A bill authored by U.S. Rep. Ed Royce (R-CA-40) clarifying current law governing the mortgage servicing industry cleared the House today. The bipartisan Mortgage Servicing Clarification Act [H.R. 314] now heads to the Senate for consideration.

"When someone takes out a loan to buy a house, it is common for their mortgage to change mortgage service providers several times over the life of their loan. This bill will allow for a more productive relationship between a homeowner and their service provider," said Royce.

Currently, when a mortgage servicing company acquires the rights to service a portfolio of home loans a small percentage of the loans will inevitably be delinquent or technically "in default" at the time of transfer. Under the Fair Debt Collections Practices Act (FDCPA), mortgage servicers are required to provide a so-called "Miranda notice" to their new customers. This notice is required when the servicer makes initial contact with the customer, often included in a new client's "welcome" letter.

"Millions of Americans who own a home can relate to this process. Maybe you were out of town and were late with your mortgage payment. The first contact from the new mortgage company, perhaps a company you have never heard of before, is a letter telling you your mortgage payment is in default and you are a delinquent. How does this contribute to a good relationship between you and your new mortgage service provider," asked Royce.

Royce said that these notices often mislead borrowers, confusing them about the nature of the relationship with their new servicer. The harshly worded notices scare consumers, and often have an unintended consequence of discouraging borrowers from contacting their new service providers.

Today's legislation would create a narrow exemption from Miranda notices for the servicers of federally-related first lien mortgages, and leave all other substantive borrower protections required by the FDCPA in place.

"The goal is to get borrowers who are late on payments back on track, not to discourage them from working with their new service providers. The Miranda warnings are counterproductive, and this legislation clarifies current law to ensure a more productive relationship between a borrower and a service provider from the start," said Royce.