Mortgage servicers should prepare for increased scrutiny of their default servicing activities. Earlier this week, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”), along with the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and state financial regulators, issued a statement that the agencies would resume their full supervision and enforcement of mortgage servicers, ending the flexible approach the agencies announced at the onset of the COVID-19 pandemic. This move is consistent with the Bureau’s March 2021 rescission of similar statements issued during the pandemic that provided temporary flexibilities to financial institutions.
In April 2020, the agencies issued a statement that they would take a relaxed approach to supervision and enforcement of mortgage servicers’ compliance with certain requirements because of constraints caused by the COVID-19 pandemic. For example, the agencies indicated that they did not intend to take supervisory or enforcement action against servicers for delays in sending loss mitigation application acknowledgement letters to borrowers as long as servicers made good faith efforts to provide the notices and take related actions within a reasonable time.
At the time, servicers were facing a strain on their capacities caused by an increase in loss mitigation requests from struggling borrowers combined with a decrease in servicers’ staffing levels in light of work-from-home and shelter-in-place directives. But the agencies believe that servicers have now had enough time to adjust their operations to comply with the requirements of Regulation X under the Real Estate Settlement Procedures Act.
Approximately one million borrowers remain in forbearances, and according to the CFPB, the majority of these forbearances are expected to end this year. The Bureau views Regulation X protections as critical to helping these borrowers avoid foreclosure. Among the Regulation X provisions that the CFPB has promised to fully enforce are the rules that became effective in August 2021 that require servicers to make additional outreach attempts to delinquent borrowers and borrowers in forbearance plans that are expiring soon. The rules also establish procedural safeguards on the initiation of foreclosure that essentially restrict many such initiations through the end of the year. Read more about these rules here.
Servicers’ compliance with Regulation X does not happen in a vacuum. Instead it is dependent on the loss mitigation requirements of government and private mortgage insurers and investors, and these requirements continue to evolve in response to the pandemic. Moreover, none of the housing assistance funds authorized by Congress to help borrowers avoid foreclosure have been distributed yet, as the Department of the Treasury and states seek to finalize the plans. Collectively, these evolving loss mitigation requirements and plans for distribution of housing assistance funds present challenges for servicers’ compliance with the requirements of Regulation X.
In addition to the announcement of the end of the flexible approach to supervision and enforcement of mortgage servicers, the CFPB released a report detailing the Bureau’s mortgage servicing-related efforts during the pandemic. Among other things, the CFPB has undertaken prioritized assessments in lieu of planned examinations to identify potential risks to consumers due to the pandemic; issued a report summarizing data on servicing activities during the pandemic that addresses issues such as call wait times, delinquency rates, and how servicers track borrower language preferences; and put additional resources into reviewing consumer complaints related to COVID-19 forbearances.
The CFPB has made it clear that it is focused on mortgage servicing and is paying close attention to mortgage servicers’ response to borrowers impacted by the pandemic. The CFPB expects servicers to work with borrowers to resolve delinquencies and avoid foreclosure when possible. Mortgage servicers should be prepared for Director Chopra to take a more aggressive approach to enforcement of not only Regulation X requirements, but also other requirements applicable to servicers, such as the prohibition on unfair, deceptive, and abusive acts and practices.