What the Fair Credit Reporting Act Should
Teach Us About Mortgage Servicing
Progressive Recommendations to Protect Home Mortgage Consumers
Peter Swire January 2011
Our nation’s recent housing crisis revealed deep flaws in the way monthly mort-
gage payments by homeowners are handled by mortgage servicers—the compa-
nies that collect monthly mortgage payments from homeowners and forward the
payments to investors in those mortgages. These flaws go far beyond the recent
and headline-grabbing robo-signing scandals, in which many mortgage servicing
companies were found complicit in shoddy handling of the legal requirements
for foreclosure. Other major players in the housing market are deeply dissatisfied
with the current system, including private investors in mortgages that have been
bundled into mortgage-backed securities, mortgage insurance companies, and
the two big mortgage finance giants that are now in government conservatorship,
Fannie Mae and Freddie Mac.
So, too, are the consumers of home mortgages—the more than 50 million home-
owners who write monthly mortgage checks to mortgage servicing companies.
This issue brief presents a new analysis of how consumers are systematically disad-
vantaged by the current system of mortgage servicing, in which mortgage servic-
ing rights are governed legally to protect the interests of investors and mortgage
servicers before the rights of consumers are ever considered.
As the mortgage servicing industry evolved in the past decade, a major market
failure developed—they owe their responsibility only to investors, and owe no
duty at all to consider the needs and interests of consumers. Amid the housing
crisis that began in 2006 and metastasized over the next four years, it became
increasingly clear this type of market failure precisely tracks the problems that led
to creation of the Fair Credit Reporting Act in 1970—harms to consumers when
the large financial companies responsible for consumers’ credit ratings served the
interests of their major corporate clients rather than consumers. That market failure
four decades ago was corrected by FCRA, which requires the three big credit rating
agencies—Equifax, Experian, and TransUnion—to give individuals the right to
see their credit history and to correct mistakes. Over time, Congress strengthened
these consumer protections under FCRA, notably in overhauls in 1996 and 2004.
That same market failure corrected by FCRA in consumer finance is now readily
apparent in the mortgage servicing marketplace. After all, some of the biggest
consumer issues in a family’s life—whether they can stay in their home, on what
terms, and paying how much in fees—is a realm of finance over which consumers
boast little to no leverage. What’s more, mortgage servicing rights are not specifi-
cally addressed in the financial regulatory reform law passed by Congress last year.
The upshot: An effective set of consumer protection rules should be a priority of
financial regulators, the new 112th Congress, and the Obama administration in
the response not just to the robo-signing scandals but also the creation of our next
generation of housing finance as Congress and the administration grapple with
how to replace the mortgage finance roles played by Fannie Mae and Freddie Mac.
This issue brief offers some progressive recommendations for how this could be
done to the benefit of consumers and our mortgage finance system.
Full report below…