Protections for Borrowers Affected by the COVID-19 Emergency Under the Real Estate Settlement Procedures Act (RESPA), Regulation X
Proposed rule; request for public comment.
CFR Part: "12 CFR Part 1024"
RIN Number: "RIN 3170-AB07"
Citation: "86 FR 18840"
Document Number: "Docket No.
Page Number: "18840"
"Proposed Rules"
Agency: "
SUMMARY:
DATES:
Comments must be received on or before
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FOR FURTHER INFORMATION CONTACT:
SUPPLEMENTARY INFORMATION:
I. Summary of the Proposed Rule
FOOTNOTE 1 The Coronavirus Aid, Relief, and Economic Security Act, Public Law 116-136, 134 Stat. 281 (2020) (CARES Act). END FOOTNOTE
FOOTNOTE 2 The CARES Act defines a "federally backed mortgage loan" as any loan which is secured by a first or subordinate lien on residential real property (including individual units of condominiums and cooperatives) designed principally for the occupancy of from one-to-four families that is insured by the
FOOTNOTE 3 CARES Act, supra note 2,
FOOTNOTE 4 See Press Release, The
FOOTNOTE 5 Id. END FOOTNOTE
The Bureau is concerned that a potentially unprecedented number of borrowers may exit forbearance at the same time this fall when they reach the maximum term of forbearance. As of
FOOTNOTE 6 Black Knights Mortg. Monitor,
FOOTNOTE 7 Id. at 9. END FOOTNOTE
FOOTNOTE 8 Id. END FOOTNOTE
Both populations of delinquent borrowers are at heightened risk of referral to foreclosure soon after the foreclosure moratoria end if they cannot bring their loan current or reach a loss mitigation agreement with their servicer to resolve their delinquency and avoid foreclosure. The Bureau is also concerned that a potentially historically high number of borrowers will seek assistance from their servicers at the same time, which could lead to delays and errors as servicers work to process a high volume of loss mitigation inquiries and applications this fall. In addition, the Bureau is concerned that the circumstances facing borrowers due to the COVID-19 emergency, which may involve potential economic hardship, health conditions, and extended periods of forbearance or delinquency, may interfere with some borrowers' ability to obtain and understand important information that the existing rule aims to provide borrowers regarding the foreclosure avoidance options available to them.
Overall, the proposed amendments aim to encourage borrowers and servicers to work together to facilitate review for foreclosure avoidance options, including to ensure that borrowers have the opportunity to be reviewed for loss mitigation options before a servicer makes the first notice or filing required for foreclosure. The proposed amendments would only apply to mortgage loans secured by the borrower's principal residence. An abandoned property is less likely to be a borrower's principal residence. /9/ None of the proposed amendments would apply to small servicers. /10/
FOOTNOTE 9 Determining a borrower's principal residence will depend on the specific facts and circumstances regarding the property and applicable State law. For example, a vacant property may still be a borrower's principal residence. An abandoned property, however, might no longer be a borrower's principal residence. END FOOTNOTE
FOOTNOTE 10 See 12 CFR 1024.30(b)(1); 12 CFR 1026.41(e)(4). END FOOTNOTE
In this proposal, the Bureau is focused on both the population of borrowers who are currently delinquent and not in either an active forbearance or an alternative loss mitigation option, and on the large population of borrowers who will be exiting forbearance programs in the next several months. In issuing this proposal, the Bureau recognizes that both the weight of the COVID-19 pandemic and related economic effects have disproportionately fallen upon communities in which many individuals and families were struggling financially even before the pandemic including--Black, Hispanic, Native American, rural, and lower-income communities. For example, the Bureau's analysis of a
FOOTNOTE 11
The proposed amendments to Regulation X would establish a temporary COVID-19 emergency pre-foreclosure review period that would generally prohibit servicers from making the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process until after
Second, the Bureau proposes to permit servicers to offer certain streamlined loan modification options made available to borrowers with COVID-19-related hardships based on the evaluation of an incomplete application. Eligible loan modifications must satisfy certain criteria that aim to establish sufficient safeguards to ensure that a borrower is not harmed if the borrower chooses to accept an offer of an eligible loan modification instead of completing a loss mitigation application. First, to be eligible, the loan modification must be made available to a borrower experiencing a COVID-19-related hardship. Second, 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. Third, any amounts that the borrower may delay paying until the mortgage loan is refinanced, the mortgaged property is sold, or the loan modification matures, must not accrue interest. Fourth, the servicer may not charge any fee in connection with the loan modification and must waive all existing late charges, penalties, stop payment fees, or similar charges promptly upon the borrower's acceptance of the loan modification. Finally, the borrower's acceptance of an offer of the loan modification must end any preexisting delinquency on the mortgage loan or 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. If the borrower accepts an offer made pursuant to this new exception, the proposal 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 acknowledgment notice required by
Third, the Bureau proposes amendments to the early intervention and reasonable diligence obligations to ensure that servicers are communicating timely and accurate information to borrowers about their loss mitigation options during the current crisis. Specifically, the Bureau is proposing to amend the early intervention requirements to require servicers to discuss specific additional COVID-19-related information during live contact with borrowers established under existing
In addition, the Bureau proposes to clarify 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 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 if the borrower wishes to complete the loss mitigation application and proceed with a full loss mitigation evaluation. If the borrower requests further assistance, the servicer must exercise reasonable diligence to complete the application before the end of the forbearance program period.
Finally, the Bureau is also proposing to define COVID-19-related emergency 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)).
The Bureau solicits comment on all aspects of this proposed rule. The Bureau is particularly interested in whether the proposed amendments facilitate efficient and timely pre-foreclosure loss mitigation review without interfering with the housing market in a way that is not proportional to the level of potential borrower harm, including by permitting foreclosure for the disposition of abandoned properties and in other instances where loss mitigation is not possible. In this vein, the Bureau is interested in receiving comments on operational challenges mortgage servicers may experience in implementing the proposal or whether the proposal adequately addresses the risks to borrowers the Bureau has identified. In addition, the Bureau solicits comment generally on whether the proposal would successfully prevent avoidable foreclosures or might lead to other borrower harms. The Bureau also seeks comment on whether the Bureau has accurately identified the risks of borrower harm.
II. Background
A. The Bureau's Regulation X Mortgage Servicing Rules
In
FOOTNOTE 12 Real Estate Settlement Procedures Act of 1974, Pub. L. 93-533, 88 Stat. 1724 (codified as amended at 12 U.S.C.
FOOTNOTE 13 78 FR 10695 (
FOOTNOTE 14 Amendments to the 2013 Mortgage Rules under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z), 78 FR 44686 (
FOOTNOTE 15 See generally 2013 RESPA Servicing Final Rule, supra note 13, at 10699-701. END FOOTNOTE
FOOTNOTE 16 See Servicing Rule Assessment Report, supra note 13, at 37-60. END FOOTNOTE
FOOTNOTE 17 2013 RESPA Servicing Final Rule, supra note 13, at 10700. END FOOTNOTE
FOOTNOTE 18 See
The Bureau's mortgage servicing rules address these concerns by establishing procedures that mortgage servicers generally must follow in evaluating loss mitigation applications submitted by mortgage borrowers /19/ and requiring certain communication efforts with delinquent borrowers. /20/ The mortgage servicing rules also provide certain protections against foreclosure based on the length of the borrower's delinquency and the receipt of a complete loss mitigation application. /21/ For example, Regulation X generally prohibits a servicer from making the first notice or filing required for foreclosure until the borrower's mortgage loan is more than 120 days delinquent. /22/ These requirements are discussed more fully in the section-by-section analysis in part IV.
FOOTNOTE 19 See generally 12 CFR 1024.41. Small servicers, as defined in Regulation Z, 12 CFR 1026.41(e)(4), are generally exempt from these requirements. 12 CFR 1024.30(b)(1). END FOOTNOTE
FOOTNOTE 20 12 CFR 1024.39. END FOOTNOTE
FOOTNOTE 21 12 CFR 1024.41(f) through (g). END FOOTNOTE
FOOTNOTE 22 12 CFR 1024.41(f)(1)(i). END FOOTNOTE
The COVID-19 pandemic was declared a national emergency on
FOOTNOTE 23 86 FR 11599 (
FOOTNOTE 24 85 FR 39055 (
FOOTNOTE 25 See 12 CFR 1024.41(c)(2). END FOOTNOTE
B. Forbearance Programs Offered Under CARES Act
The CARES Act was signed into law on
FOOTNOTE 26 CARES Act, supra note 2,
In
FOOTNOTE 27 See Press Release, The
FOOTNOTE 28 FHA,
FOOTNOTE 29 See supra note 27. END FOOTNOTE
FOOTNOTE 30 News Release, Fed. Hous. Fin. Agency, FHFA Announces that Enterprises will Purchase Qualified Loans in Forbearance to Keep Lending Flowing (
These forbearance programs offered under the CARES Act have assisted borrowers in a meaningful way by providing a lifeline during the economic crisis. /31/ Through its mortgage market monitoring, the Bureau understands that servicers of mortgage loans that are not federally backed may be offering similar forbearance programs to borrowers.
FOOTNOTE 31 JPMorgan Chase & Co. Inst., Is Mortgage Forbearance Reaching the Right Homeowners during the COVID-19 Pandemic? (
C. Borrowers With Loans in Forbearance Due to the COVID-19 Emergency
Since the CARES Act was enacted, 6.9 million borrowers have entered a forbearance program. /32/ As of
FOOTNOTE 32 Black
FOOTNOTE 33 Id. END FOOTNOTE
FOOTNOTE 34 Id. END FOOTNOTE
FOOTNOTE 35 Id. at 14. END FOOTNOTE
Of the 6.9 million borrowers who have entered forbearance programs, approximately 4.2 million borrowers have exited their forbearance program. /36/ More than 50 percent of all borrowers who initiated a forbearance program, since the pandemic started, have begun to make their mortgage payments and are reperforming under the original terms of their agreement or have paid their mortgage off in full by either refinancing or selling their home. /37/ Although market conditions have been favorable for refinancing or selling a borrower's home, it remains uncertain how market conditions will affect a borrower's ability to sell or refinance their home in the future.
FOOTNOTE 36 Black Knights Mortg. Monitor,
FOOTNOTE 37 Id. END FOOTNOTE
The disposition or exit of loans in a COVID-19 forbearance has varied by investor. Of the millions of borrowers who have entered a forbearance program, more than half have since exited. /38/ Nearly two-thirds of GSE borrowers have exited their forbearance programs and roughly 60 percent are either now current on their mortgage or have paid off their mortgage in full by either refinancing or selling their home. /39/ Although FHA has the highest rate of borrowers in a forbearance program, they also have the lowest portion of borrowers who have exited a forbearance program. /40/ Of the FHA loans that entered a forbearance program, 49 percent have exited to date. /41/ In addition, 35 percent of FHA borrowers are reperforming and 7 percent have paid off their mortgage. /42/ Comparatively, of the loans in forbearance held in private securities or portfolio approximately 50 percent have exited. /43/
FOOTNOTE 38 Id. END FOOTNOTE
FOOTNOTE 39 Id. END FOOTNOTE
FOOTNOTE 40 Id. END FOOTNOTE
FOOTNOTE 41 Id. END FOOTNOTE
FOOTNOTE 42 Id. END FOOTNOTE
FOOTNOTE 43 Id. END FOOTNOTE
Based on informal outreach the Bureau has conducted with servicers since the COVID-19 emergency began, the Bureau understands that payment behavior of borrowers in forbearance programs has changed over time. These changes suggest that borrowers who are in forbearance programs now are borrowers who are experiencing severe or permanent hardships, and it may be more challenging for these borrowers to resume their mortgage payments.
FOOTNOTE 44 Id. at 12. END FOOTNOTE
FOOTNOTE 45 Id. END FOOTNOTE
FOOTNOTE 46 Fed. Home Loan Mortg. Corp., Mortgage Forbearance and Performance during the Early Months of the COVID-19 Pandemic (
This data is consistent with information that servicers have shared with the Bureau informally. Servicers have indicated that early in the pandemic almost half of borrowers in forbearance programs continued to make their monthly mortgage payments. Some borrowers only missed one or two mortgage payments, which made it possible for those borrowers to make up the missed payments. Other borrowers requested forbearance just in case they became unable to make their mortgage payments, but ultimately continued to make their payments. The Bureau, through its market monitoring, understands that in general, the percent of borrowers making their mortgage payments while in a forbearance program has declined relative to the number of borrowers who remain in forbearance.
Considering that the number of borrowers making payments while in a forbearance program may continue to decline, combined with the large number of mortgages that entered forbearance since the COVID-19 emergency, the Bureau anticipates that most of the borrowers who remain in active forbearance will need to obtain a loss mitigation option, such as repayment plans, payment deferral programs, loan modifications, or short sales, to resolve their delinquency when their forbearance programs come to an end.
Furthermore, because the number of new forbearance requests also continues to decline (as of
FOOTNOTE 47 Black
Borrowers who requested forbearance early on in the pandemic have reached a critical milestone. At the end of
FOOTNOTE 48 Id. at 7. END FOOTNOTE
FOOTNOTE 49 Id. at 9. END FOOTNOTE
FOOTNOTE 50 Id. at 11. END FOOTNOTE
FOOTNOTE 51 Neil Paine, The Industries Hit Hardest By The Unemployment Crisis, FiveThirtyEight, (
If borrowers who are currently in an eligible forbearance program request an extension to the maximum time offered by the government agencies, those loans that were placed in a forbearance program early in the pandemic (March and
FOOTNOTE 52 Black
FOOTNOTE 53 Id. END FOOTNOTE
Borrowers facing more permanent hardships may need to seek a loss mitigation option when their forbearance program ends to resolve their delinquency. /54/ Additionally, borrowers for whom homeownership is no longer sustainable may need additional time to sell their homes.
FOOTNOTE 54 Michael Neal, Urban Inst., Mortgage Market COVID 19 Collaborative: Forbearance and Delinquency Among Agency Mortgage Loans, (
D. Borrowers With Loans Not in a Forbearance Program
Even though millions of borrowers have received assistance through forbearance programs, there are still thousands of borrowers who are delinquent or in danger of becoming delinquent and are not in a forbearance program or actively in loss mitigation. As of
FOOTNOTE 55 Black
FOOTNOTE 56 Black
FOOTNOTE 57 Molly Boesel, Loan Performance Insights Report Highlights:
The amendments included in this proposed rule are intended to encourage all borrowers and servicers to work together to facilitate review for foreclosure avoidance options. The Bureau recognizes that the large number of borrowers expected to exit forbearance over the coming months will place significant strain on servicer infrastructure. The proposed amendments allowing streamlined loan modifications based on the evaluation of an incomplete application should facilitate efficient post-forbearance resolutions for many borrowers for whom a payment deferral program does not meet the borrowers' needs. Similarly, the proposals regarding early intervention and reasonable diligence aim to emphasize the importance of servicers conducting outreach to borrowers. The Bureau is proposing the special pre-foreclosure review period as a final backstop to ensure that borrowers affected by COVID-19 emergency have an opportunity to be evaluated for loss mitigation before foreclosure, including, where appropriate, time to sell their homes in an arms' length transaction rather than at a foreclosure sale.
E. Post-Forbearance Options for Borrowers Affected by the COVID-19 Emergency
Since the beginning of the COVID-19 emergency, servicers have implemented several post-forbearance repayment options and other loss mitigation options to assist borrowers experiencing a COVID-19-related hardship. Many borrowers have been able to benefit from historically low-interest rates and have refinanced their mortgage resulting in a lower mortgage payment. However, access to low interest-rate refinances may be less available for some borrowers.
Borrowers exiting a forbearance program may have several options available depending on their specific financial situation, and the owner, investor, or insurer of their loan. For example, at any point during a forbearance program, a borrower has the option to reinstate their mortgage by paying all missed mortgage payments at once. After a borrower reinstates their mortgage, the borrower continues to pay their monthly mortgage payment under the original terms of their mortgage loan agreement. Reinstatement may be increasingly difficult for borrowers who did not make any payments during the lengthy forbearances offered to borrowers with COVID-19 related hardships.
Another option for borrowers exiting forbearance programs includes repayment plans. Repayment plans are best suited for borrowers with resolved hardships, who can afford to restart making their full contractual monthly mortgage payments plus an agreed-upon amount of the missed mortgage payments each month until the total missed payment amount is repaid in full. Regulation X generally permits a servicer to offer a short-term repayment plan, as defined in the rule, without evaluating a complete loss mitigation application from the borrower, if certain requirements are met. /58/ However, there may be repayment plans that do not meet this definition that may require the borrower to be reviewed based on a complete application.
