On July 10, 2024, the Consumer Financial Protection Bureau (CFPB) released its long-awaited mortgage servicing proposed rule to amend Regulation X. While mortgage servicing companies have operated under the current framework for over a decade and this approach was refined after the Great Recession, the CFPB has signaled its desire to modernize Regulation X's rules regarding default servicing in the wake of post-pandemic relief options.
Servicers have worked extraordinary hard to successfully provide record amounts of homeowner relief through pandemic-era programs. As a result, foreclosures have fallen significantly to an estimated 0.26% of properties nationwide, compared to a peak of 2.23% in 2010 and 1.04% before the CFPB issued its first mortgage servicing rule in January 2014. As expected, the CFPB focused on changes to default servicing and loss mitigation in its proposed rule. However, mortgage servicers may have been surprised to see that the CFPB opted for an entirely new loss mitigation framework in its proposed rule, rather than using pandemic-era ideas to amend the existing framework. In addition to loss mitigation, the CFPB's proposed rule also makes significant changes to how it accommodates limited English proficiency borrowers (LEPs) and the fees servicers can charge while their clients are receiving loss mitigation. The CFPB also raised several questions in its proposal that hint at other issues it believes it will address in the final rule.
New Loss Mitigation Framework
The most significant changes to the CFPB’s loss mitigation rules include:
New Framework: The existing filing-based loss mitigation framework will be replaced with a new system centered around foreclosure procedural safeguards. Loss Mitigation Review Cycle: This new term refers to the period during which the foreclosure safeguards are in effect. This period begins when a borrower requests loss mitigation assistance and ends only when the borrower completes payments, becomes unresponsive for more than 90 days, or completely exhausts the safeguards. Request for Loss Mitigation Assistance: This term is defined to include any communication from a borrower requesting mortgage relief, which is significantly broader than the CFPB's previous trigger of “complete filing.” Prohibition on Pre-Facilitation of Foreclosure: If a borrower requests loss mitigation more than 37 days prior to a foreclosure sale, the foreclosure action cannot proceed unless the procedural safeguards are met. Expanded Notice: Servicers must provide decision notices for all types of loss mitigation offers and denials, including forbearances and deferrals. This is a significant expansion from the current rules. More Information: Written loss mitigation decision notices must include the decision reasons for the proposed or denied workout, the inputs used, and all loss mitigation options available from the investor. Unsolicited Offers: Notice is required if servicers offer loss mitigation options based on existing information, such as a no-petition simplified amendment or workout. Forbearance: Servicers must contact borrowers prior to the end of the forbearance period to inform them of available loss mitigation options.
Language Access
The CFPB has outlined its priorities for how servicers should communicate with borrowers in languages other than English and is seeking comment on how to best handle these changes in the final rule.
Spanish Translation: Specified written communications must be translated into Spanish and provided to all borrowers along with the English version.Other Languages: Translations of certain notices must be available in at least five languages selected by the servicer, and interpretation services must be provided upon request.Marketing Language: If the loan is marketed to a consumer in a language other than English, a translation or interpretation in that language must be provided.
Other issues and open questions
Throughout the proposal, the CFPB continues to focus on so-called “junk fees” in servicing: Under the proposed rule, servicers would be prohibited from charging fees in excess of the scheduled contract amount during a loss mitigation review cycle.
The CFPB also seeks comment on the following questions:
Credit reporting: We seek comment on ensuring accurate and consistent credit reporting for borrowers receiving loss mitigation measures. “Zombie mortgages”: The CFPB seeks information regarding dormant second mortgages and potential borrower protections. Deferred amounts: We seek comment on notifying borrowers of deferred amounts due at the end of the loan term. Successors in interest: We seek comment on protecting potential successors in interest. Overlapping state laws: We seek comment on potential overlaps with state laws and resulting burdens.
Conclusion
The proposed rule would create a significant new compliance burden for mortgage servicers after significant compliance efforts by servicers to implement loss mitigation systems in the aftermath of the Great Recession. It also could reignite consumer litigation over Regulation X compliance as servicers work to implement these requirements once they are finalized.
These changes will require mortgage servicing companies to update their loss mitigation processes, enhance communication practices, and comply with new procedural safeguards. Servicing companies must also provide language assistance and prepare to adapt their fees and credit reporting practices. Additionally, servicing companies will need to understand and address potential overlaps with existing state laws as they adapt their operations to the new framework.
The rule will take effect 12 months after the final rule, while the LEP provisions will take effect 18 months after publication. Comments on the proposed rule are due on September 9, and industry groups and service providers will no doubt be working to understand and comment on the significant changes before the comment period closes.