By Diane Jenkins, Attorney and Director of Legal, Asurity

As most servicers are well aware, the Consumer Financial Protection Bureau (CFPB) recently issued new proposed servicing rules essentially overhauling the existing loss mitigation process.  The existing rules governing mortgage servicing have been in place since 2014 and include rigid timing and documentation requirements servicers must follow to assist borrowers experiencing financial challenges.  The proposed rules seek to update the loss mitigation process and incorporate many aspects of the temporary more streamlined rules implemented in response to the COVID-19 pandemic.

"When struggling homeowners can get the help they need without unnecessary obstacles, it is better for borrowers, servicers, and the economy as a whole," said CFPB Director Rohit Chopra when the proposed rule was announced. "The CFPB's proposal would reduce avoidable foreclosures and make the mortgage market more resilient during future crises."

The rule, as proposed, includes significant changes to the existing rule, including the following:

Loss Mitigation Review Cycle

The proposed rule introduces the idea of a “loss mitigation review cycle” which begins once the borrower makes a request for loss mitigation assistance and continues until either the borrower’s loan is brought current, or the servicer has exhausted all available loss mitigation options. The loss mitigation review cycle is a key concept as the servicer may not, during this time period, begin or continue a foreclosure or accrue any fees beyond the amounts scheduled to be charged if the borrower made all payments on time.

Foreclosure Procedural Safeguards

Once a loss mitigation review cycle begins, the servicer may not initiate or advance the foreclosure process unless either:

• The borrower has been reviewed for all available loss mitigation options and the borrower has made no appeals within the applicable time period or all appeals have been denied; or
• The borrower has not communicated with the servicer for at least 90 days despite regular attempts by the servicer to contact the borrower.

Complete Application No Longer Required

The proposed rule would remove most of the existing requirements regarding incomplete applications. Servicers would no longer be required to collect a complete application before making a loss mitigation determination. Consequently, the rule also removes the requirement that servicers notify a borrower about whether a loss mitigation application is complete or incomplete.

Early Intervention

Servicers will be required to establish live contact with the borrower at least 30 days, but no more than 45 days, before a forbearance is scheduled to end to inform the borrower of the availability of loss mitigation options. The CFPB will also require written early intervention communications with borrowers to contain additional information such as the owner of the loan and the type of loss mitigation options generally available with that loan owner.  There will be a partial exemption from the live contact and written early intervention notice requirements while a borrower is performing under a forbearance.

Determination Notices

Notices of offers and denials would be required for all types of loss mitigation options, including forbearances, deferrals, and partial claims.  Notices would be required to include specific reasons for the loss mitigation determination, the time period for accepting or rejecting the offer and a statement that the borrower has a right to appeal the determination.

Language Access

Servicers will be required to provide Spanish versions of specified written communications, in addition to the English versions, to all borrowers and make additional translations in certain servicer-selected languages available upon request. 

The English versions of the specified written communications will be required to include five brief in-language statements identifying the availability of translated versions of those written communications and the availability of interpretation services for the specified oral communications in the applicable language. The five languages selected must be the five most frequently used language spoken by a significant majority of borrowers with limited English proficiency, other than English or Spanish.

Credit Reporting

The CFPB indicated it is aware of a select number of instances where servicers have furnished information about borrowers undergoing loss mitigation review to credit reporting agencies. While the proposed rule does not propose any rule changes related to credit reporting, it does include a request for comment about possible approaches the CFPB could take to ensure servicers are furnishing accurate and consistent credit reporting information for borrowers undergoing loss mitigation review.

Challenges

Although the new rule seeks to streamline the loss mitigation process for borrowers, servicers are concerned there may be some challenges with implementing some aspects of the rule as proposed. 

Donna Schmidt, CEO of DLS Servicing and WaterfallCalc and an expert in servicing compliance, sees the 90-day waiting period for unresponsive borrowers as particularly problematic.  “As written, the new rule allows borrowers who started the loss mitigation process to remain unresponsive for up to 90 days before a servicer can initiate a foreclosure action. This does not adequately hold borrowers accountable for the resolution of their default and inadvertently allows insincere borrowers to procrastinate thru the process and indefinitely delay a foreclosure action – especially for FHA and VA loans.  There will be a long-term undesirable effect for both of those insurers that may lead to significantly higher default rates for GNMA pools.  Additionally, it will create unnecessary hurdles in complying with FHA and VA insurer requirements for timely foreclosures having an overall negative impact on the government servicing portfolio.”

The above highlights some of the key aspects of the proposed rule, but is not a comprehensive list of all of the areas of impact.  Servicers should review the proposed rule carefully and provide thoughtful feedback to the CFPB during the comment period.  The CFPB has requested comments on the proposed rules, and has asked for comments to be submitted by September 9, 2024.

To read the rules as published in the Federal Register, please visit CFPB Proposed Rule - Streamlining Mortgage Servicing for Borrowers Experiencing Payment Difficulties.