The CFPB recently issued its long-awaited proposed rule amending the mortgage servicing rules under Regulation X, with a focus on streamlining and expanding the loss mitigation procedures and foreclosure protections. The amendments have been touted as a means to streamline the loss mitigation process, with a nod to the laudable approach taken by industry during the COVID-19 pandemic. However, in doing so, the CFPB has also significantly expanded borrower protections during the loss mitigation process, and left many concerning questions based on the proposed language.

The proposed rule also amends aspects of the early intervention requirements, and error resolution requirements. Also of particular note, the proposed rule includes language access requirements, including requirements to provide translated versions of certain communications.

Comments to the proposal are due on September 9, 2024. The proposed effective date for most of the provisions is 12 months after publication of the final rule in the Federal Register. The proposed effective date for the language access requirements is 18 months after publication of the final rule.

Below we provide a deep dive into the proposed changes, including some initial thoughts on topics of concern or uncertainty.

New Definitions

The proposed rule deletes the definition of a “loss mitigation application” from § 1024.31. The concept of a loss mitigation application is replaced by the term “loss mitigation review cycle”, which is defined as follows:

Loss mitigation review cycle means a continuous period of time beginning when the borrower makes a request for loss mitigation assistance, provided the request is made more than 37 days before a foreclosure sale, and ending when the loan is brought current or the procedural safeguards in § 1024.41(f)(2)(i) or (ii) are met. A loss mitigation review cycle continues while a borrower is in a temporary or trial loss mitigation period, such as a forbearance or modification trial payment plan, and the loan has not yet been brought current.

The term “request for loss mitigation assistance” is also newly defined as follows:

Request for loss mitigation assistance means any oral or written communication, occurring through any usual and customary channel for mortgage servicing communications, whereby a borrower asks a servicer for mortgage relief. A request for loss mitigation assistance should be construed broadly and includes, but is not limited to, any communication whereby: (1) A borrower expresses an interest in pursuing a loss mitigation option; (2) A borrower indicates that they have experienced a hardship and asks the servicer for assistance with making payments, retaining their home, or avoiding foreclosure; or (3) In response to a servicer’s unsolicited offer of a loss mitigation option, a borrower expresses an interest in pursuing either the loss mitigation option offered or any other loss mitigation option.

{NOTE: The proposed rule leaves considerable uncertainty around the potential channels through which a borrower could make a “request for loss mitigation assistance”. Because such a request triggers the foreclosure protections and fee restrictions discussed below, this issue is of critical importance.}

Loss Mitigation and Foreclosure Protection Changes

Most notably, the proposed rule dramatically changes the loss mitigation procedures and foreclosure protections in § 1024.41. In general, the proposed changes dispense with the application-based procedural framework for loss mitigation and foreclosure protections. It is replaced with a framework that simply applies foreclosure protections upon any “request for loss mitigation assistance”, and then leaves it to the servicer to review the borrower for loss mitigation options sequentially or simultaneously.

• Removal of Loss Mitigation Acknowledgement Notices – The entirety of § 1024.41(b) is deleted from the regulation, and denoted as [RESERVED]. Under the existing regulation, this subsection contains the provisions for: (1) defining what constitutes a “complete loss mitigation application” under the rule; (2) the requirement to promptly review an application to determine if it is complete; and (3) the 5-day loss mitigation application acknowledgement letter requirement.

