Simon PLC Attorneys & Counselors – September 2021 Memorandum
LENDERS BEWARE OF CFPB MORTGAGE SERVICING COVID-19 FINAL RULE- A MORATORIUM ON FORECLOSURE
Bloomfield Hills, Michigan – As we slowly emerge from the COVID-19 pandemic that has consumed and continues to consume this nation (and the world) for the past 18 months, the Consumer Financial Protection Bureau (CFPB) released its final rule (2021 Mortgage Servicing COVID-19 Rule or 2021 Rule), which went into effect on August 31 pertaining to requirements that must be complied with prior to commencing and/or initiating new foreclosure actions. The new CFPB final rule amends RESPA Regulation X early intervention and loss mitigation requirements, found at 12 C.F.R. §§ 1024.39 and 1024.41. CFPB implemented the 2021 Rule in hopes to ensure a more “orderly transition” back to a normal housing market. The 2021 Rule not only provides protections to homeowners by streamlining the application process and the paperwork needed to modify mortgages in an effort to hopefully get homeowners into “affordable mortgage payment plans faster”, but also prevents what the CFBP anticipates as a “flood of foreclosures from being initiated in the fall”, as many Federal and State protections put in place during the COVID-19 pandemic comes to an end. Although not classified as a moratorium on new foreclosures, the impact is essentially the same.
Unlike the CARES Act and other initiatives put in place throughout the pandemic that applied only to federally backed mortgage loans, such as FHA, VA, USDA, Fannie Mae, and Freddie Mac mortgages, the CFPB final rule applies broadly to “federally related” mortgage loans, as defined by RESPA. “Federally related” is an extremely broad category that covers the vast majority of real estate transactions. It covers loans (other than temporary loans), including refinances, secured by either a one-to-four family structure or manufactured home. As such, the new rule applies even to servicers of non-federally-backed mortgage loans, including loans held in private-label securitization trusts.
The new rule focuses on several components, including but not limited to, (i) requirements for servicers to comply with additional procedural safeguards before initiating foreclosure (pre-foreclosure safeguards); (ii) allowing a servicer to offer certain streamlined loan modifications without requiring the borrower to submit a complete loss mitigation application (anti-evasion exception); (iii) specifying how and when a servicer must resume reasonable diligence efforts at the end of forbearance; and (iv) imposing new early intervention requirements for borrowers in default.
Essentially, under the new rule servicers are prohibited from initiating any foreclosure action until they have made contact with a homeowner or have reasonably made attempts to contact the homeowner to no avail, or evaluated an application to help homeowners avoid foreclosure. The amendments requiring servicers to comply with additional procedural safeguards before initiating foreclosure will sunset on December 31, 2021. The additional early intervention requirements apply until October 1, 2022. Other provisions in the new rule do not have a sunset date. This article will focus on the temporary pre-foreclosure safeguards prior to initiating a foreclosure.
Procedural Safeguards Prior to Initiating Foreclosure
The CFPB’s existing servicing rule prohibits a servicer from initiating foreclosure until the borrower is more than 120 days delinquent, thereby providing a pre-foreclosure period whereby servicers are encouraged to reach out to the borrower and review all loss mitigation options prior to the commencement of foreclosure. However, borrowers in forbearance for a period of four months or more without making payments during the pandemic, who then exit the forbearance period without bringing the loan current, inevitably face imminent foreclosure because their loan is more than 120 days delinquent. Similarly, borrowers impacted by the pandemic but not in forbearance, and no longer protected by the Federal or State protections in effect during the pandemic, also face imminent foreclosure. Therefore, to protect these borrowers and avoid the influx of foreclosures, the CFPB’s final rule requires that servicers comply with additional procedural safeguards before making the “first notice or filing” necessary to initiate foreclosure from the effective date of August 31, 2021 until December 31, 2021.
Under the new rule, mortgage lenders and servicers, with limited exceptions, will be prohibited from initiating foreclosure proceedings against homeowners in forbearance or who have experienced a “COVID-19-related hardship” until January 1, 2022. Between August 31 and December 31, the only accounts that can be referred for foreclosure are those that are at least 120 days past due and one of the following three conditions have been met: (i) the borrower has been thoroughly evaluated and there are no available options to avoid foreclosure; (ii) the property is abandoned; or (iii) the borrower is unresponsive to servicer outreach. Homeowners that were at least 120 days delinquent when the national emergency was declared in March 2020 are not eligible for these protections.
