A new CFPB final rule effective August 31, 2021, amends RESPA Regulation X early intervention and loss mitigation requirements, found at 12 C.F.R. §§ 1024.39 and 1024.41. The amendments provide significant new rights to homeowners exiting a mortgage loan forbearance or experiencing a payment hardship related to the COVID-19 pandemic. See 86 Fed. Reg. 34,848 (June 30, 2021). The new rule:
- Requires servicers to comply with additional procedural safeguards before initiating foreclosure;
- Permits a servicer to offer certain streamlined loan modifications without requiring the borrower to submit a complete loss mitigation application;
- Specifies how and when a servicer must resume reasonable diligence efforts at the end of forbearance; and
- Imposes new early intervention requirements for borrowers in default.
The new rule applies not just to FHA, VA, USDA, Fannie Mae, and Freddie Mac mortgages, but applies to “federally related” mortgage loans, as defined by RESPA. As written, this is extremely broad and applies to servicers of non-federally-backed mortgage loans. The rule applies where a borrower has not received a forbearance, but has defaulted on mortgage payments while experiencing financial hardship due directly or indirectly to the COVID-19 emergency.
The new rule provisions are effective August 31, 2021. The amendments requiring servicers to comply with additional procedural safeguards before initiating foreclosure will sunset on December 31, 2021. The additional early intervention requirements apply until October 1, 2022.
Failure to comply with the requirements under the new rule will result in the borrower having a right of action under RESPA for out of pocket and emotional distress damages, attorney fees, plus up to $2000 in statutory damages where there is a pattern or practice. Statutory damages in class actions are capped at $1 million.
The CFPB’s existing servicing rule prohibits a servicer from initiating foreclosure until the borrower is more than 120 days delinquent, providing a pre-foreclosure period encouraging servicers to reach out to the borrower and review all loss mitigation options prior to the commencement of foreclosure, before substantial costs have been incurred, and while the likelihood of a successful loss mitigation outcome is greatest.
While borrowers are not required to make payments when they are in forbearance, the CFPB defines such forbearance as a delinquency. Borrowers in forbearance for a period of four months or more without making payments, who then exit the forbearance without bringing the loan current, face imminent foreclosure because their loan is more than 120 days delinquent. To alleviate this problem, the final rule requires that servicers comply with additional procedural safeguards before making the “first notice or filing” necessary to initiate foreclosure from the effective date of August 31, 2021, until December 31, 2021. The CFPB explained that this is the time period in which it expects the greatest number of forbearance exits, leading to potential servicing errors due to capacity issues.
The pre-foreclosure procedural safeguards only apply to mortgages secured by the borrower’s principal residence that became 120-days delinquent after March 1, 2020. “Small servicers”—with fewer than 5000 mortgages which they also own— are not required to comply. In addition, if the statute of limitations to foreclose will run prior to January 1, 2022, the servicer may initiate foreclosure without satisfying the procedural safeguards.
For mortgages that are covered by the rule, a servicer may not make the first notice or filing necessary to initiate foreclosure under state law during the protected window of the period from August 31, 2021, to December 31, 2021, unless it has satisfied one of three procedural safeguards described below.
First, Borrower Evaluated Based upon Complete Application: if the borrower has submitted a complete loss mitigation application, has remained delinquent at all times since that complete application, and the servicer is permitted to foreclose under Reg. X § 1024.41(f)(2). Section 1024.41(f)(2) provides that after a complete application is received, the servicer may not initiate foreclosure until the borrower has been sent a written denial notice pursuant to section 1024.41(c)(1)(ii) and any appeal window has expired or the appeal has been denied, or the borrower has rejected all loss mitigation options offered by the servicer or failed to perform under a loss mitigation option.
Second, Property Is Abandoned: applies if the property securing the mortgage is abandoned according to the laws of the state or municipality where it is located. The CFPB does not define abandonment and directs servicers to the jurisdiction of the premises. Note, however, if a servicer initiates foreclosure on this basis, and a property is determined not to be abandoned under applicable law, the safeguard would not have been satisfied, and the servicer would be in violation of RESPA.
Third, Borrower Is Unresponsive: the one most likely to be at play for borrowers that fell behind during the pandemic. This safeguard is satisfied if the servicer has not received any communication from the borrower for at least 90 days prior to making the first notice or filing and the following conditions are met:
- The servicer has satisfied its required early intervention live contact attempts during the 90-day period prior to the first notice or filing.
- The servicer sent the early intervention notice letter required by Reg. X § 1024.39(b) at least 10 and no more than 45 days prior to the first notice or filing. This includes a statement encouraging the borrower to contact the servicer, a telephone number for the borrower’s point of contact assigned pursuant to section 1024.40, a brief description of available loss mitigation options and how to apply for them, and information about how to contact a HUD-certified housing counselor.
- The servicer has sent all notices required by Reg. X § 1024.41, as applicable, during the 90-day period before the servicer makes the first notice or filing. In theory this might include a section 1024.41(b)(2) notice (if the borrower has submitted an incomplete application during the 90-day period or has defaulted on a streamlined mod trial payment plan and the notice was not provided previously), and could also include the section 1024.41(c)(2)(iii) letter if a forbearance was offered or extended during the 90-day period; and
- The borrower’s forbearance, if applicable, ended at least 30 days before the servicer makes the first notice or filing.
The goal is to make sure the borrower has exhausted their loss mitigation options.
The CFPB intends to “closely monitor” consumer complaints and examine servicers to “ensure that servicer’s procedures have not created obstacles that frustrate a borrower’s ability to engage with the servicer” or that “make borrowers appear unresponsive even though they were attempting to contact the servicer.” 86 Fed. Reg. 34,848, 34,886. This includes determining whether servicer phone lines have unreasonably long hold times. Id, The CFPB specified that its record retention requirements for servicers include a requirement that if the servicer makes the first notice or filing before January 1, 2022, the servicer’s records must include evidence that one of the procedural safeguards was satisfied, such as evidence that the servicer did not receive communications from the borrower during the key time-period and that all other required notices and outreach efforts were made. Reg. X Official Interpretation § 1024.41(f)(3)-1; 86 Fed. Reg. 34,848, 34,902. Given the intent of close monitoring, we can expect that enforcement action will be used to make sure that compliance is met, and the borrower’s opportunities are meaningful.
An Executive Summary from the CFPB can be found at: https://files.consumerfinance.gov/f/documents/cfpb_covid-mortgage-servicing-rule_executive-summary_2021-06.pdf
Should you have any questions, please contact, Deborah Gallo, Esq. at email@example.com.