• Loss Mitigation Evaluation and Notice – § 1024.41(c) is revised to provide that, if a servicer receives a “request for loss mitigation assistance” (as opposed to a “complete loss mitigation application” under the current regulation) more than 37 days before a scheduled foreclosure sale, and makes a determination to offer or deny any loss mitigation assistance (the 30-day evaluation time frame is deleted), the servicer must promptly provide the borrower with a notice in writing stating that determination, which shall include:
  • The amount of time the borrower has to accept or reject an offer of a loss mitigation option, if applicable;
  • A notification, if applicable, that the borrower has the right to appeal the loss mitigation determination as well as the amount of time the borrower has to file such an appeal and any requirements for making an appeal;
  • The specific reason or reasons for the servicer’s determination to offer or deny each such loss mitigation option (currently, determination reasons are only required for denials of loan modifications);
    • We note that revised commentary language for this provision clarifies that the reasons listed must identify the relevant investor or guarantor and the specific applicable requirement that is the basis for the offer or denial.
  • The key borrower-provided inputs, if any, that served as the basis for the determination;
    {NOTE: We note that the requirement to provide “key borrower-provided inputs” for any offer or denial is highly vague, and potentially impracticable. In addition, disclosing such information (such as credit scores) may raise privacy concerns.}
  • A telephone number, mailing address, and website, where the borrower can access a list of the non-borrower provided inputs, if any, used by the servicer in making the loss mitigation determination;
    {NOTE: We note that the requirement to maintain a borrower-facing web portal detailing the account-specific inputs used in a loss mitigation determination will be a significant operational lift for industry.}
  • A list of all other loss mitigation options that may remain available to the borrower, if any, including a clear statement describing the next steps the borrower must take to be reviewed for those loss mitigation options or, if applicable, a statement that the servicer has reviewed the borrower for all available loss mitigation options and none remain;
  • A list of any loss mitigation options that the servicer previously offered to the borrower that remain available but that the borrower did not accept;
  • A telephone number where the borrower can obtain a list of all loss mitigation options that may be available from the owner or assignee of the borrower’s loan, pursuant to § 1024.39(b)(2)(ii), and a Web site to access a list of all loss mitigation options that may be available from the owner or assignee of the borrower’s mortgage loan, pursuant to § 1024.39(b)(2)(ii);
  • The name of the owner or assignee of the borrower’s mortgage loan;
  • If there is a loss mitigation offer, a statement informing the borrower whether the offered option will still be available if the borrower requests to be reviewed for other loss mitigation options prior to accepting or rejecting the offer; and
  • If there is a loss mitigation offer of a forbearance, a statement informing the borrower of the specific payment terms and duration of the forbearance.
• Missing Documents or Information Not in the Borrower’s Control – The process regarding missing information or documents not in the borrower’s control are amended in several ways. Except as provided below, for a request for loss mitigation assistance received more than 37 days before a foreclosure sale, servicers generally must not deny the request solely because the servicer lacks required documents or information not in the borrower’s control.
  • However, If the servicer has regularly taken steps to obtain required documents or information from the third party source, but the servicer has been unable to obtain the documents or information for at least 90 days and the servicer, in accordance with applicable requirements established by the investor on the loan, is unable to determine which loss mitigation options, if any, it will offer the borrower without such documents or information, the servicer may deny the request for assistance and provide the borrower with a written notice that states:
    • That the servicer has not received documents or information not in the borrower’s control that the servicer requires to determine which loss mitigation options, if any, it will offer to the borrower on behalf of the owner or assignee of the mortgage;
    • Of the specific documents or information that the servicer lacks;
    • That the servicer has requested such documents or information;
    • That, if the servicer receives the documents or information within 14 days of providing the written notice to the borrower, the servicer will complete its evaluation of the borrower for all available loss mitigation options promptly upon receiving the documents or information; and
    • The information required in § 1024.41(c)(1)(vi) to (ix) from the standard Loss Mitigation Evaluation Notice detailed above (i.e., the information regarding other options available, other options previously offered that remain available, a telephone number and website where the borrower can access a list of the options available, and the name of the investor).
• Unsolicited Loss Mitigation Offers – The proposed rule includes detail on what must be included in an unsolicited loss mitigation offer (i.e., an offer that is not based on a request for loss mitigation assistance or an application, but solely on information in the servicer’s possession/in the loan file). If such an offer is made, the servicer must provide a written notice of that determination, that includes:
  • The amount of amount of time the borrower has to accept or reject an offer of a loss mitigation program (per § 1024.41(e) discussed below); and
  • The information required in § 1024.41(c)(1)(vi) to (ix) from the standard Loss Mitigation Evaluation Notice detailed above (i.e., the information regarding other options available, other options previously offered that remain available, a telephone number and website where the borrower can access a list of the options available, and the name of the investor).
