On April 5, 2021, the Consumer Financial Protection Bureau issued a proposal to amend the existing loss mitigation rules in Regulation X. As stated in the Bureau’s press release, the proposal is designed to “help prevent avoidable foreclosures as the emergency federal foreclosure protections expire.” To accomplish that goal, the proposed rule has a few primary components, none of which are overly surprising given Acting Director David Uejio’s prior statements and the many rumors that have been circulating for quite some time now regarding the likelihood of future rulemaking. The Bureau also released a “Fast Facts” document summarizing the rule, and an unofficial redline of the proposed modifications to the regulatory text and official commentary.
First, the Bureau is proposing what essentially amounts to an extended foreclosure moratorium until after December 31, 2021, for any property that is secured by a principal residence. This would be achieved by adding a new provision to the existing dual tracking restrictions in 12 CFR 1024.41(f) prohibiting servicers from making the first notice or filing until 2022. Although the Bureau refers to this as a “temporary COVID-19 emergency pre-foreclosure review period,” the broad nature of the rule makes it more akin to an outright moratorium. This approach is being proposed instead of others that have been rumored, including either tolling the delinquency clock for borrowers exiting forbearance or requiring servicers to provide those borrowers exiting forbearance plans with a special pre-foreclosure review period. Unlike the CARES Act and many other COVID-19 relief efforts, the Bureau’s proposal isn’t limited to government-backed mortgages. The blanket moratorium will extend protections for nearly every borrower.
Early Intervention Requirements
Next, the Bureau is proposing certain temporary modifications to the existing early intervention requirements. When live contact is established with a borrower, the proposal would require that servicers check and determine whether a borrower is impacted by COVID-19 and convey certain information about available assistance. Specifically, for any borrower that is not in a forbearance program at the time live contact is established, the rule would require the servicer to assess whether the borrower is experiencing a COVID-19-related hardship and, if so, the servicer would also have to “list and briefly describe” any forbearance programs that are available to the borrower and the actions the borrower must take to be evaluated for any available forbearance programs. For any borrower that is in a forbearance plan when live contact is established, “during the last live contact . . . that occurs prior to the end of the forbearance period” the servicer would be required to convey to the borrower:
- The date the borrower’s current forbearance program ends; and
- A list and brief description of each of the types of forbearance extension, repayment options, and other loss mitigation options made available by the owner or assignee of the borrower’s mortgage loan to resolve the borrower’s delinquency at the end of the forbearance program, and the actions the borrower must take to be evaluated for such loss mitigation options.
These communication and solicitation requirements are obviously designed to ensure borrowers are informed of their forbearance and post-forbearance options. Notably, this requirement would only remain in place until August 31, 2022.
One early observation on this framework is that the Bureau’s requirements for the “last live contact . . . that occurs prior to the end of the forbearance period” could possibly conflict with prior Bureau guidance on managing early intervention requirements for borrowers on forbearance. In its April 3, 2020, FAQs Related to the COVID-19 Emergency, the Bureau seemingly established that servicers did not have to comply with the live contact requirements if a borrower was offered a short-term forbearance program and the servicer was complying with the reasonable diligence requirements. The FAQ specifically says:
To assist borrowers during the COVID-19 emergency, servicers may decide to offer borrowers a short-term payment forbearance program or short-term repayment plan based on the evaluation of an incomplete application. In that case, if a servicer has established and is maintaining ongoing contact with a borrower under the loss mitigation procedures in Regulation X, 12 CFR 1024.41(c)(2)(iii) related to offering a borrower a short-term payment forbearance program or short-term repayment plan based on the evaluation of an incomplete application, the servicer does not need to comply with the live contact requirements.
This potential discrepancy will hopefully be ironed out through the comment process, as many servicers have likely been pausing live contact efforts as a result of the Bureau’s prior guidance.
Loss Mitigation Offers Based Upon an Incomplete Application
The Bureau is once again expanding the existing exceptions to the long-standing anti-evasion clause in Regulation X. In addition to being able to offer a short-term forbearance plan, a short-term repayment plan, or a COVID-19 deferral, these amendments would allow servicers to also offer certain COVID-19-related loan modifications based upon an evaluation of an incomplete loss mitigation application. To qualify for this exception, a loan modification could not extend the term of the mortgage loan beyond 40 years from the date of the modification. Additionally, the borrower’s monthly payment could not increase, and any amounts owing that are delayed until maturity cannot accrue interest. Finally, the servicer must waive “all existing late charges, penalties, stop payment fees, or similar charges promptly upon the borrower’s acceptance of the loan modification.” Provided that those criteria are satisfied, a servicer would not have to collect a complete loss mitigation application before reviewing a borrower for any such option.
The final substantive component of the Bureau’s proposal is to clarify what a servicer must do to satisfy its reasonable diligence requirements when a borrower is offered a short-term payment forbearance plan to address a COVID-19-related hardship. Specifically, the commentary to Regulation X would be modified to make clear that a servicer “must contact the borrower no later than 30 days before the end of the forbearance period to determine if the borrower wishes to complete the loss mitigation application and proceed with a full loss mitigation evaluation.” This additional comment is mostly similar to the existing commentary that relates to reasonable diligence efforts when a borrower has received a short-term offer, except that it provides more specificity on when the outreach efforts must occur.
In the Bureau’s proposal, it suggests that the proposal ought to “take effect on or before August 31, 2021, and at least 30 days, or if it is a major rule, at least 60 days, after publication of a final rule in the Federal Register.” The Bureau also notes that it “anticipates working quickly to issue any final rule relating to this proposal as soon as possible after receiving and evaluating public comment, and at least 30 days before August 31, 2021.” This is not surprising – we should expect the Bureau to act quickly and to take the necessary actions to ensure that its rules are in effect when many borrowers’ forbearance plans are set to expire later in the year. Therefore, servicers should be prepared for a quick implementation period once a final rule is released.
The Bureau has requested that all comments on the proposed rule be submitted on or before May 10, 2021. The proposed rule contains numerous areas where the Bureau is seeking comments on specific aspects of the proposal. For example, the Bureau is seeking comment on the foreclosure moratorium proposal and is interested in whether an alternative approach of allowing certain foreclosures to proceed if a servicer has met certain outreach requirements would be preferable. Servicers should review the 150-page rulemaking and consider submitting comments to the Bureau for consideration during the rulemaking process.
Our Final Thoughts
Since the start of the Biden administration and elevation of Uejio to acting director, it has been clear that mortgage servicing will be a top near-term priority for the CFPB. The proposed amendments to Regulation X represent another bold move by Uejio to address homeowner hardships that were caused by the COVID-19 pandemic. In some respects (such as offers of loan modification upon an incomplete application), the proposal may provide the industry with additional flexibilities to address the unusual circumstances created by the pandemic and resulting government relief efforts. Overall, however, these changes can be viewed as part of the Bureau’s increased scrutiny of mortgage servicers in the age of COVID-19. This year and next year, we expect to see a steep increase by the CFPB of supervisory and other reviews of mortgage servicers, and we anticipate a much stricter approach to enforcement than in recent years.