This article was originally published in the October 2024 edition of Mortgage point magazine, online now.

On July 10, 2024, the Consumer Financial Protection Bureau (CFPB) submitted a proposed regulatory change to increase mortgage servicers’ obligations to assist borrowers before initiating foreclosure proceedings.

This proposal represents a substantial change to existing regulations requiring service providers to exhaust all potential loss mitigation options before commencing lockdown. The proposed rule introduces important procedural safeguards that activate upon a borrower’s request for loss mitigation assistance.

These include prohibitions against double tracking, a practice in which managers pursue lock-in while simultaneously engaging in loss mitigation, and restrictions on fees that managers can impose during the review process. . Additionally, the rule imposes enhanced disclosure requirements and requires service providers to offer communication options in multiple languages.

The CFPB then solicited industry comments on several aspects of the proposed rule, including its implications for the use of borrower credit data, servicer reporting practices, and the potential introduction of a special code for reporting mortgage loans subject to loss mitigation review.

Context and evolution of the regulatory framework

The proposed regulations stem from the demonstrated effectiveness of streamlined loan modifications observed during the COVID-19 pandemic, aimed at establishing these processes as a permanent feature. This initiative expands the regulatory framework developed in response to the foreclosure crisis between 2006 and 2014, during which the CFPB promulgated the 2013 Mortgage Servicing Rules under the Real Estate Settlement Procedures Act (RESPA ) and Regulation X. These rules required mortgage servicers to evaluate borrowers. for all viable loss mitigation options within a reasonable time of receipt of a complete loss mitigation application.

During the COVID-19 pandemic, mortgage delinquencies have reached levels not seen since the foreclosure crisis. In response, the CFPB issued an interim final rule on June 30, 2020, allowing service providers to offer loss mitigation options without the need for a full application. This regulatory flexibility was further expanded with additional rules in 2021, which allowed for faster enrollment of borrowers in streamlined loan modifications without the prerequisite of a full application process.

Expanded Obligations for Mortgage Loan Servicers

The proposed rule seeks to amend and expand the 2013 regulations by imposing new requirements on servicers when borrowers seek assistance during periods of financial hardship. Once a borrower requests loss mitigation assistance, the servicer must ensure that one of the following procedural safeguards is met before proceeding with foreclosure or imposing certain fees: (1) the borrower is considered ineligible for any loss mitigation option; or (2) the borrower has failed to communicate with the servicer for at least 90 days despite the servicer’s efforts.

A notable aspect of the proposal is the extension of foreclosure and fee protections throughout the loss mitigation review cycle, until the borrower is current on their payments or the one of the procedural guarantees is respected. The CFPB anticipates that these measures will incentivize service providers to conduct loss mitigation reviews more quickly and accurately.

Clarifications and new definitions

The proposed rule introduces and defines the term “loss mitigation review cycle,” defining it as the continuous period beginning when a borrower requests loss mitigation assistance, provided that such request is made at least 37 days before a sale by foreclosure. This cycle continues until a servicer implements a solution that brings the borrower’s loan current or satisfies one of the procedural safeguards. The rule also expands the scope of what constitutes a “request for loss mitigation assistance,” ensuring that any communication from a borrower, oral or written, through customary channels, can trigger procedural protections against foreclosure.

Ban on double tracking and additional fees

The rule explicitly prohibits the practice of double tracking, requiring foreclosure activities to cease as soon as a borrower requests loss mitigation assistance and continue throughout the review cycle. Furthermore, with the exception of late fees, managers could not accrue additional fees or penalties during this period, which could require them to bear the cost of third-party services related to the management of unpaid debts, such as real estate inspections.

Language and communication requirements

Given the diverse language needs of borrowers, the proposed rule requires service providers to provide translated communications into Spanish and other languages ​​upon request, both in written and oral form. This provision extends to borrowers whose loans were marketed in a language other than English, ensuring that they receive relevant loss mitigation communications in the same language.

Conclusion

The proposed rule, if adopted, would significantly strengthen mortgage servicers’ obligations to assist distressed borrowers by requiring them to exhaust all loss mitigation avenues before proceeding with foreclosure. It is also intended to provide borrowers with significant opportunities for relief, but may also impose additional costs on servicers and potentially delay foreclosure proceedings, thereby affecting the enforcement of mortgage obligations. Given that these are the first substantial revisions to the mortgage servicing rules in eight years, the proposed rule could result in significant changes to industry practices, requiring an investment of time and resources as servicers s strive to comply with the new requirements.

With the public comment period still open, it is crucial that service providers, investors, trade associations, and their advisors thoroughly review the CFPB’s proposal to evaluate its potential impact on their operations. Additionally, these parties should seriously consider whether they should contribute to public comments or provide data that could help the CFPB refine amendments to Regulation necessary on the proposed rule and its calls for data and other relevant information.

The CFPB’s request for comments reflects the agency’s ongoing efforts to balance borrower protections with industry concerns and it is anticipated that the CFPB will take several months to review public comments and make revisions before issuing the rule final later this year or in early 2025. Implementation of the Regulation X amendments is expected to take effect nine to 12 months after the rule is finalized.