FOOTNOTE 58 Section 1024.41(c)(2)(iii) defines a repayment plan for purposes of
Servicers have also made available options such as payment deferral programs or partial claims programs to assist in the repayment of delinquent mortgage amounts. The benefit of these programs for borrowers is that they allow the borrower, if financially able, to resume their pre-forbearance mortgage payment and defer any missed payment amounts until the end of the mortgage term without accruing any additional interest or late fees. These programs bring a borrower's mortgage current but are typically only available when other options, such as reinstatement or a repayment plan, are not feasible. The
FOOTNOTE 59 85 FR 39055 (
Servicers have also made available loan modification options for borrowers. With a loan modification, the borrower's mortgage terms change, such as through extending the number of years to repay the loan, reducing the interest rate, or reducing the principal balance. Loan modifications often lower the borrower's monthly payment to a more affordable amount. The GSEs and FHA permit streamlined application procedures for some loan modifications, such as the GSE Streamlined Flex Modification and FHA's COVID-19 Modification.
If borrowers find themselves unable to stabilize their finances or do not wish to remain in their home, servicers also offer short sales or deed-in-lieu of foreclosure as an alternative to foreclosure.
F. Heightened Risk of Foreclosures
The Bureau's mortgage servicing rules generally prohibit servicers from making the first notice or filing required for foreclosure until the borrower's mortgage loan obligation is more than 120 days delinquent. /60/ Even where forbearance programs pause or defer payment obligations, they do not necessarily pause delinquency. /61/ A borrower's delinquency may begin or continue during a forbearance period if a periodic payment sufficient to cover principal, interest, and, if applicable, escrow is due and unpaid during the forbearance. Because the forbearance programs offered during the current crisis generally do not pause delinquency and borrowers may be delinquent for longer than 120 days, it is possible that a servicer may refer the loan to foreclosure soon after a borrower's forbearance program ends unless a foreclosure moratorium or other restriction is in place.
FOOTNOTE 60 12 CFR 1024.41(f). See also 12 CFR 1024.30(c)(2) (limiting the scope of this provision to a mortgage loan secured by a property that is the borrower's principal residence). END FOOTNOTE
FOOTNOTE 61 For purposes of Regulation X, a preexisting delinquency period could continue or a new delinquency period could begin even during a forbearance program that pauses or defers loan payments if a periodic payment sufficient to cover principal, interest, and, if applicable, escrow is due and unpaid according to the loan contract during the forbearance program. 12 CFR 1024.31 (defining delinquency as the "period of time during which a borrower and a borrower's mortgage loan obligation are delinquent" and stating that "a borrower and a borrower's mortgage obligation are delinquent beginning on the date a periodic payment sufficient to cover principal, interest, and, if applicable, escrow becomes due and unpaid, until such time as no periodic payment is due and unpaid.") However, it is important to note that Regulation X's definition of delinquency applies only for purposes of the mortgage servicing rules in Regulation X and is not intended to affect consumer protections under other laws or regulations, such as the Fair Credit Reporting Act (FCRA) and Regulation
Since the CARES Act took effect in March of 2020, various Federal and State foreclosure moratoria have been established. The Federal foreclosure moratoria stopped new foreclosure actions (except those concerning abandoned properties) and suspended all foreclosure actions in process through a certain date. /62/ The moratoria generally do not apply to properties that are considered abandoned under applicable law. The proposed amendments, like the existing foreclosure restrictions in Regulation X, would only apply to mortgage loans secured by the borrower's principal residence. An abandoned property is less likely to be a borrower's principal residence. /63/
FOOTNOTE 62 Ctr. for Disease Control and Prevention, Temporary Halt in Residential Evictions to Prevent the Further Spread of COVID-19 (
FOOTNOTE 63 Determining a borrower's principal residence will depend on the specific facts and circumstances regarding the property and applicable State law. For example, a vacant property may still be a borrower's principal residence. An abandoned property, however, might no longer be a borrower's principal residence. END FOOTNOTE
FHFA, FHA,
FOOTNOTE 64 See Press Release, The
FOOTNOTE 65 ATTOM Data Solutions, Q3 2020 U.S. Foreclosure Activity Reaches Historical Lows as the Foreclosure Moratorium Stalls Filings (
FOOTNOTE 66 Black
The Bureau is focused on minority borrowers who might be at heightened risk of foreclosure resulting in the gaps in the homeownership rates continuing to grow. Homeownership rates vary significantly by race and ethnicity. In 2019, the homeownership rate among white non-Hispanic Americans was approximately 73 percent, compared to 42 percent among Black Americans. The homeownership rate was 47 percent among Hispanic or Latino Americans, 50 percent among
FOOTNOTE 67 USAFacts, Homeownership rates show that Black Americans are currently the least likely group to own homes (
ATTOM Data Solutions' 2021 first-quarter analysis found that approximately 175,000 homes secured by mortgages are in some stage of the process of foreclosure. /68/ However, with the Federal moratoria in place until
FOOTNOTE 68 ATTOM Data Solutions, Vacant Zombie Properties Remain Miniscule Factor in
FOOTNOTE 69 Determining a borrower's principal residence will depend on the specific facts and circumstances regarding the property and applicable State law. For example, a vacant property may still be a borrower's principal residence. An abandoned property, however, might no longer be a borrower's principal residence. END FOOTNOTE
FOOTNOTE 70 See supra note 68. END FOOTNOTE
FOOTNOTE 71 Id. END FOOTNOTE
G. The Bureau's COVID-19 Emergency Mortgage Servicing Efforts
In the wake of the COVID-19 pandemic, the Bureau has taken numerous steps to protect and assist mortgage borrowers. Although the below does not describe all the efforts the Bureau has undertaken, it does summarize a few of the Bureau's initiatives since the beginning of the pandemic. The Bureau issued a mortgage servicing-related interagency policy statement and FAQs, /72/ various guidance materials, and an Interim Final Rule (IFR) amending Regulation X's loss mitigation rules, as discussed above. The Bureau has engaged in targeted supervisory activity, /73/ and has created and disseminated consumer education resources in coordination with HUD, FHA, FHFA,
FOOTNOTE 72
FOOTNOTE 73
FOOTNOTE 74 See, e.g., News Release, Fed. Hous. Fin. Agency,
FOOTNOTE 75
This proposed rule aims to complement these and the other strategic efforts the Bureau has initiated since the onset of the pandemic to assist struggling borrowers and to protect those most vulnerable.
III. Legal Authority
The Bureau is issuing this proposed rule pursuant to its authority under RESPA and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), /76/ including the authorities, discussed below. The Bureau is issuing this proposed rule in reliance on the same authority relied on in adopting the relevant provisions of the 2013 RESPA Servicing Final Rule, /77/ as discussed in detail in the Legal Authority and Section-by-Section Analysis of the 2013 RESPA Servicing Final Rule.
FOOTNOTE 76 Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010). END FOOTNOTE
FOOTNOTE 77 2013 RESPA Servicing Final Rule, supra note 13. END FOOTNOTE
A. RESPA
Section 19(a) of RESPA, 12 U.S.C. 2617(a), authorizes the Bureau to prescribe such rules and regulations, to make such interpretations, and to grant such reasonable exemptions for classes of transactions, as may be necessary to achieve the purposes of RESPA, which include its consumer protection purposes. In addition, section 6(j)(3) of RESPA, 12 U.S.C. 2605(j)(3), authorizes the Bureau to establish any requirements necessary to carry out section 6 of RESPA, section 6(k)(1)(E) of RESPA, and 12 U.S.C. 2605(k)(1)(E) and authorizes the Bureau to prescribe regulations that are appropriate to carry out RESPA's consumer protection purposes. The consumer protection purposes of RESPA include ensuring that servicers respond to borrower requests and complaints in a timely manner and maintain and provide accurate information, helping borrowers prevent avoidable costs and fees, and facilitating review for foreclosure avoidance options. The amendments to Regulation X in this notice of proposed rule are intended to achieve some or all these purposes.
Specifically, and as described below, during the COVID pandemic, borrowers have faced unique circumstances including potential economic hardship, health conditions, and extended periods of forbearance. Because of these unique circumstances, the procedural safeguards under the 2013 RESPA Servicing Final Rule and subsequent amendments to date, may not have been sufficient to facilitate review for foreclosure avoidance. Specifically, the Bureau is concerned that the present circumstances may interfere with these borrowers' ability to obtain and understand important information that the existing rule aims to provide borrowers regarding the foreclosure avoidance options available to them. As a result, the Bureau believes that a substantial number of borrowers will not have had a meaningful opportunity to pursue foreclosure avoidance options before exiting their forbearance or the end of current foreclosure moratoria.
The Bureau is also concerned that based on the unique circumstances described above, there exists a significant risk of a large number of potential borrowers seeking foreclosure avoidance options in a relatively short time period and that such a large wave of borrowers could overwhelm servicers, potentially straining servicer capacity and resulting in delays or errors in processing loss mitigation requests. These strains on servicer capacity coupled with potential fiduciary obligations to foreclose could result in some servicer liability for failing to meet required timeline and accuracy obligations as well as other obligations under the existing rule with resulting harm to borrowers.
In light of these unique circumstances, the Bureau's interventions are designed to provide advance notice to borrowers about foreclosure avoidance options and forbearance termination dates, as well as to extend the pre-foreclosure review period. The interventions aim to help borrowers understand their options and encourage them to seek available loss mitigation options at the appropriate time while also allowing sufficient time for servicers to conduct a meaningful review of borrowers for such options in the present circumstances that the existing rules were not designed to address.
B. Dodd-Frank Act
Section 1022(b)(1) of the Dodd-Frank Act, 12 U.S.C. 5512(b)(1), authorizes the Bureau to prescribe rules "as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof." RESPA is a Federal consumer financial law.
The authority granted to the Bureau in Dodd-Frank Act section 1032(a) is broad and empowers the Bureau to prescribe rules regarding the disclosure of the "features" of consumer financial protection products and services generally. Accordingly, the Bureau may prescribe rules containing disclosure requirements even if other Federal consumer financial laws do not specifically require disclosure of such features.
Dodd-Frank Act section 1032(c) provides that, in prescribing rules pursuant to Dodd-Frank Act section 1032, the Bureau "shall consider available evidence about consumer awareness, understanding of, and responses to disclosures or communications about the risks, costs, and benefits of consumer financial products or services." 12 U.S.C. 5532(c). The Bureau requests any such available evidence. /78/ The Bureau also requests comment on any sources that the Bureau should consider in determining whether to finalize this proposal under section 1032(a).
FOOTNOTE 78 The Bureau is unaware of research that explicitly investigates the link between COVID-19-related stress and comprehension of information about forbearance and foreclosure. However, previous research demonstrates that prolonged or excessive stress can impair decision-making and may be associated with reduced cognitive control, leading to more impulsive and riskier decision-making, including in financial contexts. See, e.g.,
In addition, section 1032(a) of the Dodd-Frank Act authorizes the Bureau to prescribe rules to ensure that the features of any consumer financial product or service, both initially and over the term of the product or service, are fully, accurately and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks associated with the product or service, in light of the facts and circumstances.
IV. Section-by-Section Analysis
Section 1024.31 Definitions
COVID-19 Related Hardship
For clarity and ease of reference, the Bureau is proposing to define a new term, "a COVID-19-related hardship," for purposes of subpart C. The proposal 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)). The proposed amendments to the early intervention requirements in
Section 1024.39 Early Intervention
39(a) Live Contact
As discussed below in the section-by-section analysis of proposed
FOOTNOTE 79 When amending commentary, the
39(e) Temporary COVID-19-Related Live Contact
The Bureau is proposing to add
FOOTNOTE 80 Small servicers, as defined in Regulation Z, 12 CFR 1026.41(e)(4), are not subject to these requirements. 12 CFR 1024.30(b)(1). END FOOTNOTE
FOOTNOTE 81 12 CFR 1024.39(a). END FOOTNOTE
FOOTNOTE 82 12 CFR 1024.39(a); Comment 39(a)-4.i. END FOOTNOTE
FOOTNOTE 83 12 CFR 1024.39(a); Comment 39(a)-4.ii. END FOOTNOTE
FOOTNOTE 84 12 CFR 1024.39(a); Comment 39(a)-6. END FOOTNOTE
Proposed
The Bureau believes the current crisis has resulted in temporary difficulties for borrowers, both financially and in their ability to obtain and understand necessary loss mitigation information, that may warrant expanding existing
FOOTNOTE 85 Black
As discussed above in part II, as a result of the current crisis, in
FOOTNOTE 86 Housing Insecurity Report, supra note 11, at 6 (citing Black
FOOTNOTE 87 Black
For those borrowers who have not accepted any forbearance program assistance, consumer advocacy organizations, industry surveys, and other sources have suggested that many of these delinquent borrowers are unaware of the forbearance program options available to them. /88/ Additionally, the Bureau is concerned about reports, including findings discussed in the Bureau's 2021 COVID-19 Prioritized Assessments Special Edition of Supervisory Highlights, that some servicers may be providing borrowers with inconsistent or inaccurate information about forbearance programs, inhibiting borrowers' ability to take advantage of available COVID-19-related assistance, including forbearance program assistance. /89/ For borrowers who did enter into forbearance programs during the COVID-19 pandemic, sources also indicate that some either lack information about available post-forbearance loss mitigation options or received inaccurate information about the post-forbearance effects on their mortgage. /90/
FOOTNOTE 88 Letter from the Nat'l Consumer Law Ctr. et al., to
FOOTNOTE 89
FOOTNOTE 90 Id. END FOOTNOTE
The Bureau is concerned that the present unique circumstances of the COVID-19 emergency may have interfered with or may continue to interfere with some borrowers' ability to obtain and understand the important information servicers are required to provide under existing rules regarding foreclosure avoidance options. The lack of information may prevent some borrowers from understanding the potential urgency and need for foreclosure avoidance options for their loan, particularly once the forbearance program ends. These borrowers may not understand their loan's heightened risk for foreclosure initiation, a risk that is even greater for borrowers with longer forbearance periods prevalent in the COVID-19 emergency, as discussed more fully in part II. Even if borrowers received accurate information about the risk of foreclosure and the availability of foreclosure avoidance options, the Bureau is concerned that borrowers may still not fully understand the urgency. The Bureau believes that because there are foreclosure moratoria in place that have been extended multiple times, and because investors are offering multiple forbearance extensions, borrowers in the current crisis may not correctly anticipate the end-date to these benefits and thus, may not fully understand the urgency related to their foreclosure risk. The Bureau believes providing borrowers certain additional information about foreclosure avoidance options during live contact may help borrowers better understand the options available and understand the urgency to develop a foreclosure avoidance plan.
The Bureau also notes that the current crisis is predicted to result in an unprecedented volume of loans exiting forbearance programs at relatively the same time, and that a large percentage of those borrowers likely will need post-forbearance loss mitigation upon exiting. Such a wave of loans exiting forbearance programs may create a heightened risk of delays or inadvertent errors that could result in avoidable foreclosure initiations and fees. For example, misplaced borrower applications, failure to correctly identify completed loss mitigation applications, or errors in the review of supporting documentation could result in unnecessary delays in the loss mitigation process that may, erroneously and in violation of the existing regulation, result in non-compliant foreclosure initiations or illegal foreclosure completions. For borrowers currently in forbearance, the Bureau believes providing borrowers additional information about loss mitigation options before the end of the borrower's forbearance program may help to encourage borrowers to apply for those options before their forbearance ends.
Accordingly, the Bureau is proposing
Proposed
The Bureau notes that proposed
Additionally, as is the case with the existing regulation, proposed
FOOTNOTE 91 Comment 39(a)-6. END FOOTNOTE
As discussed above, promptly after establishing live contact with a borrower, a servicer currently has discretion to determine whether it is appropriate to inform the borrower of loss mitigation options. /92/ In certain circumstances, the proposed amendments would eliminate that discretion. Proposed
FOOTNOTE 92 12 CFR 1024.39(a); Comment 39(a)-4.i. END FOOTNOTE
The Bureau is seeking comment on all aspects of proposed
The Bureau is also seeking comment on whether the one-year sunset date for proposed
39(e)(1)
Proposed
As discussed above, approximately 800,000 borrowers are currently delinquent but have not accepted forbearance program assistance during the current crisis. As discussed above, there is concern that this population of borrowers is unaware of the forbearance program options available. It is possible that during the current crisis, even if borrowers are aware of the options available, some borrowers may be uncertain as to how to access the assistance or may even mistrust the servicer's ability to provide the assistance to them. The Bureau explained in the 2013 RESPA Servicing Final Rule that it added early intervention live contact requirements because delinquent borrowers may not make contact with servicers to discuss their options for these very reasons. /93/ The Bureau is concerned that the current crisis is exacerbating that lack of awareness and inability to access information because of the speed at which new loss mitigation options may become available and potential crisis-related limitations on certain forms of communication, such as in-person meetings and call-center availability due to limitations on staffing. The present unique circumstances described above may have interfered or may be interfering with some borrowers' abilities to obtain and understand the important information that the existing rules aim to provide regarding foreclosure avoidance options. As the Bureau concluded in the 2013 RESPA Servicing Final Rule, a servicer's delinquency management, including these early intervention requirements, plays a significant role in whether the borrower cures the delinquency or ends up in foreclosure. /94/ As such, the proposed amendments would aim to address the lack of borrower awareness or hesitancy with respect to the almost 800,000 borrowers who are delinquent but not in forbearance by requiring servicers to provide them with additional information about their available forbearance program options.
