8 minute read | June.29.2021
The Consumer Financial Protection Bureau’s Covid-relief mortgage servicing rule issued yesterday steered away from a nationwide foreclosure freeze as initially proposed, instead creating heightened protections for those borrowers who became seriously delinquent during the pandemic. The distinction may not prove to be a game-changer for servicers, however, which will be obligated to carefully document outreach efforts and decisions to advance borrowers into foreclosure — with little margin for error.
The bureau’s final rule, which takes effect Aug. 31, obligates a servicer to continue specifying, with substantial detail, any loss mitigation options that may help the borrower resolve their delinquency. It also largely preserves the proposed streamline modification option on the basis of an incomplete loss mitigation application, although most servicers already have been offering many of these modifications since the early days of the pandemic.
The CFPB emphasized that it “will continue to engage in supervisory and enforcement activity to ensure that mortgage servicers are meeting the bureau’s expectations.” It will use its supervisory authority to obtain information about servicer activities and assess elevated risks of consumer harm. Ongoing monitoring, supervisory inquiries within or apart from a scheduled examination, and in some cases, enforcement, are the likely result. Servicers should also consider risks related to unfair, deceptive, or abusive acts or practices, even as they work to implement the specific requirements of the new rule. The bureau’s current leadership team has repeatedly highlighted its focus on protecting consumers who may have been negatively affected by Covid.
Targeted foreclosure protections for borrowers who became severely delinquent during the pandemic
The CFPB’s initial proposal generally would have frozen initiation of foreclosures on principal residences through the end of the year. However, under the final rule, the bureau is putting in place heightened “safeguards” for loans where the referral is initiated in advance of January 1, 2022, and where the borrower became more than 120 days delinquent after March 1, 2020, and the statute of limitations applicable to the foreclosure action being taken in the relevant jurisdiction expires on or after January 1, 2022.
For this population of protected borrowers, a servicer may only initiate foreclosure if one of three “safeguards” are met:
Critically, the bureau creates an express record-retention requirement for servicers, obligating them to retain documents and information that support referral decisions. The rule specifies a servicer may rely on call logs and servicing notes to document unresponsive borrowers, as well as a schedule of all transactions credited or debited to the mortgage account. Servicers should expect those records to be scrutinized during supervisory and enforcement activities around foreclosure initiation.
Modifications based on evaluation of an incomplete loss mitigation application
The final rule largely retains the “streamline loan modification” option in the proposal that allows servicers to offer borrowers with a Covid-19 related hardship a loan modification based on an incomplete application. Significantly, the CFPB revised the fee limitation to only require waiver of existing fees owed and incurred on or after March 1, 2020. A modification offered on the basis of an incomplete application would need to meet the following criteria:
If the borrower fails to perform under a trial modification offered through an incomplete application, the servicer must immediately resume reasonable diligence efforts to encourage the borrower to complete the application. The servicer also must provide the borrower the incomplete application acknowledgement notice if it has not already done so.
As noted in our initial alert on the proposal, investors and agencies have largely eliminated documentation requirements in response to the pandemic, and servicers have been successfully offering streamlined loan modifications under Regulation X’s current requirements. The lack of documentation requirements has blurred the lines of what constitutes a complete application. This distinction will be critical in determining which loans satisfy the “complete application” foreclosure initiation safeguards.
Additional borrower outreach required
The final rule requires servicers, through October 1, 2022, to give borrowers Covid-related information pursuant to the current Regulation X early intervention requirements, as follows:
To satisfy these requirements, servicers will need to actually make outbound calls to borrowers on one or more occasions at a valid telephone number, and cannot simply satisfy the requirement through written or electronic communications.
If the borrower is in a short-term forbearance program due to a Covid-19-related hardship and the borrower remains delinquent, the servicer also must contact the borrower no later than 30 days before the scheduled end of the forbearance period to determine if they wish to complete the loss mitigation application and proceed with a full loss mitigation evaluation. The servicer must then exercise reasonable diligence to complete the application before the end of the forbearance period if the borrower requests additional assistance.
Subtle escrow guidance?
Although the rule does not alter any escrow-related requirements in Regulation X, the preamble to the rule contains escrow-related guidance. It states that, although Regulation X does not require a servicer to send a short-year statement prior to offering any loss mitigation option, the CFPB “strongly encourages” servicers to conduct an escrow analysis and issue a short-year statement or annual statement, depending on the applicable timing. It notes that doing so could help avoid unexpected escrow-related payment increases after the borrower agrees to the loss mitigation option.
The CFPB also said a servicer is permitted to advance funds to cover an escrow shortage and seek repayment of those advanced funds as part of the non-interest-bearing deferred balance from a loss mitigation option.
If you have any questions regarding the CFPB’s rule, please contact an Orrick attorney with whom you have worked in the past.