looked.

For the record, I will admit that this particular development was not one I was expecting.  In retrospect, I guess I just didn’t realize how many people were willing appear on television and lie.

In any case, the best the banking lobbyists could ever have hoped for was to delay the inevitable, because their eventual fate had been set in motion during the go-go years of the housing market, and set in stone during 2009 and 2010, when the abuse of borrowers in the loan modification process became de rigueur among servicers.  This country at times may appear to be entirely under the control of corporate interests, but those interests, being unable to do anything but go too far, eventually run smack into millions of voters, and that’s where the proverbial rubber meets the cold harsh reality of the unforgiving road.




So, here we are, about to celebrate New Years, 2014, and the Consumer Financial Protection Bureau (“CFPB”), has been hard at work amending the Truth in Lending Act (“TILA”), and parts of RESPA as well (“Real Estate Settlement and Procedures Act).

Specifically, we’re talking implementing the provisions of the Dodd-Frank Act as related to mortgage loan servicing through the amendment of TILA’s Regulation Z, and RESPA’s Regulation X… both have seen significant, and one might even say, earth-shattering and Draconian changes made that will take effect in January of 2014.  And even the most cynical will soon have to admit that these changes represent a huge win for borrowers at risk of foreclosure, and a devastating development for bankers and servicers.  There’s simply no two ways about that.

Roughly half of the changes apply to TILA and the other half to RESPA, and fundamentally the new rules, just as was done by the California Homeowner Bill of Rights, codify the servicing standards from the National Mortgage Settlement, but they also go much further, impacting essentially every aspect of the mortgage industry, from origination to foreclosure.

As an overview, they include such obviously homeowner-friendly provisions as…

1. A statute of limitations that runs for the entire life of the loan, as far as those in foreclosure are concerned.  For others, the old one-year statute has been replaced by a three year.

2. Private rights of action, so that homeowners can now turn to the courts to seek remedies when servicers violate the new rules.

3. Provisions for borrowers to receive attorneys fees and get injunctions stopping foreclosure… oh, and borrowers can also receive up to three years interest should their lawsuits prevail.

What’s most shocking about the new rules is how little whining we’ve heard from the mortgage industry about them during the months leading up to the changes taking place.  I can only attribute this otherwise inexplicable and conspicuous silence to one of two things:

  1. Denial.  Actually, mass denial.
  2. Few have read about it… until now.

Maybe it was the irrational and utterly false hope that last minute lobbying would somehow bring a meaningful positive change in their favor, which created some sort of mass denial to spread throughout the industry.  Or, more likely, they simply didn’t have the time or inclination to read the new rules thoroughly, if at all.  And I suppose it’s also possible that they knew but wanted to keep it quiet as long as possible… it could happen, I suppose.

Whatever the reason behind servicer silence pertaining to the new TILA and RESPA rules, the fact remains that they’re going to wake up New Years Day knowing that a very bad year is very likely ahead.  Obviously, to cover all of the new rules in their entirety would mean too many pages in one article… even for one of my articles… so here are some highlights…

  • Loan Originator Compensation – Gone are the days of brokers being compensated with Yield Spread Premiums, or in other words, no more compensation for selling a loan at a higher interest rate than the rate for which the borrower qualified.


  • Ability To Repay & Qualified Mortgages (QM) – Part of it could be called the THREE PERCENT SOLUTION because it puts a cap of three percent on compensation including all lender and broker fees… and pre-payment penalties.  There’s also a maximum back-end Debt-to-Income ratio of 43 percent, and loans can only have 30-year terms and be fully amortizing.  Fannie and Freddie have their own rules, but they’re very close to the new QM rules.


  • Bottom-line… it’s going to be QMs or nothing, because Qualified Mortgages provide a safe harbor because it is assumed that the borrower has the ability to repay.  But a borrower can challenge QM status of their loan for the life of the loan, and may be able to get an injunction against foreclosure and receive three years interest.  To lenders it means life of loan liability.


  • High Cost Mortgages and Counseling – There are new rules under HOEPA for “High Cost Loans.”  The thresholds have been reduced and the types of loans covered now include purchase money loans.


  • Mortgage Servicing – Basically the new servicing standards from the National Mortgage Settlement are now federal law. So, there has to be a Single Point of Contact, no dual tracking and plenty of timeline requirements for various notifications.