FOOTNOTE 93 2013 RESPA Servicing Final Rule, supra note 13, at 10788 (citing to see, e.g., Future of Housing Finance: Hearing on the current state of the housing finance market and how to facilitate the return of private sector capital into the mortgage markets before H. Subcomm. on Ins., Hous., and Comm. Opportunity of the H. Comm. on Fin. Services, 112th Cong. 50-51 (2011) (statement of
FOOTNOTE 94 2013 RESPA Servicing Final Rule, supra note 13, at 10788 (citing to
Proposed
Under proposed
Under proposed
FOOTNOTE 95 Existing SEC 1024.41(c)(2)(iii) and comment 41(c)(2)(iii) define short-term payment forbearance program as a payment forbearance program that allows the forbearance of payments due over periods of no more than six months. END FOOTNOTE
In addition to a list and description of applicable forbearance programs made available to borrowers experiencing COVID-19-related hardships, proposed
FOOTNOTE 96 12 CFR 1024.38(b)(2); 12 CFR 1024.40(b)(1)(i). END FOOTNOTE
FOOTNOTE 97 12 CFR 1024.40(b)(1)(ii). END FOOTNOTE
The Bureau seeks comment on all aspects of proposed
Relatedly, the Bureau also seeks comment on whether limiting the scope of these expanded communications to COVID-19 related hardships until the sunset date presents implementation challenges. Proposed
In addition, the Bureau seeks comment on whether it should expand the options the servicer must describe to the borrower to include all loss mitigation options available to borrowers experiencing a COVID-19-related hardship that the owner or assignee of the borrower's mortgage makes available through the servicer, instead of only applicable forbearance programs. The Bureau notes that existing
Finally, the Bureau seeks comment on whether it should specify components of the loss mitigation option description the servicer would provide. Proposed
39(e)(2)
Proposed
Although forbearance programs assist borrowers in avoiding foreclosure for a period of time, lengthy forbearance programs can result in heightened foreclosure initiation risk once the program ends. The Bureau is concerned that because some forbearance agreements may require full repayment of the forborne amount at the end of the program, unless the borrower obtains other, additional loss mitigation options such as a payment deferral or loan modification, borrowers may struggle to repay the amount owed at the end of a forbearance program and may be seriously delinquent. In addition, it is possible that a servicer may be permitted to initiate the foreclosure process soon after the borrower exits forbearance. As discussed more fully in the section-by-section analysis of
FOOTNOTE 98 12 CFR 1024.41(f)(1). END FOOTNOTE
FOOTNOTE 99 Supra note 61 and accompanying text. END FOOTNOTE
However, as noted above, the Bureau is concerned that the unique circumstances during the COVID-19 emergency may have interfered with or may be interfering with some borrowers' ability to obtain and understand important information that the existing rules aim to provide regarding foreclosure avoidance options, preventing them from seeking this necessary loss mitigation assistance. For the borrowers currently in a forbearance program, the proposed additions to early intervention aim to help ensure these borrowers are provided with additional information about when their forbearance program ends, the types of loss mitigation options made available, and the actions a borrower must take to be evaluated. The Bureau believes that this information during the proposed new, temporary intervention may be necessary to educate and encourage more borrowers to seek loss mitigation assistance before the end of forbearance, rather than waiting until their forbearance program has ended. As discussed above, the Bureau believes encouraging borrowers to seek loss mitigation assistance earlier may help ensure that borrowers and servicers have sufficient time for a loss mitigation review before the borrower exits forbearance, reducing the risk of avoidable foreclosure, including foreclosure caused by loss mitigation assistance delays and errors. The Bureau also recognizes that in the current crisis, providing borrowers with specific information about the actions they must take to be evaluated may help to provide consistent and necessary information so that they may obtain loss mitigation assistance in a timely manner.
For these reasons, the Bureau is proposing new
Proposed
In addition to listing and describing the applicable loss mitigation options made available to certain borrowers,
FOOTNOTE 100 12 CFR 1024.38(b)(2); 12 CFR 1024.40(b)(1)(i) and (ii). END FOOTNOTE
The Bureau intends proposed
Proposed
FOOTNOTE 101 Fed. Nat'l Mortg. Ass'n, Lender Letter (LL-2021-02) (
FOOTNOTE 102 See, e.g., id. For example, the Bureau understands that some investors may require a waterfall structure during contacts discussing loss mitigation options with the borrower, where loss mitigation options are presented in a specified order. The Bureau does not believe that proposed
The Bureau seeks comment on all aspects of proposed
Relatedly, the Bureau also seeks comment on whether proposed
FOOTNOTE 103 Fed. Nat'l Mortg. Ass'n, Lender Letter (LL-2021-02) (
The Bureau also seeks comment on whether to require these expanded communications with all borrowers in forbearance until the sunset date rather than limiting the scope to borrowers in a forbearance made available to borrowers experiencing a COVID-19 related hardship. Proposed
The Bureau also seeks comment on whether it has appropriately limited the number of times the borrower should receive the information in proposed
Additionally, the Bureau seeks comment on the scope of the content in proposed
Finally, the Bureau seeks comment on whether proposed
Section 1024.41 Loss Mitigation Procedures
41(b) Receipt of a Loss Mitigation Application
41(b)(1) Complete Loss Mitigation Application
Section 1024.41(b)(1) provides that a complete loss mitigation application means an application in connection with which a servicer has received all the information that the servicer requires from a borrower in evaluating applications for the loss mitigation options available to the borrower. It further provides that a servicer shall exercise reasonable diligence in obtaining documents and information to complete a loss mitigation application. /104/
FOOTNOTE 104 Small servicers, as defined in Regulation Z, 12 CFR 1026.41(e)(4) are not subject to these requirements. 12 CFR 1024.30(b)(1). END FOOTNOTE
Comment 41(b)(1)-4 provides guidance to servicers on what is considered reasonable diligence to complete loss mitigation applications. In general, a servicer must request information necessary to make a loss mitigation application complete promptly after receiving the loss mitigation application. Comment 41(b)1-4.iii discusses a servicer's reasonable diligence obligations when a servicer offers a borrower a short-term payment forbearance program or a short-term repayment plan based on an evaluation of an incomplete loss mitigation application and provides the borrower the written notice pursuant to
During the past year, mortgage servicers have offered short-term payment forbearance options like forbearance programs made available by the CARES Act to borrowers facing COVID-19-related hardships. As discussed more fully in part II, over 2 million borrowers remain in forbearance programs, including large numbers who will have been in forbearance programs for over a year when they exit. It is expected that a large number of borrowers who took advantage of a full 18 months of forbearance made available to borrowers with federally backed mortgages will begin to exit forbearance in
Current comment 41(b)(1)-4.iii provides that reasonable diligence means servicers must contact the borrower before the short-term payment forbearance program ends, but it does not specify when servicers must make the contact. The Bureau is concerned that some servicers may not make this contact early enough for borrowers affected by the unique circumstances of the COVID-emergency to complete a loss mitigation application before the end of the forbearance period. Therefore, the Bureau believes that it may be appropriate to provide additional clarity as to when servicers must make this contact with certain borrowers during this time.
For these reasons, the Bureau is proposing to add a new comment 41(b)1-4.iv which states that if the borrower is in a short term payment forbearance program made available to borrowers experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency, including a payment forbearance program made pursuant to the Coronavirus Economic Stability Act, section 4022 (15 U.S.C. 9056), that was offered based on evaluation of an incomplete application, a servicer must contact the borrower no later than 30 days prior to the end of the forbearance period to determine if the borrower wishes to complete the loss mitigation application and proceed with a full loss mitigation evaluation. If the borrower requests further assistance, the servicer should exercise reasonable diligence to complete the application prior to the end of the forbearance period. The servicer must also continue to exercise reasonable diligence to complete the loss mitigation application prior to the end of forbearance period. /105/
FOOTNOTE 105 However, a servicer would not be required to continue reasonable diligence efforts if the borrower accepts a loss mitigation option offered based on the evaluation of an incomplete application pursuant to
The Bureau intends proposed comment 41(b)1-4.iv to work with the proposed new intervention live contact requirements in proposed
Requiring servicers to contact the borrower at least 30 days prior to the end of the forbearance as set out in proposed
Proposed comment 41(b)(1)-4.iv limits the circumstances when servicers must comply with the requirements of the proposed comment to situations when the borrower is in a short-term payment forbearance program made available to borrowers experiencing a COVID-19 related hardship. The Bureau solicits comment on whether to, instead, extend these requirements to all borrowers exiting short-term payment forbearance programs during a specified time period. The Bureau seeks comment on whether that alternative would be easier for servicers to implement.
41(c) Evaluation of Loss Mitigation Applications
41(c)(2)(i) In General
Section 1024.41(c)(2)(i) states that, in general, servicers shall not evade the requirement to evaluate a complete loss mitigation application for all loss mitigation options available to the borrower by making an offer based upon an incomplete application. For ease of reference, this section-by-section analysis generally refers to this provision as the "anti-evasion requirement." Currently, the provision identifies three general exceptions to this anti-evasion requirement,
41(c)(2)(v) Certain COVID-19-Related Loss Mitigation Options
Section 1024.41(c)(2)(v) currently allows servicers to offer a borrower certain loss mitigation options made available to borrowers experiencing a COVID-19-related hardship based upon the evaluation of an incomplete application, provided that certain criteria are met. The Bureau added this provision to the mortgage servicing rules in its
As discussed in the section-by-section analysis of
41(c)(2)(vi) Certain COVID-19-Related Loan Modification Options
Section 1024.41(c)(2)(i) states that, in general, servicers shall not evade the requirement to evaluate a complete loss mitigation application for all loss mitigation options available to the borrower by making an offer based upon an incomplete application. /106/ The Bureau added a temporary exception to this anti-evasion requirement in its
FOOTNOTE 106 Id. END FOOTNOTE
FOOTNOTE 107 85 FR 39055, 39059, 39061-62 (
As described in more detail in the section-by-section analysis of
As discussed in part II, Federal foreclosure moratoria are scheduled to end in late
FOOTNOTE 108 See supra note 61 and accompanying text. END FOOTNOTE
Through certain loss mitigation options, such as payment deferral and loan modification programs, eligible borrowers can eliminate the immediate potential risk of foreclosure referral. Certain investors and insurers, such as the GSEs and FHA, permit servicers to offer some of these programs using streamlined application procedures, under which they do not need to collect a complete loss mitigation application from the borrower.
For example, as the Bureau discussed in the
FOOTNOTE 109 85 FR 39055, 39060-61 (
As discussed in part II, it appears that many borrowers who will exit forbearance programs in
Streamlined application procedures, such as those authorized by the GSEs for certain loss mitigation options such as flex modifications, may help ensure that servicers have sufficient resources to efficiently and accurately respond to loss mitigation assistance requests from the unusually large number of borrowers who will be seeking assistance from them in the coming months as Federal foreclosure moratoria and many forbearance programs end. And borrowers dealing with the social and economic effects of the COVID-19 emergency may be less likely than they would be under normal circumstances to take the steps necessary to complete a loss mitigation application to receive a full evaluation. This could prolong their delinquencies and put them at risk for foreclosure referral. Moreover, by allowing servicers to assist borrowers eligible for streamlined loan modifications more efficiently, servicers will have more resources to provide other loss mitigation assistance to borrowers who are ineligible for or do not want streamlined loan modifications.
The Bureau believes that loan modifications that satisfy the proposed eligibility criteria for the new exception to the anti-evasion requirement would protect borrowers from certain potential harms, such as the financial strain of being required to quickly repay all forborne amounts, if they accept an offer of a loan modification eligible for the proposed new exception. /110/ As discussed more fully below, to be eligible for the proposed new exception, the loan modification option would need to satisfy certain criteria. Specifically, the loan modifications eligible for the proposed new exception must limit a potential term extension to 480 months, not increase the required monthly principal and interest payment, not charge a fee associated with the option, and waive certain other fees or charges. For loan modifications to qualify under the proposed new exception, they must not charge interest on amounts that are deferred and will not become due until the mortgage loan is refinanced, the mortgaged property is sold, or the loan modification matures. However, loan modifications that charge interest on past due amounts that are capitalized into a new modified term could qualify for the proposed new exception, as long as they otherwise satisfy all of the criteria in proposed
FOOTNOTE 110 As discussed more fully below, receiving a streamlined loan modification under the proposed exception based on an incomplete application generally would not remove a borrower's right under
These proposed criteria are intended to remove the immediate threat of foreclosure referral. They also would help ensure that borrowers in forbearance programs would not face any additional fees or a balloon payment immediately after their forbearance programs end, and they would ease the financial strain of having to make additional payments to repay any past due amounts. As a result of the proposed eligibility criteria, borrowers receiving one of the covered loan modifications would have additional time to repay past due amounts that may be capitalized and would have years to plan to address amounts due that are deferred until the mortgage loan is refinanced, the mortgaged property is sold, or the loan modification matures. This may be particularly important during the COVID-19 emergency, as many borrowers may be facing extended periods of economic uncertainty.
The Bureau acknowledges that borrowers accepting a loan modification offer under the new proposed exception would not receive protections under
FOOTNOTE 111 2013 RESPA Servicing Final Rule, supra note 13, at 10828. END FOOTNOTE
FOOTNOTE 112 Id. END FOOTNOTE
The Bureau believes that the exception set forth in proposed
Further, to be eligible for the exception under proposed
Additionally, if a borrower fails to perform under a trial loan modification plan offered pursuant to proposed
The Bureau requests comment on all aspects of proposed
41(c)(2)(vi)(A)
The Bureau is proposing to add a temporary exception to the anti-evasion requirement in
The Bureau understands that certain loan modification programs, including the GSEs' flex modifications, can involve, among other features, the capitalization of past due amounts, potential resetting of the interest rate, and deferral of principal to reach a certain mark-to-market loan to value ratio. The Bureau is not proposing to require or prohibit the incorporation of these features into loan modifications for them to qualify for the proposed exception outlined in
FOOTNOTE 113 As noted above, for loan modifications to qualify under the proposed new exception, they must not charge interest on amounts that are deferred and will not become due until the mortgage loan is refinanced, the mortgaged property is sold, or the loan modification matures. However, loan modifications that charge interest on past due amounts that are capitalized into a new modified term could qualify for the proposed new exception, as long as they otherwise satisfy all of the criteria in proposed
The Bureau solicits comment on the proposed amendment, including on whether the Bureau should consider additional criteria for the proposed new exception and on whether the proposed criteria would present obstacles for servicers in utilizing the proposed new exception.
41(c)(2)(vi)(A)(1)
Under proposed
As noted in the section-by-section analysis of
The Bureau understands that the GSEs offer a flex modification entailing, among other terms, an extension of the borrower's mortgage term to 480 months and no increase in the monthly required principal and interest payment amount. /114/ Similarly, FHA offers a COVID-19 owner occupant loan modification with a term of 360 months that, except in certain circumstances, does not entail an increase in the monthly required principal and interest payment amount. FHA guidance provides that a borrower's monthly required principal and interest payment amount may increase if the borrower "has exhausted the 30 percent maximum statutory value of all Partial Claims for an FHA-insured Mortgage." /115/
FOOTNOTE 114 See Fed. Home Loan Mortg. Corp., Freddie Mac Flex Modification Reference Guide (
FOOTNOTE 115 U.S. Dep't of Hous. and
The Bureau believes that the proposed term extension requirements and prohibitions on monthly required principal and interest payment amount increases adopted by the GSEs and FHA will provide valuable assistance to borrowers qualifying for these programs in avoiding foreclosure and resolving delinquencies. Therefore, the Bureau is proposing to permit servicers to offer a loan modification based on evaluation of an incomplete application that extends the term of the loan by no more than 480 months from the date the loan modification is effective and does not cause the borrower's monthly required principal and interest payment to increase, as long as the loan modification meets all of the additional criteria set forth in proposed
The Bureau solicits comment on this proposed eligibility criterion, including whether this criterion creates risks for borrowers and whether it would present implementation challenges for servicers. In particular, the Bureau solicits comment on whether borrowers and servicers may benefit from additional flexibility to extend loan terms beyond 480 months from the date the loan modification is effective, and whether borrowers and servicers may benefit from additional flexibility to increase the monthly required principal and interest payment amount such as, for example, when a borrower's loan is insured by FHA and the borrower has exceeded FHA's applicable thresholds for partial claims.
