Mortgage Servicing Proposed Rule
Last week, the Consumer Financial Protection Bureau (CFPB) proposed amendments to the early intervention and loss mitigation rules in Regulation X. The changes were designed to protect consumers that may have been affected by the COVID-19 pandemic by implementing safeguards to prevent avoidable foreclosures as more and more consumers end their forbearances at a time when foreclosure moratoria might be drawing to a close.
The early intervention rules in section 1024.39 of Regulation X require servicers to reach out to delinquent borrowers to make sure that the borrowers understand that there are loss mitigation options available to them. There is a live contact requirement and a written notice requirement. The proposed rule only seeks to change the live notice requirements. Currently, servicers, in most cases, are required to “establish or make good faith efforts to establish live contact with a delinquent borrower no later than the 36th day of a borrower's delinquency and again no later than 36 days after each payment due date so long as the borrower remains delinquent.”
The proposed rule changes the live notice requirement in two ways. If a borrower is not in a forbearance plan when live contact occurs, servicers will be required to inquire as to whether the borrower was affected by a COVID-19-related hardship, which is a term defined in the proposed rule. If the borrower answered in the affirmative, then servicers would be required to list and describe all forbearance programs available to the borrower, including the next steps the borrower would need to take to be evaluated for those programs. The CFPB emphasized that servicers would need to describe all forbearance programs available, not just those limited to borrowers affected by a COVID-19-related hardship.
The second change would affect borrowers already in a forbearance when live contact occurs. During the last live contact that occurs before the forbearance ends, the proposed changes would require servicers to advise a borrower of the date when the forbearance ends and to list and describe the types of post-forbearance options (e.g., forbearance extension, repayment plans, modifications, etc.) available to the borrower, including what the borrower would need to do to be evaluated for those options.
The other proposed amendments relate to the loss mitigation requirements in section 1024.41. In general, section 1024.41 requires that servicers exercise reasonable diligence in order to complete a loss mitigation application and prohibits servicers from offering loss mitigation options based on the evaluation of an incomplete loss mitigation application unless one of the exceptions in section 1024.41(c)(2) applies. These exceptions include being able to offer short-term loss mitigation options, like a forbearance of no more than six months, without having to resume reasonable diligence to complete a loss mitigation application until towards the end of the short-term plan if the borrower will remain delinquent at the end of the plan.
The proposed rule calls for three substantive changes to provide servicers with the ability to provide borrowers with loss mitigation relief in the coming months as the number of borrowers that might need loss mitigation swells. The CFPB provided more of a bright-line rule with respect to when servicers are required to resume reasonable diligence in completing a loss mitigation application as borrowers near the end of their forbearance periods. If a borrower was offered a short-term payment forbearance for a COVID-19-related hardship based on the evaluation of an incomplete application, then the proposed rule requires servicers to contact the borrower no later than 30 days before the forbearance ends to gauge whether the borrower wants to complete a loss mitigation application and be evaluated for all loss mitigation options available to the borrower.
The proposed rule also provides servicers with additional flexibility to offer loss mitigation options without completing a loss mitigation application. The suggested revisions add another exception to section 1024.41(c) and permit servicers to offer certain loan modifications without evaluating a completed loss mitigation application as long as the following criteria are satisfied:
- The term of the modified loan is not extended beyond 480 months;
- The borrower’s periodic principal and interest payment does not increase;
- If the modification permits deferral of amounts owed until certain milestones (e.g., loan is refinanced, property is sold), then the deferred amounts cannot accrue interest;
- The servicer cannot charge a fee for the modification;
- The servicer waives certain types of fees (e.g., “existing late charges, penalties, stop payment fees, or similar charges”) upon the acceptance of the modification;
- The modification is available to borrowers experiencing a COVID-19-related hardship; and
- The modification is designed to end the borrower’s delinquency upon acceptance or upon completion of a trial plan and acceptance of a permanent modification.
The CFPB noted that this new category of modification is very similar to the GSE streamlined flex modifications offered by Fannie Mae and Freddie Mac. The proposed rule would require servicers to resume reasonable diligence efforts to complete a loss mitigation application if a borrower accepted one of these types of modifications and then breached the terms of the agreement. Servicers would also be required to resume reasonable diligence efforts to complete a loss mitigation application if the borrower accepted the modification and then requested further assistance.
The final change to section 1024.41 relates to the pre-foreclosure review period described in section 1024.41(f). Under the existing regulation, servicers are prohibited from making the first notice or filing in a foreclosure until the borrower is more than 120 days delinquent, the foreclosure is based on a violation of a due-on-sale clause, or the servicer is joining a foreclosure brought by another lienholder. The proposed rule would extend this review period to December 31, 2021 if the servicer must rely on the 120-day period to proceed with foreclosure. The proposed rule sought comment on three alternatives to this approach:
- A grace period approach in which the additional prohibition against making the first notice or filing in a foreclosure begins when borrowers exit forbearance;
- An approach that ties the length of this additional protection to a borrower’s length of delinquency at the end of forbearance; or
- An approach in which the additional protection is triggered when delinquency begins or forbearance ends, whichever occurs last.
The proposed effective date of the rule is August 31, 2021. The CFPB noted that the proposed rule does not apply to small servicers—those servicers that with their affiliates service 5,000 or fewer mortgage loans for which the servicer or the affiliate is the creditor or assignee—and that it only applies to those mortgage loans secured by a borrower’s principal residence. For more guidance and a way to submit comments to NAFCU on the proposed rule, please look for an upcoming Regulatory Alert.