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Do new mortgage servicing rules go far enough?

(MoneyWatch) The Consumer Financial Protection Bureau faces another battle, this time over its new mortgage servicing rules: Do they go too far or not far enough?

The infant agency, created by the 2010 Dodd-Frank Act, has been under intense scrutiny since it first started rolling out policies a year ago. It announced its largest proposal of policy to date - new mortgage servicing regulations - and the rules have been put under a microscope.

Despite applause for a bulk of the proposals, there are sore spots on both sides, with consumer advocates concerned the rules don't go far enough to protect homeowners from shady foreclosure practices and bankers feeling rankled by the one-size-fits-all approach in a diverse industry.

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The new rules will require mortgage servicing companies to provide clear monthly billing statements, warn borrowers with adjustable mortgages before their interest rates rise and offer more options to help homeowners avoid foreclosure. Payments must be credited promptly, errors corrected quickly and records kept clean and accessible.

But some banking officials worry that these rules will adversely affect small, rural or midsize banks, leaving the big banks largely unaffected.

Officials with the Independent Community Bankers of America and the American Bankers Association fret that the rules would mean hefty and expensive structural changes and could put small banks out of the mortgage lending business altogether, concentrating mortgages within larger institutions.

"These rules will be difficult and costly to implement for our banks," said Ron Haynie, vice president or mortgage finance policy with the ICBA. "In many ways, the problems they're trying to address with these rules are not the result of problems caused by community banks and small servicers."

And in fact the CFPB's proposed rules reflect many of the mortgage servicing changes enacted through the massive $25 billion settlement between the five largest financial institutions, including Ally Bank, Citibank, Bank of America, Wells Fargo and JP Morgan Chase and state and federal legal authorities.

The settlement ended the practice of "robo-signing" foreclosures without understanding all the facts and enacted new requirements to prevent improper foreclosures. While there is some overlap between the settlement's rules and the CFPB's rules, consumer advocates claim that some key sections were left out.

"This is a step forward, no doubt about it, but it's a baby step when it should be a giant step," said Margot Saunders, of counsel to the National Consumer Law Center.

Advocates at the National Consumer Law Center particularly wanted to see the end of "dual tracking," where a servicer forecloses on a homeowner in the middle of a loan modification. Though the practice was effectively banned through the settlement, the CFPB's rules only slow down the practice. The rules allow a homeowner a time frame in which he or she can submit a loan modification application and the servicer must consider it before moving on to foreclosure.

Over at the Regulation Room, a chat room moderated by Cornell University that turns the proposals into plain-English questions and takes comments, consumers are complaining that the rules are also too generous to banks. Commenters suggest that communication between servicers and their customers should be quicker, and that there should be more specific standards in place dictating how servicers dole out loan modifications.

On the flip side, some mortgage officials are happy with the rules and believe they are critically needed.

"I think the servicing standards have an opportunity to bring certainty back to the market during a time when consumers didn't know how their loan would be serviced," said David H. Stevens, president and CEO of the Mortgage Bankers Association. "By creating standards implemented across the country, every borrower will know they're going to be treated the same way no matter who's servicing their loan."

The CFPB is taking comments on the rules through Oct. 9.

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