41(c)(2)(vi)(A)(2)
Proposed
FOOTNOTE 116 The Bureau notes that a similar provision in the existing COVID-19 related anti-evasion requirement exception,
As noted in the section-by-section analysis of proposed
The GSEs also specify that amounts deferred until the mortgage loan is transferred or the unpaid principal balance (UPB) is paid off do not accrue interest. The Bureau seeks comment on whether to specify in a final rule that interest cannot be charged on amounts deferred until UPB pay off, transfer, or both.
Proposed
The Bureau notes that some investors or insurers, such as FHA, may only require servicers to waive fees incurred after the beginning of the COVID-19 pandemic, but provide servicers with discretion to waive other fees. The Bureau recognizes that offers of loan modifications where the servicer elects not to waive such fees or charges, including some FHA COVID-19 owner occupant loan modifications, would not qualify for the proposed new anti-evasion requirement exception. The Bureau invites comment on whether the proposed fee waiver provision in
41(c)(2)(vi)(A)(3)
Proposed
As noted in part II, the COVID-19 emergency presents a unique period of economic uncertainty, during which borrowers may be facing extended periods of financial hardship and servicers expect to face extraordinary operational challenges to assist large numbers of delinquent borrowers. The Bureau, therefore, proposes to limit the proposed anti-evasion requirement exception in
41(c)(2)(vi)(A)(4)
Proposed
The Bureau believes that these proposed provisions, taken together, would help ensure that borrowers who accept a loan modification offered under proposed
FOOTNOTE 117 12 CFR 1024.41(f)(1). END FOOTNOTE
Additionally, the Bureau notes that servicers must still comply with the requirements of
Additionally, servicers may be required to comply with early intervention obligations if a borrower's mortgage loan account remains delinquent after a loan modification is offered and accepted under proposed
FOOTNOTE 118 Small servicers, as defined in Regulation Z, 12 CFR 1026.41(e)(4), are not subject to these requirements. 12 CFR 1024.30(b)(1). END FOOTNOTE
FOOTNOTE 119 See 12 CFR 1024.39(a) and (b). Also, servicers generally must have policies and procedures in place to advise borrowers of all of their loss mitigation options. 12 CFR 1024.38. During the COVID-19 emergency, one of the loss mitigation options to be presented to borrowers with federally backed mortgages is their right to CARES Act forbearance. END FOOTNOTE
The Bureau solicits comment on all aspects of proposed
41(c)(2)(vi)(B)
Section 1024.41(b)(1) generally requires that a servicer exercise reasonable diligence to complete any loss mitigation application submitted 45 days or more before a foreclosure sale, and
The protections in
FOOTNOTE 120 2013 RESPA Servicing Final Rule, supra note 13, at 10827-28. END FOOTNOTE
FOOTNOTE 121 Id. END FOOTNOTE
As further discussed above, the Bureau believes that the requirements of
The Bureau notes that, if a borrower does wish to pursue a complete application and receive the full protections of
Additionally, servicers may be required to comply with early intervention obligations if a borrower's mortgage loan account becomes delinquent after a loan modification takes effect or remains delinquent due to, for example, being in a trial loan modification plan, after a borrower accepts an offer under proposed
Additionally, many borrowers who would receive an offer under proposed
In light of these protections, as well as the safeguards set forth in proposed
Trial Loan Modifications
As discussed above, to be eligible for the proposed exception to the anti-evasion requirement under
FOOTNOTE 122 12 CFR 1024.41(f)(1). END FOOTNOTE
FOOTNOTE 123 Similarly, to be eligible for the current exception to the anti-evasion requirement under
The Bureau understands that certain loan modification options, such as the flex modifications offered by the GSEs, require that a borrower complete a trial loan modification plan before the loan modification is finalized and a borrower's delinquency ends. Borrowers seeking this type of loan modification who are more than 120 days delinquent would likely remain so during the trial period, and thus would not be protected under
The Bureau seeks to ensure that borrowers are not harmed by a loan modification offer that requires the completion of a trial loan modification plan before ending any preexisting delinquency on the mortgage loan account. Specifically, the Bureau wants to ensure that, if those borrowers failed to perform under a trial loan modification plan, they would still have sufficient opportunity to complete an application and be reviewed for all loss mitigation options before foreclosure can be initiated. To achieve this goal, the Bureau is proposing to require the resumption of reasonable diligence efforts if a borrower fails to perform under a trial loan modification plan offered pursuant to proposed
The Bureau believes it may be appropriate that a borrower who fails to perform under a trial loan modification plan offered pursuant to proposed
FOOTNOTE 124 12 CFR 1024.41(c)(1)(i) generally requires that a servicer evaluate a borrower for all loss mitigation options available to the borrower if the servicer receives a complete loss mitigation application more than 37 days before a scheduled foreclosure sale. END FOOTNOTE
As noted above, borrowers seeking a loan modification who are more than 120 days delinquent would likely remain so during the trial period, and thus would not be protected during a trial loan modification plan under
The Bureau also solicits comment on all other aspects of proposed
41(f) Prohibition on Foreclosure Referral
Section 1024.41(f) prohibits a servicer from referring a borrower to foreclosure in certain circumstances. Specifically,
The Bureau adopted
FOOTNOTE 125 2013 RESPA Servicing Final Rule, supra note 13, at 10833. END FOOTNOTE
FOOTNOTE 126 Id. END FOOTNOTE
Section 1024.41 generally does not apply to small servicers. /127/ However, the pre-foreclosure review period in
FOOTNOTE 127 12 CFR 1024.30(b)(1). END FOOTNOTE
FOOTNOTE 128 12 CFR1024.41(j). END FOOTNOTE
The Proposal
The Bureau is proposing to revise
If adopted, this special pre-foreclosure review period should help ensure that every borrower who is experiencing a delinquency between the time the rule becomes final until the end of 2021, regardless of when the delinquency first occurred, will have sufficient time in advance of foreclosure referral to pursue foreclosure avoidance options with their servicer. Ensuring borrowers have sufficient time before foreclosure referral should, in turn, help to avoid the harms of dual tracking, including unwarranted or unnecessary costs and fees, and other harm when a potentially unprecedented number of borrowers may be in need of loss mitigation assistance at around the same time later this year after the end of forbearance periods and foreclosure moratoria.
As explained in part II above, the current crisis has brought about extraordinary hardships for borrowers across the country. Many borrowers have been offered relief through forbearance or other short-term loss mitigation options based on an incomplete application, or without the submission of any loss mitigation application. Likewise, foreclosure moratoria on most mortgages have ensured that even borrowers who have not taken advantage of any loss mitigation options have been able to remain in their homes during the current crisis. However, the foreclosure moratoria that apply to most mortgages are scheduled to end in late
FOOTNOTE 129 See supra note 61 and accompanying text. END FOOTNOTE
Borrowers exiting forbearance programs may be eligible for one or more loss mitigation options, and the options added in the Bureau's
FOOTNOTE 130 See supra note 88. END FOOTNOTE
Servicers should be in a much better position to handle the increased volume of default servicing at this time than they were during the 2008 crisis because legal requirements are clearer, processes have generally improved, and servicers have had time to predict and plan for additional staffing needed to handle the increased volume. Despite this, servicers faced significant challenges responding to the rapidly evolving situation last year, /131/ and the Bureau is concerned that servicers may face similar challenges again later this year. Given the potentially unprecedented nature of the situation (as discussed herein), it may have been impossible to predict the staffing and training needed to properly assist the volume of severely delinquent borrowers exiting their forbearance programs later this year who may need help determining how to avoid foreclosure.
FOOTNOTE 131 Housing Insecurity Report, supra note 11, at 5-9. END FOOTNOTE
A lack of adequately trained staff during the anticipated deluge of loss mitigation activity could harm borrowers in multiple ways. For example, servicers may not have adequate resources to meet reasonable diligence obligations under
FOOTNOTE 132 See 12 CFR 1024.41(f)(2). END FOOTNOTE
FOOTNOTE 133 The Bureau has expressed concerns about potential harms to borrowers who can result when mortgage servicing is transferred. See, e.g.,
Further, the combination of evolving requirements, new staff, and the high volume of severely delinquent borrowers could cause error rates associated with the servicing of delinquent borrowers to increase, even for servicers with otherwise strong compliance management systems. Given the volume of borrowers who may be facing a heightened risk of foreclosure referral, even a small error rate could lead to many borrowers experiencing harm. The Bureau expects servicers to have in place appropriate staffing and monitoring systems to identify and correct such errors. However, the Bureau is concerned that, during this potentially unparalleled COVID-19 emergency, servicers may not be able to identify or correct errors that may lead them to make foreclosure referrals erroneously. Allowing servicers to proceed with foreclosure according to investor requirements, which often set a deadline for making the first notice or filing, /134/ in these circumstances could cause harm to a large number of borrowers if they are not able to meaningfully pursue foreclosure avoidance options because of servicer errors. As a result, the Bureau believes that it is appropriate to impose a special pre-foreclosure review period that would give servicers time to complete compliance reviews, identify and correct any errors, and ensure that they can accurately respond to the potentially unprecedented volume of borrowers in need of assistance at around the same time. If the Bureau were to allow the first notice or filing to occur with respect to these loans during the special pre-foreclosure review period, borrowers may suffer harms associated with, among other things, dual tracking.
FOOTNOTE 134 See, e.g.,
In addition to servicer-related concerns, the Bureau is also concerned that borrowers may encounter obstacles during this period and may need additional time before foreclosure referral to consider foreclosure avoidance options. Regulation X currently requires servicers to reach out to these borrowers regarding loss mitigation options, and to exercise reasonable diligence to obtain and timely evaluate complete loss mitigation applications. /135/ This proposal seeks to bolster these consumer protections.
FOOTNOTE 135 See generally 12 CFR 1024.39; 12 CFR 1024.41(b)(1). END FOOTNOTE
The available evidence and early outreach suggest that the present circumstances may have so interfered with a borrower's ability to obtain and understand important information regarding the status of their loans and foreclosure avoidance that immediately subjecting them to foreclosure proceedings upon exiting forbearance or losing the protection of a foreclosure mortarium risks denying them a meaningful opportunity to be reviewed for potential foreclosure avoidance options available to them. For example, borrowers may have received outdated or incorrect information that could delay their requests for loss mitigation options, or they may have delayed such requests because they did not understand the risk of foreclosure due to potentially historically long forbearance periods and lengthy foreclosure moratoria. Indeed, the long forbearance and moratoria periods in the circumstances of the pandemic may have led borrowers to defer consideration of their long-term ability to meet their monthly mortgage payment obligations in favor of short-term needs concerning health, childcare, and lost wages. Many borrowers also may not have taken steps to address their delinquency because they expected that the foreclosure moratoria would be extended again or that they would have another the opportunity to extend their forbearance. The Bureau believes that such expectations are understandable given repeated extensions of the same throughout the current economic and health crisis. The current crisis also may have created unique obstacles, such as physical barriers preventing borrowers from obtaining documentation required to complete a loss mitigation application, which may have significantly undermined borrower ability to address their delinquencies sooner. Without additional regulatory intervention now, some investors may require servicers to proceed with the foreclosure process before some borrowers obtain a meaningful opportunity to seek and be considered for potential foreclosure avoidance options.
To be sure, some borrowers may seek help at a slightly earlier date because of the proposed early intervention requirements described above in the section-by-section analysis of
To address these concerns, the Bureau is proposing to impose a special pre-foreclosure review period. Specifically, the Bureau is proposing to amend
The Bureau solicits comments on every aspect of the proposed revisions to
Potential Exemptions
The Bureau believes that it may be appropriate to adopt exemptions that would allow a servicer to make the first notice or filing before
First, the Bureau believes that it may be appropriate to allow a servicer to make the first notice or filing before
However, the Bureau is concerned that such an exemption could inadvertently prevent some borrowers from having an opportunity to meaningfully pursue foreclosure avoidance options before foreclosure referral. For example, the Bureau is concerned that such an exemption might not account for situations where a borrower's eligibility changes within a relatively short period of time, as may happen during this particular economic crisis, as certain businesses may begin to reopen or open more completely based on when different State and local jurisdictions make adjustments to their COVID-19-related restrictions. Although
FOOTNOTE 136 2013 RESPA Servicing Final Rule, supra note 13, at 10836. END FOOTNOTE
One approach to address this concern may be to limit any exemption such as that discussed above so that it only applies if the borrower has been evaluated for all available loss mitigation options after the effective date of this rule. This should help ensure that borrowers are not surprised to learn that they are no longer protected from foreclosure referral, while still allowing servicers to proceed with foreclosure if an extended review period will not benefit the borrower. The Bureau solicits comment on whether such an exemption should be finalized and whether the limitations discussed above would achieve the consumer protection purposes discussed herein.
Second, the Bureau also believes that it may be appropriate to allow a servicer to proceed with foreclosure if the servicer has exercised reasonable diligence to contact the borrower and has been unable to reach the borrower. If the Bureau were to finalize such an exemption, any final rule could define reasonable diligence, such as by basing it on similar concepts in the Home Affordable Modification Program. For example, reasonable diligence could include multi-modal communication attempts, such as, over a period of 30 days: (1) Making a minimum of four telephone calls to the last known phone numbers of record, at different times of the day; and (2) sending two written notices to the last address of record by sending one letter via certified/express mail or via overnight delivery service with return receipt/delivery confirmation and one letter via regular mail.
The Bureau believes that it may be possible to adopt such an exemption without undermining the purposes of the proposed special pre-foreclosure review period because delaying the foreclosure referral for these borrowers may be unlikely to benefit them and making the first notice or filing could prompt communication. However, adopting this type of exemption could potentially lead to the exact harms this proposal seeks to limit, and some borrowers could be subject to dual tracking or foreclosure without being given a meaningful opportunity to consider foreclosure avoidance options. In particular, the Bureau is concerned that the same borrower-related concerns discussed above could also increase the likelihood that a borrower does not respond to servicer outreach. For example, a borrower who does not have an FHA mortgage loan may initially fail to respond to their servicer because they falsely believe that FHA's extended deadlines for first notice or filing apply to them. Borrowers may also fail to respond because they believe that physical limitations associated with the COVID-19 emergency would prevent them from obtaining the documents necessary to complete a loss mitigation application.
If the Bureau were to adopt this exemption, the Bureau would likely limit its scope so that it only applies if the servicer engages in reasonable diligence after the effective date of any final rule. Absent such a limitation, the concerns discussed herein may be exacerbated if servicers could proceed with foreclosure because the borrower failed to respond to servicer outreach before the effective date of this rule. The Bureau solicits comment on whether such an exemption would be appropriate, whether the exemption should only apply if reasonable diligence occurs after the effective date of this rule, and whether any such exemption should be further tailored to address these or other concerns.
Length of the Special COVID-19 Emergency Pre-Foreclosure Review
The Bureau is proposing generally to prohibit a servicer from making the first notice or filing until a date certain--
FOOTNOTE 137 Black
The proposed
The Bureau expects that ending the special pre-foreclosure review period on
The Bureau solicits comment on the potential benefits and implementation challenges associated with the proposed date certain approach. The Bureau also solicits comment on whether the proposed date certain--
Potential Alternative Approaches
The Bureau is proposing to end the special pre-foreclosure review period on a date certain rather than other alternatives because it believes the date certain approach may help to (1) ease compliance for the industry and (2) protect all delinquent borrowers who may need additional time to consider foreclosure alternatives before the initiation of foreclosure, regardless of whether they entered into a forbearance program or were delinquent before the crisis began. The Bureau currently believes that it would be more difficult for servicers to implement other potential interventions that the Bureau has considered thus far because compliance for those options would necessarily be tied to the facts of each loan and could overlap with other procedures that servicers already have in place. In addition, some other approaches may not provide protections for all borrowers who may need additional time to consider foreclosure avoidance options before the initiation of foreclosure.