  • The new rules require servicers to attempt contact with borrowers each time they miss a payment to provide important information that can help get them get back on track. Servicers now have to have live contact with delinquent borrowers and letters that explain foreclosure prevention alternatives.  (But there’s still no requirement that investors must offer foreclosure alternatives.)


  • Specifically, servicers must communicate with the borrower with regard to requests for loss mitigation, information requests, error resolution, force-placed insurance, initial interest rate adjustment of adjustable-rate mortgages, and periodic statements.


  •  Under RESPA, QWRs have been replaced with “Error Resolution,” and “Information Requests.”  Now divided into two different sections, borrowers will have to become familiar with what goes into which.


  • Private Rights of Action – On certain violations of amended Truth in Lending Act (“TILA”), borrowers can now sue, and receive legal fees and up to three years of interest.  And the statute of limitations that was one year… is now three.


  • But, for the entire life of the loan, although you can’t bring an affirmative lawsuit after the three years statute of limitations, borrowers can potentially get an injunction against the foreclosure by alleging that their loan was not a Qualified Mortgage, and may be able to receive the three years interest, which can be used to offset their indebtedness.  And again, that’s for the life of the loan.


  • Forced Placed Insurance – A whole section restricts how forced placed insurance can be imposed.  Borrowers must be notified and have the opportunity to prove they have their own coverage before forced placed insurance may be used.


  • Prompt crediting of payments and periodic statements that must be in a format that’s easy for consumers to understand and must be used in advance of interest rate adjustments.


Life of Loan Liability for Lenders…

Overall, the new rules mean that lenders and servicers will now face tremendous potential liability for the life of the loans they originate and service… and this will undoubtedly mean that lenders will be hyper-cautious about originating loans in the first place.

A few years ago, when the CFPB was only a gleam in Elizabeth Warren’s eye, I didn’t really understand why the banking lobby was fighting tooth and nail over the agency’s very existence.  Now I totally get it.

I’ll say it again… under the new rules, which are going into effect in a few weeks, at any time during the life of the loan, a borrower facing foreclosure, could now challenge the QM status of their loan. The borrower could claim that things were not done correctly and that they didn’t have the ability to repay the loan.  He or she could be granted an injunction against the foreclosure, and could receive up to three years interest, which could be offset against his or her indebtedness.

Now, how careful will lenders be about making loans once the new rules take effect?  How about uber-careful?  Mega-careful?  How about careful like an air traffic controller who is landing planes at O’Hare Airport during a blizzard on the day before Thanksgiving?  Yeah, that sounds about right.

So, there you have it… a solid check mark in the “WIN” column for consumers over the interests of the banking industry.  And I don’t think Realtors, mortgage brokers, or even the banks themselves have come to fully understand and appreciate what’s ahead for each of their respective industries.

For homeowners it means significantly greater protections against predatory lending, many of which have been a long time coming.  But, let’s be honest here… it also means fewer qualified buyers than ever before… on top of the precious few qualified buyers in the housing market even before the new rules arrived on the scene.

It also means that getting a mortgage will be really difficult from this point forward.  Demand will be down and prices will fall in 2014 like they did during the second half of 2010.  Our economy is not in any sort of shape to withstand the shock that’s ahead.  And this time, our new female Fed Chair can’t just start quantitative easing to get rates down.

This time, it’s not just going to be different… this time, it’s going to be a difference we’ll all feel.


Mandelman out.



Want more information on the CFPB’s new TILA and RESPA and even HOEPA rules?

Questions? About interpretation or application:
(202) 435-7700


And here are the links to the information that MATTERS…


New Mortgage Rules at a Glance


Regulatory Implementation of the New Mortgage Rules


A Single Playlist of all the Videos Explaining the New Rules


And here are links to the CFPB’s Quick Reference Charts…

»What is a Qualified Mortgage? – a basic guide for lenders.
»Small creditor qualified mortgages flowchart.
»Transaction coverage and exemptions for the 2013 mortgage origination rules.
»Comparison of the general Ability-to-Repay requirements with the requirements for originating Qualified Mortgage loans.
»Coverage of the Bureau’s 2013 mortgage servicing rules for loans and servicers.


Here’s Richard Cordray, Director of the CFPB, explaining the new rules…


And here’s the video on the Qualified Mortgage Final Rule…

And here’s the video on Mortgage Servicing Final Rule, Reg X and Z…

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