The new pre-foreclosure procedural safeguards implemented by the CFPB apply only to mortgages secured by the borrower’s principal residence that became 120-days delinquent after March 1, 2020. A narrow subset of servicers called “small servicers”—those that service fewer than 5000 mortgages which they also own—also are not required to comply. In addition, if the statute of limitations to foreclose will run prior to January 1, 2022, the servicer may initiate foreclosure without satisfying the procedural safeguards.
Borrower Has Been Thoroughly Evaluated Based Upon A Complete Application. The first procedural safeguard option for a servicer to be permitted to initiate foreclosure during the protected window applies if the borrower has submitted a complete loss mitigation application, has remained delinquent at all times since that complete application was submitted, and the servicer has complied with Reg. X § 1024.41(f)(2). Section 1024.41(f)(2) provides that after a complete application is received, the servicer may not initiate foreclosure until the borrower has been sent a written denial notice pursuant to section 1024.41(c)(1)(ii) and any appeal window has expired or denied, or the borrower has rejected all loss mitigation options offered by the servicer or failed to perform under a loss mitigation option.
Property Securing Mortgage Is Abandoned. The second possible “procedural safeguard” that may be satisfied, enabling a servicer to initiate foreclosure during the protected time-period, applies if the property securing the mortgage is abandoned according to the laws of the state or municipality where it is located.
Borrower Is Unresponsive For At Least 90 Days. This safeguard is satisfied if the servicer has not received any communication from the borrower or his or her agent for at least 90 days prior to making the first notice or filing and the following conditions are met:
- The 90-day period of compliance may be satisfied based on activity that occurred prior to the effective date of the rule. However, for any stretch of the 90-day period that falls after the effective date of the overall rule, the servicer will have to comply with the enhanced early intervention efforts described below, including the specific live contact attempt between 10 and 45 days prior to the end of forbearance, in which post-forbearance options must be described.
- The servicer sent the early intervention notice letter required by Reg. X § 1024.39(b) at least 10 and no more than 45 days prior to the first notice or filing, which includes a statement encouraging the borrower to contact the servicer, a telephone number for the borrower’s point of contact, a brief description of available loss mitigation options and how to apply for them, and information about how to contact a HUD-certified housing counselor.
- The servicer has sent all notices required by Reg. X § 1024.41, as applicable, during the 90-day period before the servicer makes the first notice or filing, which could include but is not limited to, notices if the borrower has submitted an incomplete application during the 90-day period or has defaulted on a streamlined mod trial payment plan and the notice was not provided previously, and could also include a letter if a forbearance was offered or extended during the 90-day period; and
- The borrower’s forbearance, if applicable, ended at least 30 days before the servicer makes the first notice or filing.
A critical point in determining if a servicer has met the third safeguard is that the servicer has not received a communication from the borrower or his or her agent. The CFPB clarified that a servicer has not received a communication from the borrower (meaning the borrower would be deemed unresponsive, the third safeguard has been met, and the servicer could initiate foreclosure) if the servicer: (i) has not received any written or electronic communication from the borrower about the mortgage loan; (ii) has not received a telephone call from the borrower about the mortgage loan; (iii) has not successfully established live contact with the borrower about the mortgage; and (iv) has not received a payment from the borrower on the mortgage. However, it must be noted that a good faith effort must be demonstrated showing that the servicer has attempted live contact with the borrower and that the servicer has not created obstacles that would inhibit a borrower’s ability to engage them regarding their loan.
A servicer can initiate a foreclosure after January 1, 2022, without satisfying any of the above additional or enhanced requirements. However, if a servicer initiates a foreclosure prior to January 1, 2022, it is essential that the servicer retain evidence of strict compliance under the temporary procedural safeguard framework. A servicer that initiates a foreclosure (makes the first notice or filing) at a time when none of the procedural safeguards have been satisfied violates RESPA and may be subject to a borrower’s private right of action under RESPA for out of pocket and emotional distress damages as well as attorneys’ fees.
For our clients that have been greatly impacted by both Federal and State moratoriums on foreclosures be aware of the current CFPB final rules and adhere closely to its requirements. The Bureau intends to “closely monitor” consumer complaints and examine servicer’s procedures and records to ensure strict compliance with the final rules.
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