However, the Bureau is seriously considering alternative interventions because it is also concerned about potential disadvantages to the proposed date certain approach that may not exist for other interventions. For example, the Bureau is concerned that the proposed date certain approach could unnecessarily increase costs to borrowers for whom foreclosure is not avoidable and reduce the equity that they have in their homes, while simultaneously increasing costs to servicers, which could exacerbate liquidity and reserve concerns. The proposed date certain approach without certain exceptions also would provide, at best, limited benefits to a delinquent borrower who never communicates with their servicer during this time, and it would not provide any protection to a borrower who is referred to foreclosure before the effective date of the rule.
The proposed approach also could encourage some servicers to make the first notice or filing before any final rule becomes effective. The Bureau notes that, consistent with the
FOOTNOTE 138 See Supervision & Enforcement Housing Report, supra note 75. END FOOTNOTE
Further, although the proposed date certain approach is straightforward, it could nevertheless impose costs on servicers to update their systems and add another layer of complexity to default servicing. The Bureau is also concerned that new State or Federal legislation or changes to investor requirements after issuance of this proposal could necessitate adjustments to the date specified or other amendments to the proposed provisions. This could render the proposal less effective and increase complexity.
The Bureau seeks comment on the potential limitations of the proposed date certain approach and on alternatives that could help to resolve these concerns. In particular, the Bureau requests comments on a "grace period" approach that would provide an additional foreclosure protection from the existing requirements starting when a borrower exits their forbearance program. Such an exemption could prohibit servicers from foreclosure referral until a certain number of days (e.g., 60 or 120 days) after a borrower exits their forbearance program. The Bureau has not proposed the grace period option, in part, because it currently believes the grace period option, which would require loan-specific analysis, would be more difficult for servicers to implement than the proposed date certain approach, which does not. The Bureau is also concerned that the grace period approach would not protect borrowers who never entered a forbearance program.
The Bureau solicits comment on the potential benefits and implementation challenges associated with the alternative grace period approach, including whether such an approach would be more difficult to implement than the proposed approach. The Bureau also solicits comment on what may be an appropriate number of days for any such grace period if commenters believe that approach would be a preferable option.
The Bureau has also considered an approach keyed to the length of delinquency, such as temporarily extending the number of days a borrower must be delinquent before the servicer may make the first notice or filing. However, the Bureau is currently concerned that such an approach would provide shorter (or possibly no) protection for borrowers with delinquencies that began before the crisis because they could become eligible for foreclosure referral immediately or soon after exiting forbearance. The Bureau is also currently concerned that such an approach would also require a fact-specific analysis for each delinquent loan, which would add another layer of complexity for servicers to implement. The Bureau seeks comments on whether this approach may be preferable to the proposed date certain approach.
Finally, the Bureau specifically seeks comment on whether the extended review period should end on a date that is based on when a borrower's delinquency begins or forbearance period ends, whichever occurs last. The Bureau believes this approach could ensure that a borrower, regardless of the specific facts and circumstances, has a meaningful opportunity to consider foreclosure avoidance options. However, the Bureau is currently concerned that this approach could be much more operationally complex and could increase the risk of error. The Bureau seeks comments on whether this approach may be preferable to the proposed date certain approach.
Scope of the Special Pre-Foreclosure Review Period
If adopted, the special pre-foreclosure review period would apply to all delinquent loans that are secured by the borrower's principal residence, regardless of when the first delinquency occurred.
The Bureau initially concludes that the proposal should apply to all delinquent loans, regardless of when the delinquency first occurred, because the potential consumer harms addressed by the rule would exist for all delinquent borrowers, regardless of when they first became delinquent. All such borrowers may have faced similar unprecedented circumstances that rendered current protections insufficient to ensure meaningful review for foreclosure avoidance. For example, if servicers do not have the capacity to handle the anticipated surge in default servicing volume toward the end of 2021, all delinquent borrowers who may become eligible for foreclosure referral later this year would be affected--even if they were more than 120 days delinquent before the crisis began. Further, borrowers could encounter difficulties submitting a complete loss mitigation application because of COVID-related issues, such as being unable to obtain required documentation that must be obtained in person, regardless of when they first became delinquent.
The Bureau solicits comments on this aspect of the proposed rule, including whether borrowers would be sufficiently protected if the special pre-foreclosure review period only applied to borrowers who first became delinquent in 2020 or 2021 or entered a forbearance program before the effective date of any final rule.
As noted in part I above, this proposal only applies to a mortgage loan that is secured by a property that is a borrower's principal residence. /139/ If the borrower has abandoned the property securing the loan, depending on the facts and circumstances and applicable law, the property may no longer be the borrower's principal residence. /140/
FOOTNOTE 139 12 CFR 1024.30(c)(2). END FOOTNOTE
FOOTNOTE 140 Stakeholders over the years have urged the Bureau to expressly exempt abandoned properties from the foreclosure restrictions in the rules. The Bureau has considered expressly exempting abandoned properties from the pre-foreclosure review period in
Small Servicers
The proposed special pre-foreclosure review requirements would generally apply to the same mortgage loans that are subject to the pre-foreclosure review period in
FOOTNOTE 141 12 CFR 1024.30(b)(1) and 1024.41(j). END FOOTNOTE
FOOTNOTE 142 2013 RESPA Servicing Final Rule, supra note 13, at 10843. END FOOTNOTE
The Bureau seeks comment on this proposed approach.
V. Proposed Effective Date
The Bureau proposes that any final rule relating to this proposal take effect on or before
As discussed more fully in part II, many of the protections available to homeowners as a result of measures to protect them from foreclosure during the COVID-19 emergency are ending in the coming months. The Bureau, therefore, anticipates working quickly to issue any final rule relating to this proposal as soon as possible after receiving and evaluating public comment, and at least 30 days before
VI. Dodd-Frank Act Section 1022(b) Analysis
A. Overview
In developing the proposed rule, the Bureau has considered the proposed rule's potential benefits, costs, and impacts as required by section 1022(b)(2)(A) of the Dodd-Frank Act. /143/ The Bureau requests comment on the preliminary analysis presented below as well as submissions of additional data that could inform the Bureau's analysis of the benefits, costs, and impacts. In developing the proposed rule, the Bureau has consulted or offered to consult with the appropriate prudential regulators and other Federal agencies, including regarding consistency with any prudential, market, or systemic objectives administered by such agencies, as required by section 1022(b)(2)(B) of the Dodd-Frank Act.
FOOTNOTE 143 Specifically,
B. Data Limitations and Quantification of Benefits, Costs, and Impacts
The discussion below relies on information that the Bureau has obtained from industry, other regulatory agencies, and publicly available sources, including reports published by the Bureau. These sources form the basis for the Bureau's consideration of the likely impacts of the proposed rule. The Bureau provides estimates, to the extent possible, of the potential benefits and costs to consumers and covered persons of this proposal given available data. However, as discussed further below, the data with which to quantify the potential costs, benefits, and impacts of the proposed rule are generally limited.
In light of these data limitations, the analysis below generally includes a qualitative discussion of the benefits, costs, and impacts of the proposed rule. General economic principles and the Bureau's expertise in consumer financial markets, together with the limited data that are available, provide insight into these benefits, costs, and impacts. The Bureau requests additional data or studies that could help quantify the benefits and costs to consumers and covered persons of the proposed rule.
C. Baseline for Analysis
In evaluating the benefits, costs, and impacts of the proposal, the Bureau considers the impacts of this proposal against a baseline in which the Bureau takes no action. This baseline includes existing regulations and the current state of the market. Further, the baseline includes, but is not limited to, the CARES Act and any new or existing forbearances granted under the CARES Act and substantially similar programs.
The baseline reflects the response and actions taken by the Bureau and other government agencies and industry in response to the COVID-19 pandemic and related economic crisis, which may change. Protections for mortgage borrowers, such as forbearance programs, foreclosure moratoria, and other consumer protections and general guidance, have evolved since the CARES Act was signed into law on
D. Potential Benefits and Costs to Consumers and Covered Persons
This section discusses the benefits and costs to consumers and covered persons of (1) the proposed special pre-foreclosure review period (proposed
1. Prohibition on Foreclosure Referral
The proposed amendments to Regulation X would temporarily establish a special pre-foreclosure review period that would generally prohibit servicers from making the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process unless such first notice or filing is made after
Benefits and Costs to Consumers
The proposed provision would provide benefits and costs to consumers by providing consumers additional time for meaningful review of loan modification and loss mitigation options that help the borrower prevent avoidable foreclosure. The benefits and costs of this additional time for review can be measured by actual avoidance of foreclosure.
In the context of the COVID-19 pandemic and related economic crisis, a very large number of mortgage loans may be at risk of foreclosure. Generally, a servicer can initiate the foreclosure process once a borrower is more than 120 days delinquent, as long as no other limitations apply. In response to the current economic crisis, there are existing forbearance programs and foreclosure moratoria in place that prevent servicers from initiating the foreclosure process. As currently stands, Federal foreclosure moratoria are in effect until
FOOTNOTE 144 See Black
FOOTNOTE 145 See supra note 61 and accompanying text. END FOOTNOTE
The primary benefit to consumers from this proposed provision would arise from a reduction in foreclosure and its associated costs. There are a number of ways a borrower who is delinquent on their mortgage may resolve the delinquency without foreclosure. The borrower may be able to prepay by either refinancing the loan or selling the property. The borrower may be able to become current without assistance from the servicer ("self-cure"). Or, the borrower may be able to work with the servicer to resolve the delinquency through a loan modification or other loss mitigation option. Resolving the delinquency in one of these ways, if possible, will generally be less costly to the borrower than foreclosure. Even after foreclosure is initiated, a borrower may be able to avoid a foreclosure sale by resolving their delinquency in one of these ways, although a foreclosure action is likely to impose additional costs and may make some of these resolutions harder to achieve. For example, a borrower may be less likely to obtain an affordable loan modification if the administrative costs of foreclosure are added to the existing unpaid balance of the loan. /146/ By providing borrowers with additional time before foreclosure can be initiated, the proposed provision would give borrowers a better opportunity to avoid foreclosure altogether.
FOOTNOTE 146 In addition, the Bureau has noted in the past that consumers may be confused if they receive foreclosure communications while loss mitigation reviews are ongoing, and that such confusion potentially may lead to failures by borrowers to complete loss mitigation processes, or impede borrowers' ability to identify errors committed by servicers reviewing applications for loss mitigation options. 2013 RESPA Servicing Final Rule, supra note 13, at 10832. END FOOTNOTE
To quantify the benefit of the proposed provision from a reduction in foreclosures sales, the Bureau would need to estimate (1) the average benefit to consumers, in dollar terms, of preventing a single foreclosure and (2) the number of foreclosures that would be prevented by the proposed provision. Given data currently available to the Bureau and information publicly accessible, a reliable estimate of these figures is difficult due to the significant uncertainty in economic conditions, evolving state of government policies, and elevated levels of forbearance and delinquency. Below, the Bureau outlines available evidence on the average benefit to preventing foreclosure and the number of foreclosures that could be prevented under the proposed provision.
Importantly, the Bureau notes that any evidence used in the estimation of the benefits to borrowers of avoiding foreclosure, generally, comes from earlier time periods that differ in many and significant ways from the current economic crisis. In the decade preceding the current crisis, the economy was not in distress. There was significant economic growth that included rising house prices, low rates of mortgage delinquency and forbearance, and falling interest rates. The current economic crisis also differs in substantive ways compared to the last recession from 2008 to 2009. In particular, housing markets have remained strong throughout the crisis. House prices have increased almost 7 percent year-over-year as of
FOOTNOTE 147 See Am. Enterprise Inst., National Home Price Appreciation Index (
Estimates of the cost of foreclosure to consumers are large and include both significant monetary and non-monetary costs, as well as costs to both the borrower and non-borrowers.
FOOTNOTE 148 This estimate from HUD is based on a number of assumptions and circumstances that may not apply to all borrowers who experience a foreclosure sale or those that remediate through non-foreclosures options.
FOOTNOTE 149 Rebecca Diamond et al., The Effect of Foreclosures on Homeowners, Tenants, and Landlords, (Nat'l
FOOTNOTE 150 One study estimated that, on average, a single foreclosure is associated with an increase in urgent medical care costs of
FOOTNOTE 151 See, e.g.,
Furthermore, during the COVID-19 pandemic and associated economic crisis, the cost of foreclosure for some borrowers may be even larger than the expected average cost of foreclosure more generally. Housing insecurity presents health risks during the pandemic that would otherwise be absent and that could continue to be present even if foreclosure is not completed for months or years. /152/ In addition, searching for new housing may be unusually difficult as a result of the pandemic and associated restrictions. Recent analysis has shown that the pandemic has had disproportionate economic impacts on communities of color. For example, Black and Hispanic homeowners were more than two times as likely to be behind on housing payments as of
FOOTNOTE 152 See, e.g., Nrupen Bhavsar et al., Housing Precarity and the COVID-19 Pandemic: Impacts of Utility Disconnection and Eviction Moratoria on Infections and Deaths Across US Counties, (Nat'l Bureau od Econ. Res., Working Paper No. 28394, 2021), https://www.nber.org/papers/w28394. END FOOTNOTE
FOOTNOTE 153 Housing Insecurity Report, supra note 11. END FOOTNOTE
The total benefit to borrowers of delaying foreclosure also depends on the number of foreclosures that would be prevented by the proposed provision; in other words, the difference in the total foreclosures between what would occur under the baseline and what would occur under the proposed delay. To estimate this, the first step is estimating the number of loans that will be more than 120 days delinquent as of the effective date of the proposed rule, currently,
As of
FOOTNOTE 154 See Black
FOOTNOTE 155 Id. END FOOTNOTE
Furthermore, the Bureau assumes that the distribution of performance outcomes as of
FOOTNOTE 156 See Black
Most loans that become delinquent do not end with a foreclosure sale. The Bureau's 2013 RESPA Servicing Rule Assessment Report (Servicing Assessment Report) /157/ found that, for a range of loans that became 90 days delinquent from 2005 to 2014, approximately 18 to 35 percent ended in a foreclosure sale within three years of the initial delinquency. /158/ Focusing on loans that become 60 days delinquent, the same report found that, 18 months after the initial 60-day delinquency, between 8 and 18 percent of loans had ended in foreclosure sale over the period 2001 to 2016, with an additional 24 to 48 percent remaining at some level of delinquency. /159/ An estimate of the rate at which delinquent loans end in foreclosure can be taken from this range albeit with uncertainty as to the extent to which these data can be generalized to the current period. For example, using values from 2009 might overestimate the number of foreclosures due to differences in house price growth and the resulting amount of equity borrowers have in their homes. All else equal, this difference might lead to a higher share of delinquent borrowers who prepay.
FOOTNOTE 157 See Servicing Rule Assessment Report, supra note 13. END FOOTNOTE
FOOTNOTE 158 Id. at 69-70. END FOOTNOTE
FOOTNOTE 159 Id. at 48. END FOOTNOTE
The Bureau outlines one approach to estimating the baseline number of foreclosures, albeit with significant uncertainty. First, the Bureau considers a range of between one-third and two-thirds of the number of loans that are in forbearance as of
FOOTNOTE 160
The baseline number of such loans that will end with a foreclosure sale can be estimated using data from the Servicing Rule Assessment Report. Using data from 2016 (the latest year reported), 18 months after the initial 60-day delinquency, 8 percent of delinquent loans ended with a foreclosure sale and an additional 24 percent remained delinquent and had not been modified. /161/ Of the loans that remain delinquent without a loan modification, the Bureau expects a significant number of these loans will end with a foreclosure sale although the Bureau does not have data to identify the exact share. The Bureau assumes one-half of this group will end with a foreclosure sale, which is a significant share although not a majority of loans. /162/ Overall, this gives a baseline estimate of loans that will experience foreclosure sale of between roughly 155,000 and 310,000. The Bureau requests comment on the assumptions underlying this estimate, including discussion of any data available to predict the share of loans that will end with a foreclosure sale.
