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In response to the COVID-19 pandemic, the Consumer Financial Protection Bureau (CFPB or the Bureau) has proposed a set of amendments to Regulation X covering mortgage servicers. The CFPB believes that in the fall of 2021, a large number of borrowers will exit forbearance programs in a short period of time and that many of those borrowers will subsequently need to obtain loss mitigation options from mortgage servicers. Such a potential surge in borrowers seeking loss mitigation could strain the limited resources of mortgage servicers. Therefore, the CFPB is proposing amendments aimed at preventing avoidable foreclosures and easing review of loss mitigation options. Specifically, the Bureau is proposing a special pre-foreclosure review period to give borrowers affected by the COVID-19 emergency an opportunity to be evaluated for loss mitigation options. The proposed amendments also would permit servicers to evaluate incomplete applications in certain situations to streamline loan modification decisions. The proposal also would require servicers to provide certain information to borrowers in live contacts, as defined under existing Mortgage Servicing Rule requirements, and conduct reasonable due diligence to complete loss mitigation applications. These proposals are described in more detail below.

Prohibition on Foreclosure Referral

If adopted, the proposed rule would temporarily establish a special pre-foreclosure review period that would generally prohibit servicers from initiating foreclosure until December 31, 2021. If adopted with the proposed effective date of August 31, 2021, the proposal could delay many foreclosures from being initiated by up to four months, according to CFPB analysis. The delay would be in addition to existing prohibitions on initiating foreclosure until the loan is more than 120 days delinquent.

Evaluation of Loss Mitigation Applications

The proposed rule would extend certain exceptions from the requirement that servicers evaluate only a complete loss mitigation application to certain streamlined loan modifications (e.g., GSEs' Flex Modification Programs, FHA's COVID-19 Owner-Occupant Loan Modification, and similar programs). Under the proposed rule the servicer would be allowed to offer certain loan modifications based on the evaluation of an incomplete application if certain criteria are met. If the borrower accepts such a loan modification (e.g., reduction in mortgage principal and/or interest rates, temporarily postpone payments or loan extensions), the servicer would no longer be required to comply with evaluation and notice requirements. However, the servicer would be required to immediately resume reasonable diligence efforts to complete any loss mitigation application a borrower submitted before the servicer's offer of a trial loan modification plan if the borrower fails to perform or if the borrower requests further assistance.

Live Contact and Reasonable Diligence Requirements

The proposed rule would temporarily require servicers to provide additional information to certain borrowers during live contacts. Servicers would be required to ask whether borrowers who are not in a forbearance program at the time of the live contact are experiencing a COVID-19 related hardship. If they are experiencing a COVID-19 related hardship, the proposed rule would require servicers to describe available forbearance programs and actions a borrower must take to be evaluated.

For borrowers who are in a forbearance program at the time of live contact, the proposed rule would require servicers to provide specific information about the borrower's current forbearance program and describe available post-forbearance loss mitigation options during the last required live contact made just before the end of the forbearance period.

If the borrower is in a short-term payment forbearance program due to a COVID-19 emergency that was offered based on evaluation of an incomplete application, a servicer must contact the borrower no later than 30 days before the end of the forbearance period to determine if the borrower wishes to complete the loss mitigation application. If the borrower requests further assistance, the servicer should exercise reasonable diligence to complete the application before the end of the forbearance period.

The CFPB proposes that any final rule related to this proposal would become effective on August 31, 2021. The CFPB requests public comments on the 150-page proposed rule on or before May 10, 2021.

In addition to complying with the amendments to Regulation X as proposed, mortgage servicers should consider the financial, risk and operational implications of the new rule, if adopted, and the potential surge in borrowers seeking loss mitigation options when forbearance ends. Cashflow, expected loss, and other risk models will likely not be calibrated to adequately capture the potential for risk mitigation and foreclosure for borrowers currently in forbearance. Servicers may lack adequate workforce capacity to process a larger number of requests for risk mitigation options as forbearance programs end. Servicers would continue to incur costs of servicing non-performing loans, including servicer advances, maintenance of real-estate owned (e.g., insurance, taxes, lawn care), preparing required disclosures, and responding to borrower requests, during the prolonged pre-foreclosure review period. And of course, servicers would need to fund the activities necessary to change policies, procedures, scripts, and systems to comply with the changes to the regulation.

The proposed rule can be found on the CFPB website.

How We Can Help

FORVIS is a strategic advisor actively assisting some of the largest bank and non-bank mortgage companies. Our global platform is designed to help address the inherent transaction risks across the enterprise, including providing a holistic approach to enhancing the borrower experience, leveraging intelligent automation to optimize outreach, and developing mitigation strategies to minimize the regulatory and financial impact of the regulation. Our Risk and Regulatory Advisory professionals are available to discuss your specific challenges related to compliance, regulatory change, technology, and a host of other issues servicers may face.

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