• Borrower Response Timeframes – The proposed rule amends the borrower response timeframes in §1024.41(e) for consistency with the new review process. Accordingly, if a request for loss mitigation assistance (as opposed to a complete loss mitigation application) is received 90 days or more before a sale, the borrower has 14 days to accept or reject an offer. The current 7-day response timeframe similarly applies if a request for loss mitigation assistance is received less than 90 days before a foreclosure sale, but more than 37 days before a foreclosure sale.
• Foreclosure Protections – Most notably under the proposed rule, the foreclosure hold protections in § 1024.41 are no longer tied to receipt of a complete loss mitigation application. Instead, a protected “loss mitigation review cycle” begins if the borrower makes a request for loss mitigation assistance more than 37 days before a foreclosure sale. Once the loss mitigation review cycle begins, the servicer cannot make the first notice or filing for foreclosure, or advance the foreclosure process (e.g., scheduling a sale, mediation, or arbitration), unless one of the following procedural safeguards is met:
  • No Remaining Loss Mitigation Options – The servicer has (1) reviewed the borrower for loss mitigation and no available loss mitigation options remain, (2) sent all required evaluation notices under § 1024.41(c), if applicable, and (3) the borrower has either not requested an appeal within the applicable timeframe, or all appeals have been denied.
  • Unresponsive Borrower – The servicer has regularly taken steps to identify and obtain any information and documents necessary from the borrower to determine which loss mitigation options, if any, it will offer to the borrower, and if the servicer has made a loss mitigation determination, has regularly taken steps to reach the borrower regarding that determination, but the borrower has not communicated with the servicer for at least 90 days.
    • “Communication” – For purposes of this requirement, a “communication” is any communication by phone, in writing, electronically, about the mortgage loan obligation. “Communication” also includes making a payment on the mortgage loan obligation.
      {NOTE: We note that the means by which a borrower can “communicate” and remain “responsive” for purposes of a loss mitigation review cycle are incredibly broad, and are sure to enable abuse. Under this language, a borrower could simply call the servicer every 89 days and ask for the updated principal balance, to extend the foreclosure and fee restrictions, without ever moving toward enabling a loss mitigation review.}
    • Regular Contact – The commentary also clarifies that to satisfy this safeguard for unresponsive borrowers, the servicer must regularly communicate the status of the loss mitigation review to the borrower, which includes requesting documentation and information that the servicer requires from the borrower and communicating available options.
      {NOTE: We note that the proposed rule leaves considerable uncertainty regarding what must be done to satisfy the criteria of having “regularly taken steps to identify and obtain information and documents necessary” from the borrower. Greater specificity on this point is necessary.}
• Fee Protections – Notably, during a loss mitigation review cycle, no fees can accrue on the borrower’s account other than amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the loan agreement. Notably, this would constitute a broad restriction on any fee, charges, costs or interest. For example, this would prevent servicers from assessing delinquency-related third party costs to borrowers.
  {NOTE: This restriction constitutes a significant impairment of a creditor’s contractual rights to maintain and secure collateral, and pass along the associated costs to consumers. In combination with the above provisions, this is tantamount to a borrower-forced forbearance on the loan, for an undefined period of time.}
• Appeals – The proposed rule also significantly expands the appeal rights of a borrower. Regardless of when a request for loss mitigation assistance is received (the rule currently grants appeal rights only if a servicer receives a complete application 90 days or more before a scheduled sale), a servicer shall permit a borrower to appeal the “determination regarding any loss mitigation option available to the borrower” (the current rule only permits the appeal of a denial of a loan modification).
  • Regarding the timeframe for an appeal, the proposed rule retains the 14-day timeframe after the servicer provides the loss mitigation determination. However, language is added clarifying that a compliant appeal request, that also meets the criteria for a written notice of error under § 1024.35, must be treated as both a loss mitigation appeal under § 1024.41(h) and a notice of error under § 1024.35.
  • Similarly, regarding the appeal determination steps, the proposed rule states that if an appeal also qualifies as a notice of error, the servicer may not make the appeal determination until it has either corrected the error or conducted a reasonable investigation and determined that no error has occurred. Otherwise, the 30-day appeal determination timeframe remains in place.
• Duplicative Requests – The existing provision in § 1024.41(i) covering duplicative loss mitigation requests, is amended in an unclear manner. Under the proposed rule, it merely states that a servicer “must comply with the requirements of this section for a borrower’s request for loss mitigation assistance during the same loss mitigation review cycle, unless the procedural safeguards in paragraph (f)(2)(i) and (ii) have been met” (i.e., all options have been reviewed and appeal rights have been exhausted, or the borrower is unresponsive). The revised provision does not mention any different treatment for a subsequent loss mitigation review cycle, despite the subsection retaining the title “Duplicative requests”.
  {NOTE: This provision currently protects servicers from repeat attempts to invoke foreclosure holds, even after a servicer has met the requirements to evaluate a loss mitigation application during a continuous delinquency. It is not clear from the drafting of the proposed rule, whether similar protections continue to apply. If this protection has in fact been removed, borrowers will be able to easily abuse the process to prolong the foreclosure and fee protections.}
• Servicing Transfers – The provisions governing the treatment of pending loss mitigation in the context of servicing transfers is amended to simplify the requirements, in light of the new, streamlined loss mitigation evaluation process (i.e., there are no longer rigid time frames for issuing acknowledgment letters, or evaluation notices).

