In response to a potential wave of borrowers exiting forbearance programs around the same time, the Consumer Financial Protection Bureau (CFPB or the Bureau) issued the 2021 Mortgage Servicing COVID-19 Rule (the Rule) that amends certain provisions of Regulation X to assist borrowers experiencing COVID-19-related hardships. The Rule, which becomes effective Aug. 31, 2021, is designed to assist mortgage borrowers by establishing temporary safeguards to ensure borrowers have an opportunity to be reviewed for loss mitigation before their mortgage servicer can initiate foreclosure.
Formally known as Protections for Borrowers Affected by the COVID-19 Emergency Under the Real Estate Settlement Procedures Act (RESPA), Regulation X, the rule includes the following provisions:
- Temporary special COVID-19 loss mitigation procedural safeguards that give certain borrowers an opportunity to apply for loss mitigation before foreclosure is initiated after national foreclosure moratoria have ended.
- New exception to the complete application requirement that provides servicers the ability to offer borrowers certain COVID-19-related streamlined loan modifications without a compete loss mitigation application.
- Clarification of early intervention live contact requirements for servicers to provide additional information promptly after early intervention live contacts are established with certain delinquent borrowers.
- Clarification of reasonable diligence timing requirements for when servicers must renew reasonable diligence efforts to obtain complete loss mitigation application from certain borrowers.
The CFPB issued the rule because of concerns over a potentially unprecedented number of borrowers who may need loss mitigation assistance after the end of forbearance periods and foreclosure moratoria. The CFPB is concerned that many of these borrowers may seek assistance from their servicers, causing servicers to face capacity constraints that will overwhelm their operations, increase error rates associated with the servicing of delinquent borrowers and not fully explore and offer all loss mitigation options. While the CFBP acknowledges that is impossible to predict the extent of such challenges, the Bureau believes the Rule will help borrowers avoid obstacles to pursuing foreclosure avoidance options.
Following the comment period, the Bureau altered some of the provisions of the original proposed Rule. Notably, the Bureau did not adopt the special pre-foreclosure review period as proposed, which would have prohibited servicers from initiating foreclosure for several months. Instead, the finalized Rule will temporarily provide a more tailored procedural protection through temporary special COVID-19 procedural safeguards. The Bureau believes the finalized safeguards balance the goals of foreclosure avoidance while also allowing servicers to proceed with foreclosure referral where additional actions and time are unlikely to help a borrower avoid foreclosure.
The finalized Rule is described in more detail below.
Loss Mitigation: Temporary Special COVID-19 Procedural Safeguards
The 2021 Rule temporarily adds to the current foreclosure protection conditions in certain circumstances. From Aug. 31, 2021, through Dec. 31, 2021, before referring certain 120-day delinquent accounts for foreclosure, the servicer must make sure at least one of the three temporary procedural safeguards has been met:
- The borrower was evaluated based on a complete loss mitigation application, and existing foreclosure protection conditions are met.
- The property is abandoned under state law.
- The borrower is unresponsive to servicer outreach.
The temporary procedural safeguards are not required if 1) the foreclosure referral occurs on or after Jan. 1, 2022, 2) the borrower was more than 120 days delinquent prior to March 1, 2020 or 3) the applicable statute of limitation will expire before Jan. 1, 2022.
If the servicer has met the temporary procedural safeguards, or if the safeguards do not apply, the servicer may proceed with foreclosure referral, to the extent permitted by other law and the existing foreclosure protections.
Loss Mitigation: COVID-19-Related Streamlined Loan Modifications
The 2021 Rule permits servicers to offer certain COVID-19-related loan modification options based on the evaluation of an incomplete application to borrowers with COVID-19-related hardships. To qualify for the exception, the loan modification program must:
- Limit loan term extensions to not more than 40 years from the date the modification is effective.
- Limit periodic principal and interest payment increases to not more than the amount that was required prior to the modification.
- Prohibit interest accrual on any portion of the amount due on which the loan modification permits the borrower to delay payment.
- End, or be designed to end, any pre-existing delinquency.
- Not include certain fees.
Loss Mitigation: COVID-19-Related Reasonable Due Diligence
For delinquent borrowers in short-term payment forbearance programs that were offered based on an evaluation of an incomplete application and made available to borrowers with a COVID-19-related hardship, servicers are subject to specific timing requirements under the 2021 Rule. For such borrowers, the servicer is required to contact the borrower no later than 30 days before the scheduled end of the forbearance period to determine if they wish to complete the loss mitigation application. If the borrower chooses to do so, the servicer must reinstate reasonable diligence efforts to complete the loss mitigation application before the end of the forbearance period.
Early Intervention: Additional Temporary COVID-19-Related Live Contact Information
Existing mortgage servicing rules require a servicer to make good faith efforts to establish live contact with delinquent borrowers no later than the borrower’s 36th day of delinquency and again no later than 36 days after each payment due date and provide the borrowers with certain information about loss mitigation options. The 2021 Rule temporarily requires a servicer to provide some delinquent borrowers with specific additional information, including:
- The availability of forbearance programs.
- Information about homeownership counseling services.
- Scheduled end date of current forbearance program, if applicable.
- List and description of additional loss mitigation programs, if applicable.
This requirement only applies until Oct. 1, 2022.
The temporary special COVID-19 loss mitigation procedural safeguards will impose new costs on servicers by delaying the date on which foreclosures can be initiated for certain loans by up to four months. This will prolong the cost of servicing these non-performing loans, including the cost of mailing statements, providing required disclosures and responding to borrower requests. It will also include the cost of property inspections and providing upkeep for vacant properties. Servicers could also need to cover costs of advancing principal and interest payments to investors and making escrowed real estate tax and insurance payments even if borrowers are not making payments. Similarly, servicers will incur costs to maintain liquid reserves to advance these funds. Additional costs to servicers will include the costs of changes necessary to comply with the rule, including systems changes, revisions to call scripts and changes to policies and procedures.
Servicers should plan for these costs and related activities needed to implement and communicate the new requirements. Many servicers will need to take immediate action to implement the rule changes, including developing step-by-step procedures that address the new requirements, training employees on the provisions of the rule and the new procedures, and developing loan level tracking and reporting capabilities to ensure the servicer is meeting the requirements.
The 2021 Rule can be found on the CFPB website
How DHG Can Help
DHG is actively assists some of the largest financial institution and non-bank mortgage companies. Our global platform is designed to address the inherent risks across the enterprise, including providing a holistic approach to enhancing the borrower experience, leveraging intelligent automation to improve outreach and developing mitigation strategies to minimize the regulatory and financial impact of the regulation. DHG Risk and Regulatory Mortgage Advisory professionals are available to discuss your specific challenges related to risk, compliance, regulatory change, technology and a host of other issues servicers may face.
For more information about DHG’s Regulatory Advisory capabilities, please contact us at email@example.com.