The new U.S. consumer watchdog plans to issue rules this summer to crackdown on the practice of banks and other lenders forcing expensive homeowners insurance on borrowers.
State and federal regulators have recently been taking a closer look at the use of so-called "force-placed insurance" and whether borrowers are getting a raw deal.
The Consumer Financial Protection Bureau on Monday announced it plans to draft a rule that would boost disclosure requirements by requiring mortgage servicers to give advance notice and pricing information to borrowers before charging them for this insurance.
Mortgage servicers collect payments and handle issues like foreclosures.
Many homeowners are required to buy insurance as a condition of getting or keeping a mortgage. They often end up with "force-placed insurance," controversial policies that are purchased by the bank or mortgage servicer on the homeowners' behalf if the borrower has not already purchased it elsewhere.
The agency said in a release that the goal of the rule would be to give borrowers options and to "assure that servicers do not unnecessarily charge consumers for force-placed insurance."
In many cases, existing force-placed insurance policies are sold by insurance companies that are owned by the lenders, or by insurers with which the lenders have a financial relationship.
New York financial regulators have been investigating the practice, issuing subpoenas in January to roughly two dozen insurers and mortgage servicers. [ID: nL6E8CB07C}
Fannie Mae, the largest U.S. home funding source, issued a bulletin to lenders last month announcing it would change its lender insurance requirements to reduce costs to homeowners. [ID: nL2E8E77UU]
CFPB's insurance proposal will be part of a broader set of rules set to be released this summer that are intended to clean up the mortgage servicing business, which has come under withering criticism and government scrutiny for how it has treated troubled borrowers in recent years.
"For too long, mortgage servicers have not been held accountable to their customers, and the result has been profoundly punishing to homeowners in distress," CFPB Director Richard Cordray said in a statement. "It's time to put the 'service' back in mortgage servicing."
Among the other possible proposals outlined by the agency on Monday are requiring servicers to give more notice about interest rate changes and to make "good faith efforts" to contact delinquent borrowers about options they can pursue to avoid a foreclosure.
The agency expects its proposed rules to be released this summer and they should be finalized by January 2013.
The consumer bureau was created by the 2010 Dodd-Frank financial oversight law to police markets for products such as mortgages and credit cards. It opened its doors in July.
Mortgage servicing problems, including the use of "robo-signers" to sign hundreds of unread foreclosure documents a day, have already caught the attention of state and federal officials.
Five large U.S. banks entered into a $25 billion settlement in February with state attorneys general and the Justice Department over servicing and foreclosure abuses.
These banks are Bank of America Corp, Citigroup , JPMorgan Chase & Co, Wells Fargo & Co and Ally Financial Inc
Under the settlement, banks agreed to abandon the practice of robo-signing, maintain proper documentation and revamp their loan modification procedures.
In April of 2011, 14 mortgage servicers entered into a settlement with the Office of the Comptroller of the Currency, the Federal Reserve and the now defunct Office of Thrift Supervision on steps that have to be taken to correct and improve their servicing practices, such as providing borrowers with a single point of contact for questions.
