Starting the Foreclosure Process under Regulation X
Mortgage Servicers Are Reminded to Check Those Boxes!
On June 25, 2021, the Consumer Financial Protection Bureau (CFPB) handed down a new rule amending Regulation X of the Real Estate Settlement Procedures Act (RESPA), to assist mortgage borrowers affected by COVID-19. This rule takes effect on August 31, 2021, and it will remain in effect through the remainder of the 2021 calendar year. The rule was proposed earlier this year, and the CFPB received significant feedback from the mortgage industry, consumer advocates, and attorneys. Due to those comments and proposals, the CFPB detailed the arguments made prior to implementation and its reasoning behind the final rule. Crawford & von Keller attorneys are now being asked, “What should mortgage servicers know about starting the foreclosure process under CFPB Regulation X?” With this new rule, the CFPB has mandated that servicers check specific boxes and offer possible loss mitigation alternatives to borrowers before starting the foreclosure process.
Purpose of the New CFPB Rule
Due to the devastating economic ramifications of COVID-19, a historic number of borrowers are struggling with their mortgage payments. While the CARES Act did a great deal to curb a substantial increase in foreclosures in 2020, many borrowers remain delinquent on their mortgages. Another sizable portion of borrowers will be exiting forbearance plans this fall. Knowing this is coming, the CFPB implemented this rule to both assist borrowers and give specific guidelines to servicers before starting the foreclosure process, in hopes of avoiding an avalanche of foreclosures this fall and winter.
Four Major Sections of the New Rule: Frequently Asked Questions
There are four major sections of the new CFPB rule. Servicers must consider each before starting the foreclosure process:
- Restrictions on new foreclosure actions until 2022
- Incomplete Applications can now qualify for a modification
- Early intervention communication requirements
- Reasonable diligence during forbearance
Below, you’ll find answers to frequently asked questions regarding the rule and starting the foreclosure process under Regulation X.
Does the Rule Apply to All Residential Mortgages or Just GSE Loans?
From the wording of the rule, and the analysis given by the CFPB, it appears this rule applies to all residential mortgage loans, regardless of whether they are federally-backed loans or private loans. There is an exception though for Small Servicers, defined as:
- Servicer who services less than 5,000 loans
- Housing Finance Agency
- Non-profit entity who services less than 5,000 loans
Does the Rule Apply to Secondary Homes and Investment Properties?
No. This rule only applies to mortgage loans that are secured by the borrower’s primary residence.
Are Loans that were in Default Prior to the Pandemic Exempted?
Yes. Loans in default for at least 120 days prior to March 1, 2020, are exempt from this rule.
Is there a Federal Foreclosure Moratorium Until 2022?
No. This new rule is not a blanket moratorium. It does however put specific restrictions on servicers and require that they complete certain steps before starting the foreclosure process.
When Can the Servicer Proceed with Foreclosure?
- Servicers may proceed with foreclosure, if:
- The borrower submitted a completed loss mitigation application and § 1024.41(f)(2) permits the servicer to make the first notice or filing. 1024.41(f)(2) means the servicer has determined the following:
- Borrower is not eligible for Loss Mitigation, and an appeal is not applicable, the appeal period has expired, or the borrower’s appeal was denied.
- Borrower rejects “all” Loss Mitigation options offered.
- Borrower fails to perform under Loss Mitigation agreement.
- The Property has been abandoned.
- The servicer has conducted specified outreach and the borrower is unresponsive.
- The borrower submitted a completed loss mitigation application and § 1024.41(f)(2) permits the servicer to make the first notice or filing. 1024.41(f)(2) means the servicer has determined the following:
These requirements clearly show an intent on behalf of the CFPB to make sure that lenders and servicers offer the borrower some type of loss mitigation and the borrower then takes some step to either not accept that offer or not perform under the terms of the offer.
How Does the Rule Affect Incomplete Loss Mitigation Applications?
Borrowers will often submit documents for a loan modification or some other loss mitigation program, but the documents are either incomplete, out of date, or lacking what the servicer needs for a full and formal loss mitigation review. Previously, the CFPB, with some limited exceptions, prohibited mortgage servicers from offering loss mitigation options based on evaluations of incomplete applications (The Anti-Evasion Clause). To combat this issue, the CFPB came up with requirements for servicers who want to offer a streamlined loan modification when there is an incomplete application:
- The Loan Modification offered can’t be more than 480 Months (40 years).
- There is No Interest allowed if the Loan Modification delays payments and any of these occur before the payments are due:
- Loan is refinanced
- Mortgaged property is sold
- Loan Modification matures
- Insurance terminates on an FHA loan
- Loan Modification MUST be made available to borrowers experiencing a COVID-19 Hardship.
