Consumer Finance Litigation

On August 31, 2021, a new final rule amending Regulation X’s mortgage servicing rules for borrowers experiencing hardship due to COVID-19 will take effect. The Consumer Financial Protection Bureau (“CFPB”) hopes that these provisions will prevent a new foreclosure crisis when the majority of existing foreclosure moratoria implemented by state and federal governments expire over the course of this summer. A mastery of these new provisions will be essential knowledge for lenders, loan servicers, and their counsel in the coming months and years ahead.

Here are five major provisions in the CFPB’s final rule:

First, the final rule defines COVID-19-related hardship to mean a financial hardship due, directly or indirectly, to the national emergency for the COVID-19 pandemic. Thus, the final rule will likely be widely applicable to a large number of borrowers currently in default or forbearance.

Second, the final rule establishes what the CFPB calls “procedural safeguards” that must be met for certain mortgages before the servicer can make a new foreclosure first notice or filing. The first notice or filing procedural safeguards are applicable only if the borrower’s mortgage loan obligation became more than 120 days delinquent on or after March 1, 2020, and the statute of limitations applicable to the foreclosure action being taken in the laws of the State or municipality where the property securing the mortgage loan is located expires on or after January 1, 2022. Under those circumstances, the servicer may make a new foreclosure first notice or filing only if: (1) the borrower submitted a completed loss mitigation application and § 1024.41(f)(2) permits the servicer to make the first notice or filing, (2) the property securing the mortgage loan is abandoned, or (3) the servicer has conducted specified outreach and the borrower is unresponsive. The above procedural safeguards need not be met for first notices or filings undertaken after January 1, 2022.

Third, the final rule permits servicers to offer certain streamlined loan modification options to borrowers with COVID-19 related hardship based on the evaluation of an incomplete loss mitigation application. Eligible loan modifications must satisfy certain criteria that aim to establish sufficient safeguards to help ensure that a borrower is not harmed if the borrower chooses to accept an offer of an eligible loan modification based on the evaluation of an incomplete application. For example, the loan modification may not cause the borrower’s monthly required 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. If the loan modification permits the borrower to delay paying certain amounts until maturity, or other triggers specified in the final rule, those amounts cannot accrue interest. Acceptance of an offer of the loan modification must be designed to end any preexisting delinquency on the mortgage loan upon the borrower satisfying the servicer’s requirements for completing a trial loan modification plan and accepting a permanent loan modification. Additionally, the servicer may not charge any fee in connection with the loan modification and must waive all existing late charges, penalties, or similar charges that were incurred on or after March 1, 2020, upon the borrower’s acceptance of the loan modification. The final rule also contains other limits on such modifications.

If the borrower accepts an offer made pursuant to this new exception, the final rule excludes servicers from certain requirements with regard to loss mitigation applications. However, if the borrower fails to perform under a trial loan modification plan offered pursuant to the proposed new exception, or requests further assistance, the final rule requires servicers to undertake certain additional loss mitigation steps and to provide additional notices to the borrower as specified in greater detail in the final rule.

Fourth, the final rule amends the early intervention obligations and requires servicers to discuss specific additional COVID-19-related information during live contact with borrowers established under existing § 1024.39(a) if the borrower is not in a forbearance program or if the borrower is near the end of a forbearance program made available to borrowers experiencing a COVID-19 related hardship. This provision is will end on October 1, 2022.

Fifth, the final rule clarifies servicers’ reasonable diligence obligations when the borrower is in a short-term payment forbearance program made available to a borrower experiencing a COVID-19-related hardship based on the evaluation of an incomplete application. Specifically, the final rule requires servicers to contact the borrower no later than 30 days before the end of the forbearance period if the borrower remains delinquent to determine if the borrower wishes to complete the loss mitigation application and proceed with a full loss mitigation evaluation.

The final rule and its official interpretation total two hundred eight pages. Thus, the summary above is far from a comprehensive summary of the final rule and its numerous provisions, requirements, and exceptions. As the CFPB acknowledges, the final rule will come into effect at a time when many mortgage servicing employees are working remotely or only recently back in the office. Combine that with the fact that a large number of borrowers are expected to submit new loss mitigation applications at around the same time this summer when many short term forbearance plans are set to expire, and compliance with the final rule promises to be a challenge that lenders, loan servicers, and their counsel need to prioritize ahead of its August 31, 2021, effective date.