The Consumer Financial Protection Bureau has issued yet another suite of regulatory changes related to mortgage servicing. The rules add additional protections for borrowers—and therefore increased requirements for servicers—as well as clarify certain issues that have been the subject of questions and confusion by servicers.
Final Servicing Rule
First, a new final rule makes several changes to the Dodd-Frank mortgage servicing rules under Regulations X and Z. This rule will take effect 12 months (or, for certain provisions, 18 months) after publication in the Federal Register, which has not yet taken place as of this writing but is expected soon. Key provisions of the rule include the following, as described further on the CFPB’s website:
- “Complete” Loss Mitigation Application Notification: Servicers must let borrowers know when their application for loss mitigation is “complete.” The CFPB states that this is an important change because certain protections are triggered by an application being “complete.” For instance, servicers are often prohibited from conducting a foreclosure sale while they are in the process of reviewing a complete loss mitigation application.
- Repeat Loss Mitigation Protections: Under the current rules, a mortgage servicer is required to give borrowers certain loss mitigation protections once during the life of the loan. The new rule will require that servicers give those protections again for borrowers who have brought their loans current at any time since previously submitting a complete loss mitigation application.
- Borrowers in Bankruptcy: Currently, servicers do not have to provide periodic statements or early intervention loss mitigation information to borrowers in bankruptcy. The new rule will require servicers to provide statements to borrowers in bankruptcy in certain circumstances, as well as a modified early intervention notice providing information about loss mitigation options. Servicers also currently do not have to provide early intervention loss mitigation information to borrowers who have told the servicer to stop contacting them under the Fair Debt Collection Practices Act (“FDCPA”). The new rule generally requires servicers to provide modified written early intervention notices to let those borrowers also know about loss mitigation options.
- Servicing Transfers: A new servicer must comply with the loss mitigation requirements within the same timeframes that applied to the previous servicer, with some exceptions. If a borrower submits an application shortly before transfer, the new servicer must send an acknowledgment notice within 10 business days of the transfer date. If the borrower’s application was complete prior to transfer, the new servicer must evaluate it within 30 days of the transfer date. If the new servicer needs more information to evaluate the application, the borrower would retain some foreclosure protections in the meantime. If the borrower submits an appeal, the new servicer has 30 days to make a determination on the appeal.
- Dual Tracking: The CFPB’s existing rules prohibit servicers from taking certain foreclosure actions once they receive a complete loss mitigation application from a borrower more than 37 days prior to a scheduled sale. However, the CFPB states that it has found that in some cases, borrowers are not receiving this protection, and servicers’ foreclosure counsel may not be taking adequate steps to delay foreclosure proceedings or sales. The new rule clarifies that, if a servicer has already made the first foreclosure notice or filing and receives a timely complete application, servicers and their foreclosure counsel must not move for a foreclosure judgment or order of sale, or conduct a foreclosure sale, even if a third party conducts the sale proceedings, unless the borrower’s loss mitigation application is properly denied, withdrawn, or the borrower fails to perform on a loss mitigation agreement.
- Principal Residence/Vacant Property: Pursuant to 12 CFR § 1024.30(c)(2), the procedures set forth in 12 CFR §§ 1024.39 through 1024.41 regarding early intervention, continuity of contact, and loss mitigation only apply to a mortgage loan secured by a property that is a borrower’s principal residence. The CFPB has previously stated that whether a property is the borrower’s principal residence is a fact-specific inquiry. In the preamble to the final rule, the CFPB states that servicers have expressed uncertainty as to the applicability of provisions such as the 120-day foreclosure referral waiting period in 12 CFR § 1024.41(f)(1)(i) when a property is vacant. Accordingly, as part of the final rule, the CFPB is adopting comment 30(c)(2)-1, which clarifies that, if a property ceases to be a borrower’s principal residence, the procedures set forth in §§ 1024.39 through 1024.41 do not apply to a mortgage loan secured by that property. The comment further explains that the determination of principal residence status will depend on the specific facts and circumstances regarding the property and applicable state law. It further clarifies this explanation with an example explaining that a vacant property may still be a borrower’s principal residence in certain circumstances, such as where a servicemember relocates pursuant to permanent change of station orders and was occupying the property as his or her principal residence immediately prior to displacement, intends to return to the property at some point in the future, and does not own any other residential property.
- When Delinquency Begins: Several of the borrower protections under the existing servicing rules depend on how long a consumer has been delinquent on a mortgage loan. This has caused particular confusion in the servicing community because of lack of clarity as to what “delinquent” means, and when “delinquency” begins, for purposes of the servicing rules. The new rule clarifies that delinquency begins on the date a borrower’s periodic payment becomes due and unpaid. When a borrower misses a periodic payment but later makes it up, if the servicer applies that payment to the oldest outstanding periodic payment, the date that the borrower’s delinquency began advances.