FOOTNOTE 161 Servicing Rule Assessment Report, supra note 13, at 48. END FOOTNOTE
FOOTNOTE 162 A large share of foreclosures are not completed within the first 18 months of delinquency, so it is reasonable to assume that many loans that are still delinquent 18 months after an initial 60-day delinquency will eventually end in foreclosure. See Servicing Rule Assessment Report, supra note 13, at 52-53. END FOOTNOTE
The next step is to estimate how the number of foreclosures would change under the proposal. The Bureau proposes that any final rule relating to this proposal would become effective on
FOOTNOTE 163 An extension of forbearance programs or foreclosure moratoria would reduce the total number of months delay under the proposed rule. This would reduce the number of foreclosures prevented under the rule by the number of loans that self-cure, prepay, or enter into a loan modification during the time between the end of forbearance programs or foreclosure moratoria and
FOOTNOTE 164 If servicers delay initiating foreclosure, then the total number of foreclosures prevented under the proposed rule would fall by the number of loans that self-cure, prepay, or enter into a loan modification during that period of time. The number of loans that will self-cure, prepay, or enter into a loan modification during that period is uncertain given limited information on what the economic circumstances and financial status of borrowers will be at that time. END FOOTNOTE
Estimating how many foreclosures might be prevented by a four-month delay requires making strong assumptions about the additional growth in the share of recovered loans over the additional four-month period, where recovered is defined as a self-cure or permanent loan modification. The data available to the Bureau do not provide direct evidence of how protecting this group of borrowers from initiation of foreclosure will affect the likelihood that their loans will ultimately end with a foreclosure sale. In particular, some factors from the current environment that are difficult to generalize using data from earlier periods are: First, borrowers with loans in a forbearance plan may be very different from borrowers with loans that are delinquent but not in a forbearance plan; second, among borrowers with loans in a forbearance plan, some borrowers have made no payments for 18 months while others have made partial or infrequent payments; and, third, borrowers with loans in a forbearance plan are unlikely to have arrearages due at the end of the forbearance period. Any of these differences across borrowers can significantly affect the growth in the share of recovered loans over time. The Bureau requests comment on this assumption, in particular on how the share of recovered loans will change over a four-month period.
The Bureau provides some evidence on the rate at which delinquent loans may recover to estimate the total benefit to borrowers of the provision using information reported in the Servicing Assessment Report. Among borrowers who become 30 days delinquent in 2014: 60 percent recover before their second month of delinquency, 80 percent recover by the 12th month of delinquency, and 85 percent recover by the 24th month of delinquency. /165/ These patterns, first, show that most borrowers who become delinquent recover early in their delinquency. Second, the data show that the rate of change in recovery falls as the length of the delinquency increases. For example, after the initial month of delinquency, an additional 20 percent of borrowers recover by the 12th month of delinquency, and then an additional 5 percent of borrowers by the 24th month. On a monthly basis, the number of borrowers who recover increases by less than one percent per month during the second year. /166/ The Bureau notes that the above discussion is based on the recovery experience of loans that became 30 days delinquent. A smaller number of loans became more seriously delinquent. Relative to that smaller base, the share of loans recovering during later periods would be greater.
FOOTNOTE 165 See Servicing Rule Assessment Report, supra note 13, at 85. The data used in this figure are publicly available loan performance data from
FOOTNOTE 166 The rate of change in borrowers who have recovered is calculated as: [(85 percent - 80 percent) / 80 percent] x 100 [approx.] 6 percent. This gives a monthly average increase in the share of loans that have recovered between the 12th and 24th month of delinquency of approximately 0.5 percent (6 percent12 months). END FOOTNOTE
The proposed pre-foreclosure review period would provide borrowers additional time during which servicers cannot initiate foreclosure. This may increase the number of borrowers who are able to recover, in particular by ensuring more borrowers have the opportunity to pursue foreclosure avoidance options before a servicer makes the first notice or filing required for foreclosure. The size of this increase depends on how much of a difference the delay makes in borrowers' ability to recover. This, in turn, depends on factors such as the financial circumstances of borrowers as of the effective date, the number of foreclosures that servicers would in fact initiate, absent the rule, during the months after the effective date, and the effect of delaying foreclosure on borrowers' ability to obtain loss mitigation options or otherwise recover. The Bureau requests comment on the likelihood that borrowers coming out of forbearance will be able to recover in the months shortly after forbearance ends and how a delay in initiation of foreclosure would affect their ability to recover.
For purposes of illustrating potential benefits of the proposed rule, suppose that the increase in the number of borrowers who are ultimately able to recover as a result of the delay is 0.5 percent per month of delay, which is similar to the monthly rate at which the number of borrowers who have recovered grows during the second year after a 30-day delinquency, as discussed above. Assuming the full four-month delay, the additional share of loans that recover could then be estimated at about 2 percent of the initial group of delinquent loans. /167/ The remaining distribution of outcomes (foreclosure, prepay, and delinquent without loan modification) are estimated based on a constant relative share across groups. /168/ This means that 7.9 percent of delinquent loans will end with a foreclosure sale within 18 months. Similar to under the baseline, the Bureau also assumes that one-half of loans that are delinquent and not in a loan modification will end with a foreclosure sale after more than 18 months (meaning an additional 11.8 percent of delinquent loans would end with a foreclosure sale). This generates an estimate of foreclosure sales under the proposed rule of between roughly 152,000 and 304,000, or a reduction of between approximately 2,600 and 5,300 foreclosures.
FOOTNOTE 167 The extent of the delay depends on when a loan exits forbearance. If the exact number of loans exiting forbearance each month was known, then one could multiply the number of loans exiting forbearance each month by the month-adjusted expected recovery rate. For example, loans that exit in October might have an average recovery rate of 1.5 percent (0.5 percent x 3 months) and loans that exit in November might have an average expected recovery rate of 1.0 percent (0.5 percent x 2 months), all else equal. Then, the number of recovered loans can be calculated by summing across months. END FOOTNOTE
FOOTNOTE 168 More specifically, the Bureau assumes that the number of loans that either self-cure or are modified increases by 2 percent, and that other outcomes decrease proportionately. For loans that became 60 days delinquent in 2016, the Bureau estimated that about 46 percent either cured or were modified within 18 months, about 8 percent had ended in foreclosure, about 24 percent remained delinquent, and about 22 percent had prepaid. See Servicing Rule Assessment Report, supra note 13, at 48. A 2 percent increase in recovery would mean that the share of loans that recover increases to 47 percent (46 percent x 1.02) given the additional four-month delay. The assumption of a constant relative share across groups means that an additional recovery reduces the number of foreclosures by 0.15, the number of prepaid by 0.41, and the number of delinquent loans without loan modification by 0.44. An increase in the share of loans that cure or are modified from 46 to 47 percent implies a reduction in the share that end in foreclosure by 18 months to about 7.9 percent, and the share that remain delinquent at 18 months to about 23.6 percent. END FOOTNOTE
The Bureau believes that an assumed increase in the likelihood of recovery of 2 percent may significantly overestimate or underestimate the actual effect of the proposed rule on whether loans recover or end with a foreclosure sale. The discussion above relies on data from between 2014 and 2016, which was not a period of economic distress as described earlier. In the current period compared to 2014 and 2016, the level of delinquency is higher and changes in the incidence of recovery over time may be slower. On the other hand, significant house price growth and higher levels of home equity may make it more likely the borrowers can avoid foreclosure if borrowers have better options for selling or refinancing their homes than in 2014 and 2017. The Bureau requests comment on the extent to which the increase in the rate of recovery used for the above estimates is reasonable, including any data that can shed light on this assumption.
Finally, an illustration of the potential total benefit to borrowers of avoiding foreclosure sales as a result of the proposed provision can be calculated by taking the difference in the number of foreclosure sales under the baseline compared to under the proposed rule and multiplying that difference by the per-borrower cost of foreclosure. Based on a per foreclosure cost to the borrower of $12,500, the benefit to borrowers of avoiding foreclosure under the proposed rule is estimated at between $33 million and $66 million. The estimate is based on a number of assumptions and represents one approach to quantifying the total benefits to borrowers.
The above estimate of the benefit to borrowers of avoiding foreclosure likely underestimates the true value of the benefit. As discussed above, there is evidence that borrowers incur significant non-monetary costs that are not accounted for in the above estimates. Furthermore, there may be non-borrower benefits, such as benefits to neighbors and communities from reduced foreclosures, that are unaccounted for. Therefore, estimates of the total benefit to consumers, which includes the benefit to borrowers and non-borrowers are expected to be larger than the reported estimates.
Some borrowers would benefit from the proposed provision even if they would not have experienced a foreclosure sale under the baseline. Many borrowers are able to cure their delinquency or otherwise avoid a foreclosure sale after the servicer has initiated the foreclosure process. Even though these borrowers do not lose their homes to foreclosure, they may incur foreclosure-related costs, such as legal or administrative costs, from the early stages of the foreclosure process. The proposed provision could mean that some borrowers who would have cured their delinquency after foreclosure is initiated are instead able to cure their delinquency before foreclosure is initiated, meaning that they are able to avoid such foreclosure-related costs. The Bureau does not have data that would permit it to estimate the extent of this benefit of the proposed rule, which would likely vary according to State foreclosure laws and the borrower's specific situation. The Bureau requests comments on this benefit to consumers, including data or other information that could help quantify the benefit.
The proposed provision may create costs for some borrowers if it delays their engagement in the loan modification and loss mitigation process. For some borrowers, notification of foreclosure process initiation may provide the impetus to engage with the servicer to discuss options for avoiding foreclosure. For these borrowers, delaying the initiation of foreclosure may delay their engagement in determining a next step for resolving the delinquency on the loan, whether it be through repayment, loan modification, foreclosure, or other alternatives. This delay may put the borrower in a worse position because the additional delay can increase unpaid amounts and thereby reduce options to avoid foreclosure. The Bureau does not have data that would permit it to estimate the extent of this cost of the proposed rule. The Bureau requests comments on this cost to consumers, including data or other information that could help quantify the cost.
Benefits and Costs to Covered Persons
The proposed provision would impose new costs on servicers and investors by delaying the date at which foreclosure can be initiated, which would prolong the ongoing costs of servicing non-performing loans and delay the point at which servicers are able to complete the foreclosure and sell the property. These costs would apply to foreclosures that the proposed rule would not prevent. As further discussed below, the costs could be mitigated somewhat by a reduction in foreclosure-related costs in cases where the delay in initiating foreclosure permits borrowers to avoid entering into foreclosure altogether.
As discussed above, the Bureau does not have data to quantify the number of loans that will ultimately enter foreclosure or the number that will end with a foreclosure sale, but, as discussed above, past experience and the large number of loans currently in a nonpayment status suggest that as many as 155,000 and 310,000 loans that would be subject to the proposed pre-foreclosure review period could ultimately end in foreclosure. An additional number of loans are likely to enter the foreclosure process but not end in foreclosure because the borrower is able to recover or prepay the loan.
By preventing servicers from initiating foreclosure for most delinquent loans until after December 31, 2021, the proposal could delay many foreclosures from being initiated by up to four months. The delay could be shorter for loans subject to a forbearance that extends past August 31, 2021, including some loans subject to the CARES Act that entered into forbearance later than March 2020 and are extended to a total of up to 18 months. The delay could also be reduced to the extent that servicers would not actually initiate foreclosure for all borrowers who are more than 120 days delinquent and whose loans are not in forbearance in the period between September and December 2021. /169/ For foreclosures that are eventually completed, a delay in the initiation of foreclosure would be expected, all else equal, to lead to an equivalent delay in the foreclosure's completion.
FOOTNOTE 169 Even absent the proposed provision, servicers may be delayed in initiating foreclosure because the attorneys and other service providers that support foreclosure actions may not have capacity to handle the anticipated number of delinquent loans, particularly given that the long foreclosure moratoria have eroded capacity. END FOOTNOTE
Any delay in completing foreclosure will mean additional costs to service the loan before completing foreclosure. This includes, for example, the costs of mailing statements, providing required disclosures, and responding to borrower requests. For loans that are seriously delinquent, servicers may be required by investors to conduct frequent property inspections to determine if properties are occupied and may incur costs to provide upkeep for vacant properties. MBA data report that the annual cost of servicing performing loans in 2017 was $156 (or $13 per month) and the annual cost of servicing nonperforming loans was $2,135 (or approximately $178 per month). /170/ Some costs of servicing delinquent loans would be ongoing each month, including costs of complying with certain of the Bureau's servicing rules. However, many of the average costs of servicing a delinquent loan likely reflect one-time costs, such as the costs of paying counsel to complete particular steps in the foreclosure process, which likely would not increase as a result of a delay. In light of this, the additional servicing costs associated with a delay are likely to be well below $178 per month for each loan.
FOOTNOTE 170 Mortg. Bankers Ass'n, Servicing Operations Study and Forum for Prime and Specialty Servicers (Dec. 2018), https://www.mba.org/news-research-and-resources/research-and-economics/single-family-research/servicing-operations-study-and-forum-for-prime-and-specialty-servicers. END FOOTNOTE
In addition, some mortgage servicers are obligated to make some principal and interest payments to investors, even if borrowers are not making payments. Servicers may also be obligated to make escrowed real estate tax and insurance payments to local taxing authorities and insurance companies. The proposal would extend the period of time that servicers must continue making such advances for loans on which they are not receiving payment. Servicers may incur additional costs to maintain the liquid reserves necessary to advance these funds.
When the servicer does not advance principal and interest payments to investors, including cases in which a loan's owner is servicing loans on its own behalf, a delay will also impose costs on investors by delaying their receipt of proceeds from foreclosure sales and preventing them from investing those funds and earning an investment return during the time by which a foreclosure sale is delayed. These costs depend on the length of any delay, the amount of funds that the investor stands to recover through a foreclosure sale, and the investor's opportunity cost of funds. For example, the average unpaid principal balance of mortgage loans in forbearance as of February 2021 was reported to be approximately $200,000. /171/ Assuming that investors would invest foreclosure sale proceeds in short-term
FOOTNOTE 171 As of February 2021, there were an estimated 2.7 million loans in forbearance representing a total unpaid principle balance of $537 billion, for an average loan size of approximately $198,000. See Black Jan. 2021 Report, supra note 36, at 7. END FOOTNOTE
Servicers would also incur costs to ensure the proposed provision is not violated. The simplicity of the provision may mean the direct cost of developing systems to ensure compliance is not too great. However, servicers that seek to pursue foreclosure for properties that are not the borrower's principal residence (for example, when a property is vacant and appears to be abandoned) may incur additional costs to ensure that those properties are in fact not the borrower's principal residence so that they do not inadvertently violate the proposed provision. The Bureau understands that making such determinations can be difficult and is the source of significant perceived compliance risk given the possibility of incorrectly concluding that the property is no longer a borrower's principal residence. /172/
FOOTNOTE 172 Servicing Rule Assessment Report, supra note 13, at 173. END FOOTNOTE
The costs to servicers described above may be mitigated somewhat by a reduction in foreclosure-related costs, to the extent that the additional time for borrowers to be considered for loss mitigation options prevents some foreclosures from being initiated. Often, a borrower who is able to obtain a loss mitigation option in the months before foreclosure would otherwise be initiated would also be able to obtain that option shortly after foreclosure is initiated. In such cases, a delay in initiating foreclosure could mean servicers avoid the costs of initiating and then terminating, the foreclosure process. For example, servicers may avoid certain costs, such as the cost of engaging local foreclosure counsel, that they generally incur during the initial stages of foreclosure and that they may not be able to pass on to borrowers. Even absent the proposed rule, servicers may choose to delay initiating foreclosure for loans that are more than 120 days delinquent, subject to investor requirements, if the probability of recovery is high enough that the benefit of waiting, and potentially avoiding foreclosure-related costs, outweighs the expected cost of delaying an eventual foreclosure sale. By requiring servicers to delay initiating foreclosure until after December 31, 2021, the proposed rule would cause servicers to delay foreclosure even when the net benefit of doing so is negative, and therefore any benefit servicers would receive from delayed foreclosures is expected to be smaller on average than the cost to servicers arising from the delay.
The Bureau seeks comment on the discussion of the benefits and costs of the proposed provision for consumers and covered persons discussed above. In particular, the Bureau seeks comment on data and methodology for estimating the number of foreclosures that could be prevented by the proposed provision, the associated benefits to consumers, and the costs to covered persons associated with a delay in foreclosure sales.
Alternative Approach: Potential Exemptions to the Special Pre-Foreclosure Review Period
The Bureau has also considered an alternative in which servicers would be allowed to proceed with the foreclosure process during the special pre-foreclosure review period under certain circumstances. Those circumstances could include cases in which the servicer has determined that the borrower is not eligible for any loss mitigation options or if the borrower has declined all available options. They could also include cases in which the servicer has exercised reasonable diligence to contact the borrower and the servicer has been unable to reach the borrower. Reasonable diligence could potentially be defined to include multi-modal communication attempts, such as making certain numbers and types of communication attempts over a period of 30 days.
Such an alternative could reduce the benefits of the rule for certain borrowers who would receive reduced protection from the pre-foreclosure review period. In general, the benefits of the pre-foreclosure review period would be lower for borrowers who the servicer has determined are not eligible for any loss mitigation options than they would be for other borrowers, because borrowers who have already been denied would be less likely to obtain a loss mitigation option even if afforded additional time. However, the alternative could prevent borrowers from benefiting from the proposed provision in situations where a borrower's eligibility changes within a relatively short period of time, as may happen during this particular economic crisis, as certain businesses may begin to reopen or open more completely based on when different State and local jurisdictions make adjustments to their COVID-19-related restrictions. The Bureau is not aware of data that could reasonably quantify the number of borrowers for whom such an exception would meaningfully reduce their benefits from the proposed provision.
