On April 5, 2021, the Consumer Financial Protection Bureau (the “CFPB”) issued a proposed rule that would, among other things, establish a temporary COVID-19 emergency pre-foreclosure review period until December 31, 2021, for principal residences. Currently, the moratorium on foreclosures and evictions for Federal Housing Administration, US Department of Agriculture, US Department of Veterans Affairs, Fannie Mae, and Freddie Mac loans has been extended until June 30, 2021. The proposed rule would further expand on the agency relief by effectively halting foreclosure initiations on principal residences until 2022 (the “Proposed Rule”).
The CFPB has made clear that the intention of the Proposed Rule is to prevent a surge of foreclosures as borrowers begin exiting forbearance. Instead, by providing additional flexibility under Regulation X for lenders and servicers to offer certain streamlined loan modification programs, the CFPB is seeking to provide borrowers with additional options to avoid foreclosure. The CFPB indicated it would accept public comments through May 10, 2021, and that a final rule implementing the proposal would take effect August 31, 2021. While we expect many comments will be submitted by the industry in response, below is a brief overview highlighting the key components of Proposed Rule.
Restriction on Foreclosure Initiation Through December 31, 2021
The Proposed Rule includes amendments to Regulation X that would restrict servicers from making the first notice or filing for any judicial or non-judicial foreclosure process on principal residences until after December 31, 2021, regardless of whether the loan default was in any way related to the COVID-19 pandemic. This prohibition would be in addition to the current restriction that prohibits a servicer from initiating foreclosure until a mortgage loan is more than 120 days delinquent.1 The proposal acknowledges that borrowers who have entered into forbearance programs and who do not make payments during the forbearance period are increasingly delinquent on their mortgage obligations. Without additional action, the CFPB acknowledges that servicers would have a right under Regulation X to initiate foreclosure proceedings in the event a borrower comes off a forbearance plan and does not cure such delinquency. Thus, the Proposed Rule is designed to address this heightened risk of foreclosure.
However, the CFPB is also considering exemptions from this proposed restriction that would permit servicers to initiate foreclosure proceedings before December 31, 2021, if the servicer: (1) has completed a loss mitigation review of the borrower and the borrower is not eligible for any non-foreclosure option, or (2) has made certain efforts to contact the borrower and the borrower has not responded.
Streamlined Loan Modification Options
The Proposed Rule would also allow servicers to offer certain streamlined loan modification options to borrowers with COVID-19-related hardships based on the evaluation of an incomplete application. The Proposed Rule would define “COVID-19-related hardship” to mean, “a financial hardship due, directly or indirectly, to the COVID-19 emergency as defined in the Coronavirus Economic Stabilization Act, section 4022(a)(1) (15 U.S.C. 9056(a)(1)).” To be eligible, the modifications must satisfy certain safeguards aimed at ensuring that a borrower would not be harmed should the borrower choose a loan modification instead of completing a loss mitigation application. The loan modification must meet the following criteria:
- COVID-19-Related Hardship: The loan modification must be made available to a borrower experiencing a COVID-19-related hardship.
- Term and Payment Limitations: The modification may not cause the borrower’s monthly principal and interest payment to increase and may not extend the term of the loan by more than 480 months from the date the loan modification is effective.
- Non-Interest-Bearing Deferred Amounts: Any amounts that a borrower may delay paying until the loan is refinanced, the property is sold, or the loan modification matures must not accrue interest.
- Fee Restrictions: The servicer may not charge any fee in connection with the modification and must waive any existing late charges, penalties, stop payment fees, or any similar charges upon a borrower’s acceptance of the loan modification.
- Delinquency Cure: A borrower’s acceptance of the loan modification must end any preexisting delinquency on the loan or the modification must be designed to end any preexisting delinquency upon the borrower satisfying the servicer’s requirements for completing a trial loan modification plan and accepting a permanent loan modification.
If a borrower accepts a loan modification pursuant to this exception, the Proposed Rule would exclude servicers from certain requirements with regard to any loss mitigation application submitted prior to the loan modification offer, including exercising reasonable diligence to complete the loss mitigation application and sending the required acknowledgment notice pursuant to § 1024.41(b)(2).2 However, the Proposed Rule would require servicers to resume diligence with regard to any loss mitigation application a borrower submitted prior to the servicer’s offer of a trial loan modification plan should a borrower fail to perform under the trial loan modification plan offered under this exception or if the borrower requests additional assistance.
