A fast-growing segment of the mortgage industry engaged in foreclosures is subject to new regulatory oversight in Hawaii under a state law enacted last week by Gov. David Ige.
The governor signed Senate Bill 1093, which increases state regulation of mortgage servicers.
Mortgage servicers are companies that handle management aspects of home loans, including processing payments and dealing with defaults. Servicers can be banks and other lenders that own loans, as well as firms contracted by loan owners.
Practices by loan servicing firms that aren’t part of the more stringently regulated banking industry have attracted heightened concern as nonbank mortgage servicing has dramatically grown in recent years.
"It is important to strengthen Hawaii’s law now, given the nationwide surge in nonbank mortgage servicers, the types and gravity of complaints against the industry, and the serious potential for harm to consumers," Iris Ikeda, Commissioner of Financial Institutions at the state Department of Commerce and Consumer Affairs, said in written testimony on the bill.
New state regulations imposed under SB 1093 include a requirement that mortgage servicers make "reasonable and good-faith efforts" to modify loans and avoid foreclosure.
If a loan modification is denied, the law requires that a notice in boldface type be sent to the borrower stating: "If you believe your loss mitigation option request has been wrongly denied, you may file a complaint with the state Division of Financial Institutions." A telephone number and web address for the agency also must be included.
The law also bars a mortgage servicer from requiring that a borrower waive legal action as a condition of a loan modification, forbearance or repayment plan.
Other requirements address fees, mortgage payment processing, bonding, statement information, licensing, record keeping and the handling of consumer complaints and inquiries.
For instance, the law states that a fee may be collected only if it is clearly and conspicuously disclosed by the loan instruments and it is for services actually rendered.
The law also requires that late principal and interest payments are credited before any late charge is collected, and that no penalty charges may be imposed solely for late fees or delinquency charges assessed on an earlier payment if the borrower is current on monthly mortgage payments.
Ikeda said in her testimony that the provisions should not have a substantial negative impact on mortgage servicing companies since many of the firms have already adjusted their practices following concerns raised by state examiners and a major mortgage company settlement agreement in 2012.
Still, the provisions were deemed necessary in part because of continuing consumer complaints, industry expansion and difficulty for Hawaii consumers to obtain appropriate attention from mainland mortgage servicers that have no physical presence in Hawaii.
Hawaii consumers lodged 516 complaints in a federal Consumer Protection Financial Bureau database over a 25-month period ending Jan. 31, according to Ikeda’s testimony. She said nearly all the Hawaii complaints concerned loan servicing issues.
"Consumer problems with mortgage servicers clearly continue," Ikeda wrote. "This is an important bill that will enable state regulators to protect homeowners dealing with increasingly critical concerns about the mortgage servicer industry and its practices."
Ikeda said nonbank specialty servicers that typically handle troubled loans service about $1.4 trillion worth of loans in a $10 trillion market, or 14 percent of the industry.
Neal Okabayashi, a representative for the Hawaii Bankers Association, estimated that nonbank servicers will own an additional 10 percent of the market in the next two to three years, according to his written testimony.
The Hawaii Bankers Association supported the bill, and said it will fill a gap in the regulatory framework for mortgage servicing.
The only other written testimony on the bill came from the Mortgage Bankers Association of Hawaii, which supported the bill’s intent; the Hawaii Credit Union League, which said the bill would bring needed clarity to mortgage servicing rules; and Harvey Arkin, an individual who said it took him two years to obtain a trial loan modification after being denied multiple times due to errors by his loan servicer.
"Poor mortgage servicing can cause consumers extreme stress and financial harm," Ikeda said in her testimony. "If the servicer refuses to fairly consider loss mitigation options for homeowners in financial distress, homes are needlessly lost to foreclosure, devastating families and their financial futures."
Statistics from the state Judiciary show that foreclosures are in a second consecutive year of decline but are still an issue affecting more than 100 residents each month.
The number of new foreclosure lawsuits filed in state court was 210 in April, 174 in March, 147 in February and 116 in January. These figures are down from the same months last year: 211, 231, 250 and 228, respectively.