Similarly, the benefits of the proposed pre-foreclosure review period would likely be lower for borrowers whom the servicer is unable to reach. Where servicers are unable to reach a delinquent borrower, the borrower is less likely to apply for or be considered for a loss mitigation option. Moreover, the first notice or filing for foreclosure could prompt communication from some consumers who are otherwise unresponsive to servicer communication attempts. However, there may be some consumers whom the servicer cannot contact within a 30-day period but who would benefit from the proposed provision if they were to contact their servicer later in the pre-foreclosure review period. This might be especially likely because this particular crisis could create unique obstacles that prevent a borrower from contacting their servicer within the first 30 days after they exit their forbearance program. The Bureau is not aware of data that could reasonably quantify the number of borrowers for whom such an exception would meaningfully reduce their benefits from the proposed provision, or the number of borrowers for whom this alternative might provide a benefit if it were to permit a first notice or filing for foreclosure that prompts them to engage with their servicer regarding loss mitigation options.
Servicers would generally benefit from these types of exceptions to the pre-foreclosure review period. To the extent that servicers have the option to initiate the foreclosure process earlier, they will potentially benefit from a reduction in the delay of the overall foreclosure timeline. The exceptions described above may cover situations in which a loan is particularly likely to move to foreclosure, so may be the loans for which the benefit from an earlier initiation of foreclosure is greatest. The extent of such benefit depends on the number of loans that would be covered by these circumstances and the extent to which those loans are in fact loans for which the pre-foreclosure review period would not have increased the likelihood of finding a loss mitigation option.
The Bureau requests comment on the benefits and costs to consumers and covered persons of this alternative, including data and other information that could help quantify those benefits and costs.
Alternative Approach: "Grace Period" Rather Than Date Certain
The Bureau has considered an alternative to a pre-foreclosure review period, in which servicers would be prohibited from making the first notice or filing for foreclosure until a certain number of days (e.g., 60 or 120 days) after a borrower exits their forbearance program.
Such an approach would provide additional benefits to some borrowers in forbearance programs compared to the proposed rule, while reducing the benefit to other borrowers who are delinquent but not in forbearance programs. For borrowers who are in a forbearance program that ends well after the effective date of the proposed rule, this alternative approach would provide a longer period than in the proposed rule during which the borrower would be protected from the initiation of foreclosure. For example, a borrower whose forbearance ends on November 30, 2021, would be protected from initiation of foreclosure for approximately one month under the proposed rule, and approximately four months under this alternative. A large share of the borrowers currently in forbearance programs entered into forbearance after April 2020 and could extend their forbearances until November 2021 or later, and borrowers continue to be eligible to enter into forbearance programs. Although some of these borrowers may not in fact extend their forbearances to the maximum allowable extent, many would receive a longer protection from foreclosure under the alternative, which could provide them with a greater opportunity to work with servicers to obtain an alternative to foreclosure.
The alternative would not provide protection for borrowers who do not enter into forbearance programs, meaning that borrowers who are or become delinquent and do not enter forbearance would not receive any benefit from the alternative beyond the existing prohibition on initiating foreclosures until the borrower has been delinquent for more than 120 days.
For servicers, the alternative approach would, like the proposed provision, delay foreclosure for many of the affected borrowers. The cost of delay, on a per-loan and per-month basis, would not be appreciably different under the alternative than under the proposed provision, but the number of foreclosures delayed would likely differ. Whether the number of loans delayed, and the total cost of delay, are larger or smaller under the alternative than under the proposed provision depends on whether the effect of additional delay of loans in forbearance programs that expire after the beginning of the pre-foreclosure review period is greater than the effect of eliminating the delay for loans that are not in forbearance programs but are more than 120 days delinquent during the period that the proposed pre-foreclosure review period would be in effect.
The alternative could be significantly more costly for servicers to implement because it would require servicers to track a new pre-foreclosure review period for each loan exiting a forbearance program and to revise their compliance systems to ensure that they do not initiate foreclosure for loans that are within that pre-foreclosure review period. The alternative could require servicer systems to account for loan-specific fact patterns, such as cases in which a borrower's forbearance period expires but the borrower subsequently seeks to extend the forbearance period. This could introduce complexity that would make the alternative more costly to come into compliance with compared to the proposed provision, which would apply to all covered loans until a certain date. The Bureau does not have data to estimate such additional costs from the proposal.
The Bureau requests comment on the benefits and costs to consumers and covered persons of the alternative, including data and other information that could help quantify those benefits and costs.
2. Evaluation of Loss Mitigation Applications
Proposed
Benefits and Costs to Consumers
The proposed exception may benefit borrowers to the extent that they may be able to receive a loan modification more quickly, or may be more likely to obtain a loan modification at all, without having to submit a complete loss mitigation application. Where the exception to the complete application requirement applies, it will generally result in a reduction in the time necessary to gather required documents and information. In some cases, if borrowers would not otherwise complete a loss mitigation application and could not otherwise obtain a different loss mitigation option, the proposed provision could enable borrowers to obtain a loan modification in the first place. /173/ For some borrowers, a loan modification may be their only opportunity to become or remain current and avoid foreclosure. Thus, for some borrowers who obtain a loan modification under the proposed exception, the benefit of the provision would be the value of obtaining a loan modification or obtaining a loan modification more quickly, potentially preventing delinquency fees and foreclosure.
FOOTNOTE 173 Under existing
As discussed above in part II, as of February 2021 2.7 million borrowers had mortgage loans that were in a forbearance program. Of these, an estimated 14 percent are serviced by small servicers, leaving approximately 2.3 million who would be covered by the proposed rule. Many of these borrowers may recover before the proposed rule's effective date, however the large number and the ongoing economic crisis suggest that many borrowers will be in distress at that time. The Bureau does not have data to estimate the number of distressed borrowers who, as of the proposed rule's effective date, would not be able to complete a loss mitigation application if they were required to complete the application to receive a loan modification offer. However, the Bureau believes that in the present circumstances that percentage could be substantial due to limitations in servicer capacity and the challenges some borrowers face in dealing with the social and economic effects of the COVID-19 pandemic and related economic crisis. As discussed above in part II, if borrowers who are currently in an eligible forbearance program request an extension to the maximum time offered by the government agencies, those loans that were placed in a forbearance program early in the pandemic (March and April 2020) will reach the end of their forbearance period in September and October of 2021.
FOOTNOTE 174 Black Jan. 2021 Report, supra note 36, at 9. An estimated 14 percent of all loans are serviced by small servicers, and if that percentage applies to these loans, then an estimated 690,000 loans subject to the proposed rule would exit forbearance in these months. END FOOTNOTE
FOOTNOTE 175 Servicers have reported challenges in customer-facing staff capacity during the pandemic. See
The proposed provision might create costs for borrowers if it prevents them from considering, and applying for, loss mitigation options that they would prefer to a streamlined loan modification. Borrowers who are considered for a streamlined loan modification after submitting an incomplete application may not be presented with other loss mitigation options that might be offered if they were to submit a complete application. In the 2013 RESPA Servicing Final Rule, the Bureau explained its view that borrowers would benefit from the complete application requirement, in part because borrowers would generally be better able to choose among available loss mitigation options if they are presented simultaneously. The Bureau acknowledges that borrowers accepting an offer made under proposed
The Bureau requests comments on the benefits to consumers of the proposed provision, including comment on the proposed eligibility criteria the proposed exception, whether those criteria will affect the types of modifications offered to consumers, and potential effects on consumers as a result.
Benefits and Costs to Covered Persons
Servicers would benefit from the reduction in burden from the requirement to process complete loss mitigation applications for streamlined loan modifications that are eligible for the exception. Given the number of loans that are currently delinquent, and in particular the number of such loans in a forbearance program that will end during a short window of time, this benefit could be substantial. Without the proposed provision, in each case, the servicers would further need to exercise reasonable diligence to collect the documentation needed for a complete loss mitigation application, evaluate the complete application, and inform the borrower of the outcome of the application for all available options. The Bureau understands that the process of conducting this evaluation and communicating the decision to consumers can require considerable staff time, including time spent talking to consumers to explain the outcome of the evaluation for all options. /176/ This could make the cost of evaluating borrowers for all available options particularly acute in light of staffing challenges servicers may face during the COVID-19 pandemic and associated economic crisis and the large number of borrowers who may be seeking loss mitigation at the same time.
FOOTNOTE 176 Servicing Rule Assessment Report, supra note 13, at 155-156. END FOOTNOTE
In addition to the reduced costs associated with evaluation for streamlined loan modifications, the proposed provision may reduce servicer costs when evaluating borrowers for other loss mitigation options, by freeing resources that can be used to work with borrowers who may not qualify for streamlined loan modifications or for whom streamlined loan modifications may not be the borrower's preferred option. Many servicers are likely to need to process a large number of applications in a short period of time while complying with the timelines and other requirements of the servicing rules. This may place strain on servicer resources that lead to additional costs, such as the need to pay overtime wages or to hire and train additional staff to process loss mitigation applications. The proposed provision would reduce this strain and could thereby reduce overall servicing costs.
The Bureau does not have data to quantify the reduction in costs to servicers from the proposed provision. The Bureau understands that working with borrowers to complete applications and to communicate decisions on complete applications often requires significant one-on-one communication between servicer personnel and borrowers. Even a modest reduction in staff time needed for such communication, given the large numbers of borrowers who may be seeking loan modifications, could lead to substantial cost savings.
The Bureau seeks comment on the discussion of the benefits and costs of the proposed provision for consumers and covered persons discussed above. In particular, the Bureau seeks comment on, and data or studies that are informative of, potential effects of the proposal on borrowers' ability to obtain a loss mitigation option that best suits their circumstances as well as potential benefits and costs to servicers.
3. Live Contact and Reasonable Diligence Requirements
Proposed
In conjunction with proposed
Benefits and Costs to Consumers and Covered Persons
Proposed
FOOTNOTE 177 For example, recent survey evidence finds that among borrowers who reported needing forbearance but had not entered forbearance, the fact that they had not entered forbearance was explained by factors including a lack of understanding about how forbearance plans work or whether the borrower would qualify, or a lack of understanding about how to request forbearance. See
For both proposed provisions, the extent of the benefit would depend to a large degree on whether servicers are already taking the actions that would be required by the proposed provision. The Bureau understands that many servicers already have a practice of informing borrowers about the availability of general or specific forbearance programs, and options when exiting forbearance programs, as part of live contact communications. /178/ The Bureau is not aware of how many servicers provide general as opposed to specific information about forbearance programs or post-forbearance options that are available to a particular borrower. The Bureau does not have data that could be used to quantify the number of borrowers who would benefit from the proposed provision. As discussed above, an estimated 2.7 million borrowers were in forbearance programs as of January 2021 and an estimated 242,000 borrowers had loans that were seriously delinquent and not in a forbearance program. Although some fraction of the borrowers with loans in a forbearance program may be able to resume contractual payments at the end of the forbearance period, many may benefit from more specific information about the options available to them.
FOOTNOTE 178 For example,
The costs to covered persons of complying with the proposed provision would also depend on the extent to which servicers are already taking the actions required by the proposed provision. Servicers that do not currently take these actions would need to revise call scripts and make similar changes to their procedures when conducting live contact communications. /179/ Even servicers that do currently take actions that comply with the proposed provisions would likely incur one-time costs to review policies and procedures and potentially make changes to ensure compliance with the proposal. The Bureau does not have data to determine the extent of such one-time costs. Although the changes are limited, the short timeframe to implement the changes, and the fact that they would be required at a time when servicers are faced with a wide array of challenges related to the pandemic, would tend to make any changes more costly. /180/
FOOTNOTE 179 Servicers should already have access to the information they would need to provide under the proposed provision, because servicers are required to have policies and procedures to maintain and communicate such information to borrowers under 12 CFR 1024.40(b)(1)(i) and 1024.38(b)(2)(i). END FOOTNOTE
FOOTNOTE 180 One recent survey of mortgage servicing executives found that they identified adapting to investor policy changes as the biggest challenge in implementing COVID-19 assistance programs. SeeCaroline Patane, Servicers report biggest challenges implementing COVID-19 assistance programs, Fed. Nat'l Mortg. Ass'n, Perspectives Blog (Jan. 12, 2020), https://www.fanniemae.com/research-and-insights/perspectives/servicers-report-biggest-challenges-implementing-covid-19-assistance-programs. END FOOTNOTE
The Bureau seeks comment on the discussion of the benefits and costs of the proposed provisions for consumers and covered persons discussed above. In particular, the Bureau seeks data or studies that provide information on the extent to which the proposed provisions could benefit consumers by providing more timely information about their options, as well as on the potential costs to servicers of complying with the proposed provisions.
E. Potential Specific Impacts of the Proposed Rule
Insured Depository Institutions and Credit Unions With $10 Billion or Less in Total Assets, As Described in Section 1026
The Bureau believes that a large majority of depository institutions and credit unions with $10 billion or less in total assets that are engaged in servicing mortgage loans qualify as "small servicers" for purposes of Regulation X because they service 5,000 or fewer loans, all of which they or an affiliate own or originated. In the past, the Bureau has estimated that more than 95 percent of insured depositories and credit unions with $10 billion or less in total assets service 5,000 mortgage loans or fewer. /181/ The Bureau believes that servicers that service loans that they neither own nor originated tend to service more than 5,000 loans, given the returns to scale in servicing technology. Small servicers would be exempt from the proposed rule and would therefore not be directly affected by the proposed rule.
FOOTNOTE 181 81 FR 72160 (Oct. 19, 2016). END FOOTNOTE
With respect to servicers that are not small servicers, the Bureau believes that the consideration of benefits and costs of covered persons presented above would generally describe the impacts of the proposed rule on depository institutions and credit unions with $10 billion or less in total assets that are engaged in servicing mortgage loans.
Impact of the Proposed Provisions on Consumer Access to Credit
Restrictions on servicers' ability to foreclose on mortgage loans could, in theory, reduce the expected return to mortgage lending and cause lenders to increase interest rates or reduce access to mortgage credit, particularly for loans with a higher estimated risk of default. The temporary nature of the proposed rule means that it is unlikely to have long-term effects on access to mortgage credit. In the short run, the Bureau cannot rule out the possibility that the proposed rule would have the effect of increasing mortgage interest rates or delaying access to credit for some borrowers, particularly for borrowers with lower credit scores who may have a higher likelihood of default in the first few months of the loan term. The Bureau does not have a way of quantifying any such effect but notes that it would be limited to the period before the delay period expires. The exemption of small servicers from the proposed rule will help maintain consumer access to credit through these providers.
The Bureau requests comment on the effects of the proposed rule on consumer access to credit, including any data, research results, and other factual information that would help quantify any impact of the proposed rule on consumer access to credit.
Impact of the Proposed Provisions on Consumers in Rural Areas
Consumers in rural areas may experience benefits from the proposed rule that are different in certain respects from the benefits experienced by consumers in general. Consumers in rural areas may be more likely to obtain mortgages from small local banks and credit unions that either service the loans in portfolio or sell the loans and retain the servicing rights. These servicers may be small servicers that would be exempt from the proposed provisions, although they may already provide most of the benefits to consumers that the proposed rule is designed to provide.
The Bureau will further consider the impact of the proposed rule on consumers in rural areas. The Bureau, therefore, asks interested parties to provide data, research results, and other factual information on the impact of the proposed rule on consumers in rural areas.
VII. Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act (RFA) generally requires an agency to conduct an initial regulatory flexibility analysis (IRFA) and a final regulatory flexibility analysis of any rule subject to notice-and-comment rulemaking requirements, unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. /182/ The Bureau also is subject to certain additional procedures under the RFA involving the convening of a panel to consult with small business representatives before proposing a rule for which an IRFA is required. /183/
FOOTNOTE 182 5 U.S.C. 601 et seq. END FOOTNOTE
FOOTNOTE 183 5 U.S.C. 609. END FOOTNOTE
The proposed rule would not apply to entities that are "small servicers" for purposes of the Regulation X: Generally, servicers that service 5,000 or fewer mortgage loans, all of which the servicer or affiliates own or originated. A large majority of small entities that service mortgage loans are small servicers and would therefore not be directly affected by the proposed rule. Although some servicers that are small entities may service more than 5,000 loans and not qualify as small servicers for that reason, the Bureau has previously estimated that approximately 99 percent of small-entity servicers service 5,000 loans or fewer. The Bureau does not have data to indicate whether these institutions service loans that they do not own and did not originate. However, as discussed in the preamble to the 2013 RESPA Servicing Final Rule, the Bureau believes that a servicer that services 5,000 loans or fewer is unlikely to service loans that it did not originate because a servicer that services loans for others is likely to see servicing as a stand-alone line of business and would likely need to service substantially more than 5,000 loans to justify its investment in servicing activities. /184/ Therefore, the Bureau has concluded that the proposed rule would not have an effect on a substantial number of small entities.