- Successors in Interest: If a mortgage borrower dies, existing CFPB rules require that servicers have policies and procedures in place to promptly identify and communicate with family members, heirs, or other parties, known as “successors in interest,” who have a legal interest in the home. Under the new rule, confirmed successors in interest are given access to many of the same notices and documents that the original borrower would receive. The new rule establishes a broad definition of “successor in interest” that generally includes persons who receive property upon the death of a relative or joint tenant; as a result of a divorce or legal separation; through certain trusts; or from a spouse or parent. The rule also requires servicers to provide information to potential successors in interest about the documents that are needed to confirm their status as successors in interest.
- In the preamble to the final rule, the CFPB emphasizes that “confirmation of a successor in interest will not reset the 180-day period in § 1024.39(b) or the 120-day period in § 1024.41(f)(1)(i). Section 1024.39(b) provides that a servicer is not required to provide a written early intervention notice more than once during any 180-day period. Section 1024.41(f) provides that a servicer shall not make the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process unless a borrower’s mortgage loan obligation is more than 120 days delinquent or another specified condition is met. Confirmation of a successor in interest does not change the date when a loan obligation becomes delinquent.”
The provisions of this final servicing rule will take effect 12 months after publication in the Federal Register, except that the provisions relating to successors in interest and the provisions relating to periodic statements for borrowers in bankruptcy will take effect 18 months after publication in the Federal Register. Though the CFPB published the new rules on its own website on August 4, the Federal Register has still not published them as of this writing. Therefore, the rules will take effect 12 and 18 months after Federal Register publication.
FDCPA Interpretive Rule
In addition to the final servicing rule, the CFPB also issued an interpretive rule under the Fair Debt Collection Practices Act (FDCPA) clarifying the interaction of the FDCPA and the servicing rules under Regulations X and Z. As the CFPB notes in the issuance, while many mortgage servicers are not subject to the FDCPA, mortgage servicers that acquired a mortgage loan at the time that it was “in default” are subject to the FDCPA with respect to that mortgage loan. The interpretive rule constitutes an advisory opinion under FDCPA section 813(e) and provides a safe harbor from liability for actions done or omitted in good faith in conformity with the opinion, even if the opinion is rescinded or amended in whole or in part after the act or omission occurs, or is determined to be invalid by a judicial authority.
This interpretive rule constitutes an advisory opinion for purposes of the FDCPA and provides safe harbors from liability for servicers acting in compliance with applicable mortgage servicing rules in three situations:
- Servicers do not violate FDCPA section 805(b) when communicating about the mortgage loan with confirmed successors in interest in compliance with specified mortgage servicing rules in Regulation X or Z.
- Servicers do not violate FDCPA section 805(c) with respect to the mortgage loan when providing the written early intervention notice required by Regulation X (12 CFR § 1024.39(d)(3)) to a borrower who has invoked the cease-communication right under FDCPA section 805(c).
- Servicers do not violate FDCPA section 805(c) when responding to borrower-initiated communications concerning loss mitigation after the borrower has invoked the cease communication right under FDCPA section 805(c).
Like the servicing rule, this interpretive rule will take effect 12 months after publication in the Federal Register, except that the provision relating to successors in interest will take effect 18 months after publication in the Federal Register.
Principles for the Future of Loss Mitigation
In addition to these two rules, the CFPB issued a paper titled “Principles for the Future of Loss Mitigation” (Principles). The Principles are not regulations, but rather a thought piece to describe how the CFPB envisions a fair and compliant servicing system operating in a post-financial-crisis world, after the expiration of the federal Making Home Affordable mortgage modification programs. In the CFPB’s words, “These principles are intended to complement ongoing discussions among industry, consumer groups and policymakers on the development of loss mitigation programs that span the full spectrum of both home retention options such as forbearance, repayment plans and modifications, and home disposition options such as short sales and deeds-in-lieu... Further development of these principles and their implementation is necessary to prevent less desirable consumer outcomes and to ensure the continuance of appropriate consumer protections.”
As described by the CFPB, the Principles promote:
- Accessibility: Consumers should easily be able to obtain and use information about loss mitigation options, and how to apply for those options.
- Affordability: Repayment plans and mortgage loan modifications should generally be designed to produce a payment and loan structure that is affordable for consumers.
- Sustainability: Loss mitigation options used for home retention should be designed to provide affordability throughout the remaining or extended loan term.
- Transparency: Consumers should get clear, concise information about the decisions servicers make.
The Departments of Treasury and Housing and Urban Development and the Federal Housing Finance Agency also issued a joint white paper on this topic that details lessons learned from the Home Affordable Modification Program, and core principles they deem necessary in future loss mitigation frameworks. It appears likely that those agencies and the CFPB will continue to engage with stakeholders from industry, consumer groups, and others to continue to discuss and evaluate these concepts and determine what if any further action are warranted.
Looking to the Future
As servicers prepare to implement the final rule, they should pay particular attention to the need for training of all personnel who will be responsible for any aspect of implementing the new requirements. Since the servicing rules set forth very specific and technical requirements that are not always intuitive, it is crucial to compliance that training be kept refreshed and up to date.
Servicers also should keep in mind that this is not likely to be the final word from the CFPB in this area. The issuance of the Principles and the continued demonstration of scrutiny of this area by the CFPB indicate that the agency is far from done with servicing in general, and loss mitigation in particular.