Amendments to Early Intervention Requirements
The Proposed Rule would amend early intervention and reasonable diligence obligations to ensure servicers are communicating timely and accurate information to borrowers about their loss mitigation options. Specifically, the Proposed Rule would temporarily require servicers to take additional actions during live contacts under the current requirements of § 1024.39(a)3 for one year after the effective date of the final rule.
First, if a borrower is not in a forbearance program at the time live contact is established by the servicer and a forbearance program is available to borrowers experiencing a COVID-19-related hardship, the servicer must ask the borrower whether s/he is experiencing such a hardship. If the borrower indicates that s/he is experiencing a COVID-19-related hardship, the servicer must list and briefly describe any available forbearance programs and what action the borrower must take to be evaluated for such program. The CFPB noted this requirement is not limited to forbearance programs specific to COVID-19 or only available during the COVID-19 emergency programs, but would also include available programs where COVID-19-related hardships are sufficient to meet the hardship-related requirements for the forbearance program. Further, examples of forbearance programs a servicer may need to describe would include any payment forbearance program made pursuant to the CARES Act, investor-provided forbearance programs whose eligibility includes borrowers with COVID-19-related hardship, or state law required COVID-19-related forbearance program options.
Second, if the borrower is currently participating in a forbearance program made available to borrowers experiencing COVID-19-related hardships, during the last live contact that occurs prior to the end of the forbearance period, the Proposed Rule would require the servicer to provide certain information to the borrow including:
- Inform the borrower of the date the borrower’s current forbearance program ends;
- Provide a list and brief description of each of the types of forbearance extensions, repayment options, and other loss mitigation options, including but not limited to COVID-19-related options, made available to the borrower to resolve a borrower’s delinquency at the end of the forbearance program; and
- Inform the borrower of the actions the borrower must take to be evaluated for loss mitigation options.
The Proposed Rule indicates that the CFPB proposes an August 31, 2022 sunset date for these proposed amendments to the early intervention requirements.
Reasonable Diligence Obligations
The Proposed Rule would clarify servicers’ reasonable diligence obligations when the borrower is in a short-term payment forbearance program based on the evaluation of an incomplete application. The proposed amendment would specify that a servicer must contact the borrower no later than 30 days before the end of the forbearance period to determine whether the borrower wishes to complete the loss mitigation application and proceed with a full loss mitigation application. If a borrower requests further assistance, the Proposed Rule would require that a servicer exercise reasonable diligence to complete the application before the end of the forbearance program period.
Given the wide-reaching prohibition on foreclosure restrictions the Proposed Rule contemplates, including restrictions on foreclosures unrelated to the COVID-19 pandemic, it is apparent that the goal of the CFPB under the Biden Administration is to postpone foreclosures for as long as possible. We expect numerous comments will be submitted in response to the Proposed Rule, with particular focus on the potential exemptions to the blanket foreclosure restriction for principal residences. Even so, with the CFPB’s clear focus on preventing foreclosures, lenders and servicers should be proactively evaluating how they will handle borrowers exiting forbearance to limit the need to resort to that option. The additional flexibility provided by the Proposed Rule could be an additional tool for lenders and servicers to develop alternative workout and modification programs with borrowers. While it is unclear whether the CFPB actually has the power to implement these overarching restrictions by the authority granted to it under RESPA and the Dodd-Frank Wall Street Reform and Consumer Protection Act, what is clear is that the industry should continue to closely monitor the progression of this rule.
* Abigail Lyle is a partner in the financial services litigation and compliance practice group in the Dallas office of Hunton Andrews Kurth LLP. Abigail’s practice focuses on regulatory compliance and defending financial institutions in enforcement actions and litigation related to consumer protection laws. She can be reached at +1 214 979 8219 or [email protected].
** Taylor Williams is an associate in the financial institutions corporate and regulatory practice group in the Dallas office of Hunton Andrews Kurth LLP. Her practice focuses on counseling financial service providers on regulatory and compliance matters. She can be reached at +214 979 3016 or [email protected].
1 12 CFR § 1024.41(f)(1)(i).
2 12 CFR § 1024.41(b)(2).
3 12 CFR § 1024.39(a).