FOOTNOTE 184 2013 RESPA Servicing Final Rule, supra note 13, at 10866. For example, one industry participant estimated that most servicers would need a portfolio of 175,000 to 200,000 loans to be profitable.
Accordingly, the Acting Director hereby certifies that this proposal, if adopted, would not have a significant economic impact on a substantial number of small entities. Thus, neither an IRFA nor a small business review panel is required for this proposal. The Bureau requests comment on the analysis above and requests any relevant data.
VIII. Paperwork Reduction Act
Under the Paperwork Reduction Act of 1995 (PRA), Federal agencies are generally required to seek the Office of Management and Budget's (OMB's) approval for information collection requirements prior to implementation. The collections of information related to Regulation X have been previously reviewed and approved by OMB and assigned OMB Control number 3170-0016. Under the PRA, the Bureau may not conduct or sponsor and, notwithstanding any other provision of law, a person is not required to respond to an information collection unless the information collection displays a valid control number assigned by OMB.
The Bureau has determined that this proposed rule does not impose any new or revise any existing recordkeeping, reporting, or disclosure requirements on covered entities or members of the public that would be collections of information requiring approval by the Office of Management and Budget under the Paperwork Reduction Act.
The Bureau has a continuing interest in the public's opinions regarding this determination. At any time, comments regarding this determination may be sent to: The Bureau of Consumer Financial Protection (Attention:
IX. List of Subjects in 12 CFR Part 1024
Banks, banking, Condominiums, Consumer protection, Credit unions, Housing, Mortgage insurance, Mortgages, National banks, Reporting and recordkeeping requirements, Savings associations.
X. Authority and Issuance
For the reasons set forth in the preamble, the Bureau proposes to amend Regulation X, 12 CFR part 1024, as set forth below:
PART 1024--REAL ESTATE SETTLEMENT PROCEDURES ACT (REGULATION X)
1. The authority citation for part 1024 continues to read as follows:
Authority: 12 U.S.C. 2603-2605, 2607, 2609, 2617, 5512, 5532, 5581.
Subpart C--Mortgage Servicing
2. Amend
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COVID-19-related hardship means 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)).
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3. Section 1024.39 is amended by revising paragraph (a) and adding paragraph (e) to read as follows:
(a) Live Contact. Except as otherwise provided in this section, a servicer shall establish or make good faith efforts to establish live contact with a delinquent borrower no later than the 36th day of a borrower's delinquency and again no later than 36 days after each payment due date so long as the borrower remains delinquent. Promptly after establishing live contact with a borrower, the servicer shall inform the borrower about the availability of loss mitigation options, if appropriate, and take the actions described in paragraph 39(e) of this section, if applicable.
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(e) Temporary COVID-19 Related Live Contact. Until August 31, 2022, in complying with the requirements described in paragraph 39(a), promptly after establishing live contact with a borrower, the servicer shall take the following actions:
(1) Borrowers not in forbearance programs at the time of live contact. If the borrower is not in a forbearance program at the time the servicer establishes live contact and the owner or assignee of the borrower's mortgage loan makes a forbearance program available through the servicer to borrowers experiencing a COVID-19-related hardship, the servicer must ask the borrower whether the borrower is experiencing a COVID-19-related hardship. If the borrower indicates that the borrower is experiencing a COVID-19-related hardship, the servicer shall list and briefly describe to the borrower any such forbearance programs made available and the actions the borrower must take to be evaluated for such forbearance programs.
(2) Borrowers in forbearance programs at the time of live contact. If the borrower is in a forbearance program made available to borrowers experiencing a COVID-19-related hardship, during the last live contact made pursuant to paragraph 39(a) of this section that occurs prior to the end of the forbearance period, the servicer must inform the borrower of the following information:
(i) The date the borrower's current forbearance program ends; and
(ii) A list and brief description of each of the types of forbearance extension, repayment options, and other loss mitigation options made available by the owner or assignee of the borrower's mortgage loan to resolve the borrower's delinquency at the end of the forbearance program, and the actions the borrower must take to be evaluated for such loss mitigation options.
4. Section 1024.41 is amended by:
a. Revising paragraphs (c)(2)(i), and (c)(2)(v)(A)(1);
b. Adding paragraph (c)(2)(vi);
c. Revising paragraph (f)(1)(i); and
d. Adding paragraph (f)(3).
The additions and revisions read as follows:
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(c) * * *
(2) * * * (i) In general. Except as set forth in paragraphs (c)(2)(ii), (iii), (v), and (vi) of this section, a servicer shall not evade the requirement to evaluate a complete loss mitigation application for all loss mitigation options available to the borrower by offering a loss mitigation option based upon an evaluation of any information provided by a borrower in connection with an incomplete loss mitigation application.
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(v) * * * (A) * * *
(1) The loss mitigation option permits the borrower to delay paying covered amounts until the mortgage loan is refinanced, the mortgaged property is sold, the term of the mortgage loan ends, or, for a mortgage loan insured by the
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(vi) Certain COVID-19-related loan modification options. (A) Notwithstanding paragraph (c)(2)(i) of this section, a servicer may offer a borrower a loan modification based upon evaluation of an incomplete application, provided that all of the following criteria are met:
(1) The loan modification extends the term of the loan by no more than 480 months from the date the loan modification is effective and does not cause the borrower's monthly required principal and interest payment to increase.
(2) Any amounts that the borrower may delay paying until the mortgage loan is refinanced, the mortgaged property is sold, or the loan modification matures, do not accrue interest; the servicer does not charge any fee in connection with the loan modification, and the servicer waives all existing late charges, penalties, stop payment fees, or similar charges promptly upon the borrower's acceptance of the loan modification.
(3) The loan modification is made available to borrowers experiencing a COVID-19-related hardship.
(4) Either the borrower's acceptance of an offer pursuant to paragraph (c)(2)(vi)(A) of this section ends any preexisting delinquency on the mortgage loan or the loan modification offered pursuant to paragraph (c)(2)(vi)(A) of this section is 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.
(B) Once the borrower accepts an offer made pursuant to paragraph (c)(2)(vi)(A) of this section, the servicer is not required to comply with paragraph (b)(1) or (2) of this section with regard to any loss mitigation application the borrower submitted prior to the servicer's offer of the loan modification described in paragraph (c)(2)(vi)(A) of this section. However, if the borrower fails to perform under a trial loan modification plan offered pursuant to paragraph (c)(2)(vi)(A) of this section or requests further assistance, the servicer must immediately resume reasonable diligence efforts as required under paragraph (b)(1) of this section with regard to any loss mitigation application the borrower submitted prior to the servicer's offer of the trial loan modification plan.
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(f) * * * (1) * * * (i) A borrower's mortgage loan obligation is more than 120 days delinquent and paragraph (f)(3) does not apply;
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(3) Special COVID-19 Emergency pre-foreclosure review requirements. A servicer shall not rely on paragraph (f)(1)(i) to make the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process until after December 31, 2021.
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5. In Supplement
a. Under
b. Under
The revisions read as follows:
Supplement
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Subpart C--Mortgage Servicing
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39(a) Live Contact 1. Delinquency. Section 1024.39 requires a servicer to establish or attempt to establish live contact no later than the 36th day of a borrower's delinquency. This provision is illustrated as follows:
i. Assume a mortgage loan obligation with a monthly billing cycle and monthly payments of $2,000 representing principal, interest, and escrow due on the first of each month.
A. The borrower fails to make a payment of $2,000 on, and makes no payment during the 36-day period after, January 1. The servicer must establish or make good faith efforts to establish live contact not later than 36 days after January 1--i.e., on or before February 6.
B. The borrower makes no payments during the period January 1 through April 1, although payments of $2,000 each on January 1, February 1, and March 1 are due. Assuming it is not a
ii. A borrower who is performing as agreed under a loss mitigation option designed to bring the borrower current on a previously missed payment is not delinquent for purposes of
iii. During the 60-day period beginning on the effective date of transfer of the servicing of any mortgage loan, a borrower is not delinquent for purposes of
iv. A servicer need not establish live contact with a borrower unless the borrower is delinquent during the 36 days after a payment due date. If the borrower satisfies a payment in full before the end of the 36-day period, the servicer need not establish live contact with the borrower. For example, if a borrower misses a January 1 due date but makes that payment on February 1, a servicer need not establish or make good faith efforts to establish live contact by February 6.
2. Establishing live contact. Live contact provides servicers an opportunity to discuss the circumstances of a borrower's delinquency. Live contact with a borrower includes speaking on the telephone or conducting an in-person meeting with the borrower but not leaving a recorded phone message. A servicer may rely on live contact established at the borrower's initiative to satisfy the live contact requirement in
3. Good faith efforts. Good faith efforts to establish live contact consist of reasonable steps, under the circumstances, to reach a borrower and may include telephoning the borrower on more than one occasion or sending written or electronic communication encouraging the borrower to establish live contact with the servicer. The length of a borrower's delinquency, as well as a borrower's failure to respond to a servicer's repeated attempts at communication pursuant to
4. Promptly inform if appropriate.
i. Servicer's determination. Except as provided in
A. A servicer provides information about the availability of loss mitigation options to a borrower who notifies a servicer during live contact of a material adverse change in the borrower's financial circumstances that is likely to cause the borrower to experience a long-term delinquency for which loss mitigation options may be available.
B. A servicer does not provide information about the availability of loss mitigation options to a borrower who has missed a January 1 payment and notified the servicer that full late payment will be transmitted to the servicer by February 15.
ii. Promptly inform. If appropriate, a servicer may inform borrowers about the availability of loss mitigation options orally, in writing, or through electronic communication, but the servicer must provide such information promptly after the servicer establishes live contact. Except as provided in
5. Borrower's representative. Section 1024.39 does not prohibit a servicer from satisfying its requirements by establishing live contact with and, if applicable, providing information about loss mitigation options to a person authorized by the borrower to communicate with the servicer on the borrower's behalf. A servicer may undertake reasonable procedures to determine if a person that claims to be an agent of a borrower has authority from the borrower to act on the borrower's behalf, for example, by requiring a person that claims to be an agent of the borrower to provide documentation from the borrower stating that the purported agent is acting on the borrower's behalf.
6. Relationship between live contact and loss mitigation procedures. If the servicer has established and is maintaining ongoing contact with the borrower under the loss mitigation procedures under
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41(b)(1) Complete Loss Mitigation Application
1. In general. A servicer has flexibility to establish its own application requirements and to decide the type and amount of information it will require from borrowers applying for loss mitigation options. In the course of gathering documents and information from a borrower to complete a loss mitigation application, a servicer may stop collecting documents and information for a particular loss mitigation option after receiving information confirming that, pursuant to any requirements established by the owner or assignee of the borrower's mortgage loan, the borrower is ineligible for that option. A servicer may not stop collecting documents and information for any loss mitigation option based solely upon the borrower's stated preference but may stop collecting documents and information for any loss mitigation option based on the borrower's stated preference in conjunction with other information, as prescribed by any requirements established by the owner or assignee. A servicer must continue to exercise reasonable diligence to obtain documents and information from the borrower that the servicer requires to evaluate the borrower as to all other loss mitigation options available to the borrower. For example:
i. Assume a particular loss mitigation option is only available for borrowers whose mortgage loans were originated before a specific date. Once a servicer receives documents or information confirming that a mortgage loan was originated after that date, the servicer may stop collecting documents or information from the borrower that the servicer would use to evaluate the borrower for that loss mitigation option, but the servicer must continue its efforts to obtain documents and information from the borrower that the servicer requires to evaluate the borrower for all other available loss mitigation options.
ii. Assume applicable requirements established by the owner or assignee of the mortgage loan provide that a borrower is ineligible for home retention loss mitigation options if the borrower states a preference for a short sale and provides evidence of another applicable hardship, such as military Permanent Change of Station orders or an employment transfer more than 50 miles away. If the borrower indicates a preference for a short sale or, more generally, not to retain the property, the servicer may not stop collecting documents and information from the borrower pertaining to available home retention options solely because the borrower has indicated such a preference, but the servicer may stop collecting such documents and information once the servicer receives information confirming that the borrower has an applicable hardship under requirements established by the owner or assignee, such as military Permanent Change of Station orders or employment transfer.
2. When an inquiry or prequalification request becomes an application. A servicer is encouraged to provide borrowers with information about loss mitigation programs. If in giving information to the borrower, the borrower expresses an interest in applying for a loss mitigation option and provides information the servicer would evaluate in connection with a loss mitigation application, the borrower's inquiry or prequalification request has become a loss mitigation application. A loss mitigation application is considered expansively and includes any "prequalification" for a loss mitigation option. For example, if a borrower requests that a servicer determine if the borrower is "prequalified" for a loss mitigation program by evaluating the borrower against preliminary criteria to determine eligibility for a loss mitigation option, the request constitutes a loss mitigation application.
3. Examples of inquiries that are not applications. The following examples illustrate situations in which only an inquiry has taken place and no loss mitigation application has been submitted:
i. A borrower calls to ask about loss mitigation options and servicer personnel explain the loss mitigation options available to the borrower and the criteria for determining the borrower's eligibility for any such loss mitigation option. The borrower does not, however, provide any information that a servicer would consider for evaluating a loss mitigation application.
ii. A borrower calls to ask about the process for applying for a loss mitigation option but the borrower does not provide any information that a servicer would consider for evaluating a loss mitigation application.
4. Although a servicer has flexibility to establish its own requirements regarding the documents and information necessary for a loss mitigation application, the servicer must act with reasonable diligence to collect information needed to complete the application. A servicer must request information necessary to make a loss mitigation application complete promptly after receiving the loss mitigation application. Reasonable diligence for purposes of SEC 1024.41(b)(1) includes, without limitation, the following actions:
i. A servicer requires additional information from the applicant, such as an address or a telephone number to verify employment; the servicer contacts the applicant promptly to obtain such information after receiving a loss mitigation application;
ii. Servicing for a mortgage loan is transferred to a servicer and the borrower makes an incomplete loss mitigation application to the transferee servicer after the transfer; the transferee servicer reviews documents provided by the transferor servicer to determine if information required to make the loss mitigation application complete is contained within documents transferred by the transferor servicer to the servicer; and
iii. A servicer offers a borrower a short-term payment forbearance program or a short-term repayment plan based on an evaluation of an incomplete loss mitigation application and provides the borrower the written notice pursuant to SEC 1024.41(c)(2)(iii). If the borrower remains in compliance with the short-term payment forbearance program or short-term repayment plan, and the borrower does not request further assistance, the servicer may suspend reasonable diligence efforts until near the end of the payment forbearance program or repayment plan. However, if the borrower fails to comply with the program or plan or requests further assistance, the servicer must immediately resume reasonable diligence efforts. Near the end of a short-term payment forbearance program offered based on an evaluation of an incomplete loss mitigation application pursuant to SEC 1024.41(c)(2)(iii), and prior to the end of the forbearance period, if the borrower remains delinquent, a servicer must contact the borrower to determine if the borrower wishes to complete the loss mitigation application and proceed with a full loss mitigation evaluation.
iv. If the borrower is in a short term payment forbearance program made available to borrowers experiencing a COVID-19-related hardship, including a payment forbearance program made pursuant to the Coronavirus Economic Stability Act, section 4022 (15 U.S.C. 9056), that was offered to the borrower based on evaluation of an incomplete application, a servicer must contact the borrower no later than 30 days before the end of the forbearance period to determine if the borrower wishes to complete the loss mitigation application and proceed with a full loss mitigation evaluation. If the borrower requests further assistance, the servicer must exercise reasonable diligence to complete the application before the end of the forbearance period.
5. Information not in the borrower's control. A loss mitigation application is complete when a borrower provides all information required from the borrower notwithstanding that additional information may be required by a servicer that is not in the control of a borrower. For example, if a servicer requires a consumer report for a loss mitigation evaluation, a loss mitigation application is considered complete if a borrower has submitted all information required from the borrower without regard to whether a servicer has obtained a consumer report that a servicer has requested from a consumer reporting agency.
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Dated: April 2, 2021.
David Uejio,
Acting Director, Bureau of Consumer Financial Protection.
[FR Doc. 2021-07236 Filed 4-7-21; 8:45 am]
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