CFPB Proposes Mortgage Servicing Changes to Prevent Wave of COVID-19 Foreclosures

The CARES Act along with many other legislative efforts provided much needed support and relief for mortgage borrowers during the coronavirus pandemic. Among the most impactful of these measures were the foreclosure moratorium and lenders’ ability to provide forbearance options to affected borrowers without classifying such loans as nonperforming in bank financial reporting records. However, as these relief provisions are now expiring, the CFPB recognized the impending wave of foreclosures lenders and borrowers are likely facing, unless further relief provisions are extended. On April 05, 2021, the CFPB issued a proposed rule that proposes temporarily expanding Regulation X (RESPA), to ease the transition for delinquent borrowers for whom relief provisions are expiring and allowing such borrowers to bring their loans current.

RESPA already provides safeguards that require lenders to offer assistance to delinquent borrowers. Particularly, § 1024.39, requires lenders to engage in “early intervention,” as well as provide loss mitigation options to borrowers experiencing hardship, regardless of reason. However, the proposed rule recognizes that the existing measures are inadequate to sufficiently protect lenders and borrowers in light of the unique circumstances caused by the pandemic. Accordingly, the rule proposes a temporary expansion of § 1024.39, to include specific COVID-19 related provision to both the early intervention and loss-mitigation provisions. The CFPB proposes to make these measures effective for one year from the effective date of the rule, if and when the proposed rule becomes final.

To effectively facilitate the transition between expiring forbearance provisions and borrowers resuming payments, the rule proposes the following expansion of § 1024.39: (1) prohibit lenders from initiating foreclosure efforts until after December 31, 2021; (2) define the term “COVID-19-related emergency” to have the same meaning as provided under the CARES Act, 15 U.S.C. 9056(a)(1); (3) permit services to offer streamlined loan modification options to borrowers who experienced a COVID-19-related hardship; (4) expand early intervention provisions to require lenders to make live contacts with delinquent borrowers and specifically inquire about COVID-19 related hardships as well as provide loss mitigation and forbearance options available for such borrowers; and (5) require lenders to make live contact with borrowers no later than 30 days before the end of the forbearance period to determine if the borrower wishes to complete a loss mitigation application.

As mentioned above, RESPA, already contains many of the safeguards the proposed rule addresses. For example, § 1024.41, already prohibits lenders from initiating foreclosure efforts, unless a borrower is more than 120 days delinquent. In issuing the proposal, the CFPB is mindful of safeguards necessary for lenders and borrowers. Accordingly, the rule seeks comment in consideration of allowing lenders to pursue foreclosure sooner than December 31, 2021, if the servicer or lender: (1) has completed a loss mitigation review of the borrower and the borrower is not eligible for any foreclosure options; and (2) has made efforts to contact the borrower and the borrower failed to respond. Notably, the proposal does not further define “borrower’s failure to respond.” 

Similarly, the Bureau balanced the borrowers and lenders needs in proposing the streamlined loan modification options. As before, § 1024.39, already sets for loss mitigation provisions that require lenders to provide notice to borrowers setting forth mitigation options and requirements under the Fair Debt Collection Practices Act (FDCPA), as they apply to the lender. The Bureau proposes to exempt lenders from some of the loss mitigation provisions of § 1024.39, where a lender offers and the borrower accepts a streamlined loan modification option, instead of proceeding under the existing RESPA loss mitigation provisions.

Currently, § 1024.39, allows lenders to offer modification options under a request for loss mitigation only after consideration additional relief options. Under the proposal, a lender would not require considering such options or require a completed loss mitigation application. To be eligible for the streamlined modification under the proposal, the modification must meet the following six requirements: (1) the borrower is not harmed more by accepting the modification than if they proceeded under the available loss mitigation options; (2) the borrower must experience a COVID-19 related hardship (as defined earlier); (3) the modification cannot result in increasing the borrower’s monthly principal and interest payment and cannot extend the term of the loan by more than 480 months; (4) the lender must waive all delinquency-related fees upon a borrower accepting a modification; and (5) acceptance of a modification either results in ending all preexisting delinquency, or the modification is conditioned on ending such delinquency upon the borrower completing the modification requirements.

The proposed rule also provides extensive research on borrowers’ awareness of forbearance options and the effect of stress on borrowers. This research shows that despite the availability of information, the majority of borrowers do not pursue forbearance either due to being unaware of such options, lack of understanding, apprehension in proceeding under such options, or being impacted by the stress caused by the pandemic. The proposal addresses this shortfall by proposing expansion of the early intervention requirements.

The expansion of the early intervention program requirements is likely the most targeted RESPA section in the proposal. Particularly, under the proposed rule, lenders are required to specifically inquire whether a borrower was impacted by a COVID-19-related hardship, during a live contact. Additionally, the proposed rule requires lenders to inform borrowers of forbearance options, the methods of resolving delinquencies at the end of the forbearance period, and when the forbearance period ends. The Bureau proposes to set an end-date of August 31, 2022, for the proposed amendments to the early intervention requirements, related to COVID-19 provisions.

Despite the Bureau’s best efforts to balance the interests of borrowers and lenders, the provisions proposed above offer relief to borrowers while imposing requirements on lenders. However, the proposal is well-grounded in facts, such as minorities are currently already disproportionately represented in the home-ownership population. Currently, approximately 50 percent minorities are homeowners compared to approximately 70 percent of non-Hispanic White Americans, according to the Bureau’s research. Foreclosure and delinquency would further hinder the ability of these individuals to become homeowners in the future; thereby, widening the already existing inequality. Of course, a cascading wave of foreclosure would likely have a more devasting impact on lenders than possibly complying with the proposed provisions; should the rule become final.