Consumer Financial Protection Bureau Specifies Pandemic Foreclosure Protections and Signals Tight Supervision and Enforcement Around Servicer Efforts

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:

• Complete application evaluation: The borrower (1) submitted a complete loss mitigation application, (2) was evaluated based on that complete application, (3) remained delinquent since submitting the application, and (4) a foreclosure may otherwise be initiated pursuant to Section 1024.41.
   
• Abandoned property: The property securing the mortgage is abandoned at the time the borrower is referred to foreclosure. (The CFPB has previously emphasized that “vacant” does not necessarily mean “abandoned,” although the rule does not directly address this point.)
   
• Unresponsive borrower: The servicer (1) has not received any communication from the borrower in the 90 days prior to referral, (2) complies with early intervention live contact requirements during the 90-day period, (3) sends the written early intervention notice (“45-day letter”) between 10 and 45 days from the referral, (4) other applicable Regulation X notice requirements are met, and (5) any forbearance program ended at least 30 days prior to the referral. A borrower is “unresponsive” when the servicer does not receive written or electronic communication, a phone call, has not established live contact, and has not received a payment.

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:

1. Term and payment limitations: The modification may not cause the borrower’s principal and interest payment to increase for the life of the modification and may not extend the term of the loan by more than 480 months from the date of the modification.
    
2. Non-interest-bearing deferred amounts: Any amounts that the borrower may delay paying until the loan is refinanced, the property is sold, or the loan modification matures, must not accrue interest.
    
3. Fee restrictions: No fees may be charged for the loan modification and all existing late charges incurred on or after March 1, 2020, such as penalties, stop-payment fees, and similar charges must be waived upon acceptance. Although the regulation does not specify what constitutes a “similar charge,” the rule preamble said these are charges similar to late fees, penalties, and stop-payment fees, as opposed to, for example, property inspection fees.
    
4. Covid-related hardship: The loan modification is made available to borrowers experiencing a Covid-19-related hardship.
    
5. Delinquency cure: The modification must be designed to end any preexisting delinquency.

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:

• For borrowers not in forbearance at the time of contact, when live contact is made with the borrower, and the investor makes available to that borrower a Covid-related forbearance program, the servicer must (1) inform the borrower of the availability of forbearance programs for borrowers experiencing a COVID-19-related hardship, (2) list and briefly describe available programs and actions the borrower must take to be evaluated for them, and (3) tell the borrower at least one way to find contact information for homeownership counseling. The rule’s executive summary specifically said that, to satisfy the first obligation, the servicer could state “We wanted to let you know that forbearance programs are available for borrowers that are having difficulty making their payments because of the COVID-19 emergency.” With respect to the third obligation, the summary indicated the servicer could reference the contact information found on the borrower’s periodic statement.  The CFPB noted that, as of April 2021, there were only an estimated 33,000 borrowers who became seriously delinquent after the pandemic began and had not entered a forbearance program and were not in active loss mitigation.
   
• If the borrower is on forbearance, during the live contact established between 10 and 45 days before the scheduled end of the forbearance program (or the first contact if the forbearance is expiring before September 10, 2021), the servicer must inform the borrower of the date on which the current forbearance period ends and list each type of post-forbearance option that is available to the borrower to resolve the post-forbearance delinquency, along with the actions that must be taken to be evaluated for such options. The servicer also would need to tell the borrower at least one way to find contact information for homeownership counseling. Importantly, while a servicer is only required to list options available at the time live contact is established, and does not need to include any options that have already expired, servicers with dynamic scripting could also be scrutinized when regulators later review calls where certain options are not disclosed during the conversation.

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.