- This is truly significant, because the CFPB is officially dictating that servicers must at least offer loan modifications to borrowers due to the pandemic. There is an ongoing debate about whether the CFPB has jurisdiction and the power to mandate that servicers offer loan modifications based on private contracts, and this provision of the rule will assuredly be challenged in the Courts.
- Borrower’s Principal and Interest Payments must not increase.
- Borrower’s acceptance of a Loan Mod must bring the loan current, or upon completion of the trial plan, satisfying requirements, and accepting the full modification, the loan is brought current.
- Also, if the borrower communicates acceptance of a full modification to the servicer, regardless of whether any payment is made, the servicer cannot restart foreclosure for 120 days, because the pre-existing delinquency has ended.
- Servicer can’t charge a fee for Loan Mod and MUST waive the following for all fees after 3/1/20: Late fees, Penalties, Stop Payment fees, or similar fees.
What Happens if the Borrower Defaults in the Trial Plan?
Many servicers do not offer formal loan modifications outright. They typically make the borrower submit documents explaining their hardship, earnings, expenses, etc. and then offer them a three-month trial modification to see if they can make the payments on time before a formal modification is offered. So, what happens if the borrower doesn’t make all those payments on time?
The new rule requires servicers to immediately resume reasonable diligence with regard to any loss mitigation application the borrower submitted prior to the servicer’s offer of the trial loan modification plan and to provide the borrower with the acknowledgement notice required by § 1024.41(b)(2) with regard to the most recent loss mitigation application the borrower submitted prior to the offer that the servicer made under the new exception, unless the servicer has already provided that notice to the borrower.
Basically, if the borrower submitted a prior request to the servicer before they defaulted, the servicer must go back and use reasonable efforts to work something out.
The question then becomes, what does the CFPB mean by “immediately resume reasonable diligence”? The CFPB in its commentary did not give explicit guidelines because it recognizes that servicers may use different methods to try and reach out to borrowers that may include live contact or written communication. Therefore, it is in the servicer’s best interest to use reasonable means of contacting the borrower, along with routine follow-ups, and adherence to an objectively reasonable timeline for response, in accordance with its standard operating procedure for normal loss mitigation requests. However, because of the vagueness of the new rules, it is important to thoroughly document all contact with the borrower to provide as much evidence as possible to clear the bar of “reasonable diligence.”
Is Early Intervention Required?
Yes. Prevention is better than a cure, so the CFPB has addressed the issue of early intervention prior to foreclosure referral in the following ways:
- Servicers MUST discuss specific additional COVID-19-related information during live contact with borrowers established under existing § 1024.39(a) in two circumstances:
- If the borrower is not in a forbearance program and
- If the borrower is near the end of a forbearance program, information must be made available to Borrowers experiencing a COVID-19 related hardship.
- If the Borrower is NOT in a forbearance plan, the servicer must give the Borrower:
- Information on plans
- A brief description of the plans available
- The actions the borrower must take
- Contact information for counseling services
- Live Contact means the servicer has either attempted to contact the borrower by:
- Telephone
- In person interview
- Servicers must also establish live contact no later than 36 days after delinquency.
- The intent behind this is to prevent the borrower from getting too far down the road that curing the default is not practical. Many servicers already reach out via letters and telephone calls, but now the CFPB is mandating that they do so within 36 days after the delinquency occurs.
What Must Servicers Do When Borrowers Are in Forbearance Plans?
Outside the normal requirements in Regulation X, the servicers must jump through some extra hoops, but only temporarily. These specific requirements END 10/1/2022.
- The Servicer must make live contact at least 10 days, but no more than 45 days before the end of the forbearance plan and during that contact they must:
- Tell the borrower the end date of the plan
- Provide a brief description of:
- Extension plans
- Repayment options
- Loss Mitigation options
- Actions the borrower must take to comply with these options
- Provide contact information for counseling services
Again, many lenders and servicers already follow several of the provisions in this section, but the most important is the timeline regarding live contact prior to the end of the forbearance plan. The CFPB has made it abundantly clear they want the servicers to have regular check-ins with the borrowers to make sure they are aware of the loss mitigation status.
Creditors’ Rights Attorneys in the Carolinas
If you are a mortgage servicer in need of legal counsel, contact the law firm of Crawford & von Keller. Our attorneys are diligent in their compliance with Consumer Financial Protection Bureau regulations, and we can explain the steps to starting the foreclosure process under CFPB Regulation X. And with the opening of our new office in Wilmington, North Carolina, we now offer creditors’ rights services across the Carolinas. Let Crawford & von Keller answer your questions about CFPB Regulation X today.
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