Early Intervention

The proposed rule makes various noteworthy changes to the early intervention requirements in § 1024.39.

Investor-Specific Written Early Intervention Notices

• The written early intervention notice includes the following additional information requirements:
  • A telephone number and website where the borrower can access a list of all loss mitigation options that may be available from the particular investor for the borrower’s loan;
  • The name of the investor for the borrower’s loan, along with a brief description of each type of loss mitigation option that is generally available from the investor for the borrower’s loan; and
  • A statement informing the borrower how to make a request for loss mitigation assistance (the previous requirement was to include either application instructions or a statement informing the borrower how to obtain more information about loss mitigation options).
• The relevant model clause language in Appendix MS-4 is adjusted to cover this revised content, deleting Model Clauses MS-4(A) and (B).

Altered Requirements for Borrowers on a Forbearance Plan

• A new partial exemption, from both the live contact and written notice early intervention requirements, applies while a borrower is performing under a forbearance plan.
• Particular contact and notice requirements are added for borrowers in a forbearance plan that is approaching its scheduled end date. Specifically, from 30 to 45 days prior to the end of a scheduled forbearance, the servicer must:
  • Establish or make good faith efforts to establish live contact with the borrower. During the live contact, the servicer must inform the borrower of the following:
    • The date the borrower’s current forbearance is scheduled to end; and
    • The availability of loss mitigation options, if appropriate, as set forth in the existing live content provision in § 1024.39(a).
  • Send the borrower a written notice including the following information:
    • The date the borrower’s current forbearance is scheduled to end; and
    • The other content required in the general written early intervention notice provisions found in § 1024.39(b)(2)(i)-(v) of this section
  • After a forbearance ends for any reason, a servicer that enjoyed the partial exemption while the borrower was performing under the forbearance plan must resume compliance with the standard live contact and written notice early intervention requirements after the next payment due date following the forbearance end date.

Finally, as a housekeeping measure, the specific live contact content requirements related to COVID-19 related hardships (which expired on October 1, 2022) have been removed.

Language Access Requirements

While specific regulatory language was not included in the body of the proposed regulation or commentary, the CFPB, in the preamble, proposes certain language access requirements. These proposed requirements include the following:

• Servicers must provide Spanish-language translations of certain written communications to all borrowers.
  • These communications would include: (1) written early intervention notices under § 1024.39(b), (2) the § 1024.39(e)(2) proposed written notices for borrowers whose forbearances will end soon; and (3) written loss mitigation notices under § 1024.41.
• Upon request, servicers must make certain written and oral communications available in multiple languages (determined by the servicer) and to provide those translated or interpreted communications.
  • The written communications subject to this requirement would be the same as those listed above.
  • In addition, this requirement would apply to the following oral communications: (1) live contact communications required under § 1024.39(a) and § 1024.39(e); and (2) oral communications made in compliance with a servicer’s continuity of contact requirements under § 1024.40.
• Servicers must include five brief translated statements (in languages other than English or Spanish, that are used most frequently by the servicer’s borrowers) in certain written communications notifying borrowers of the availability of the translations and interpretations, and how they can be requested.
• Upon borrower request, the servicer must provide translation or interpretation services of certain written and oral communications in languages the servicer knows or should have known were used in marketing to the borrower for that mortgage loan.
  {NOTE: It is not clear in what circumstances a servicer “should have known” that a borrower was marketed to in a particular language prior to origination. This requirement seems impracticable.}

Credit Reporting

The proposed rule includes a request for comment on whether regulatory changes should be made with respect to credit reporting for borrowers undergoing a loss mitigation review. The preamble states that the CFPB is considering solutions that could include adding to or amending CFPB regulations to ensure servicers report accurate information or amending furnisher guidance to improve or enhance the guidance provided to furnishers on how to report tradeline data.

In that aim, the CFPB requests comments on the following issues:

• What servicer practices may result in the furnishing of inaccurate or inconsistent information about mortgages undergoing loss mitigation review?
• What protocols or practices do servicers currently use to ensure that mortgages are being reported accurately and consistently? Are there specific protocols or practices for ensuring loans in forbearance or borrowers affected by a natural disaster are reported accurately and consistently?
• Would it be helpful to have a special code that would be used to flag all mortgages undergoing loss mitigation review in tradeline data?
• What steps should the CFPB take to ensure servicers furnish accurate and consistent tradeline data?

Continuity of Contact

The proposed rule makes minor, related changes to the continuity of contact rules in § 1024.40. These changes primarily align the enumerated duties of the contact personnel with the revised loss mitigation requirements.

Error Resolution Amendments

The proposed rule makes minor, related changes to the error resolution procedures found in 12 CFR § 1024.35. The proposal clarifies the scope of the requirement to include: (1) advancing the foreclosure process, in violation of the foreclosure protections in § 1024.41; and (2) failing to make an accurate loss mitigation determination on a borrower’s mortgage loan. We note that these changes have no practical effect on the scope of the rule, as scope provisions in § 1024.35(b) still include the catch-all provision of “Any other error relating to the servicing of a borrower’s mortgage loan”.

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As detailed above, these proposed amendments will create significant operational hurdles for the industry, and leave many concerning questions unanswered. It is critical that industry make its voice heard during the comment period.

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