On July 10, 2024, the Consumer Financial Protection Bureau (CFPB or Bureau) proposed a rule it says will streamline mortgage servicing and the loss mitigation process. If enacted, the proposed rule would significantly revise the Real Estate Settlement Procedures Act (RESPA), including regulations related to loss mitigation procedures and reviews, early intervention procedures, and errors in servicing mortgage loans. The Bureau also sought comment on a myriad of servicing issues, like “zombie mortgages,” which it has identified as problematic through advisory opinions and enforcement actions. Here are four proposed changes for loan servicers to be aware of, plus potential future changes the Bureau is considering.

1. Big Changes to Loss Mitigation Review and Borrower Safeguards (12 C.F.R. § 1024.41)

Perhaps the biggest change proposed by the Bureau involves changes to RESPA’s loss mitigation rules. Currently, the loss mitigation rules apply when a servicer receives a “complete” loss mitigation application.[1] The proposed rule would completely do away with the current framework and instead focus on procedural safeguards for borrowers.

Under the proposed rule, loss mitigation assistance would no longer turn on whether a “complete” application was received. In fact, the Bureau has proposed doing away with the entire application-based framework found at 12 C.F.R. § 1024.41. In its place, the Bureau has proposed focusing on the “loss mitigation review cycle,” a new phrase that refers to the period of time the new proposed procedural foreclosure safeguards are in place.

The loss mitigation review cycle would begin when a borrower makes a request for loss mitigation assistance (which, under the proposed rule, could be made both orally and in writing, provided the request is made “through any usual and customary channel for mortgage servicing communications”) and end when a loss mitigation solution has been implemented or one of the new procedural safeguards have been met. Under the proposed rule, a request for loss mitigation assistance is to be construed broadly. So broadly, in fact, that if a servicer communicates with a borrower who is delinquent, a request for loss mitigation assistance is “presumed” unless the borrower clearly expresses otherwise.

The new procedural safeguards would preclude a servicer from “beginning or advancing the foreclosure process or charging certain fees” unless: (1) the servicer has reviewed the borrower for all available loss mitigation options and no available loss mitigation option remains; or (2) the borrower has not communicated with the servicer for at least 90 days despite the servicer regularly trying to communicate with the borrower regarding their loss mitigation review. What’s more, during the loss mitigation review cycle, the proposed rule would preclude a servicer from charging any fee “beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract shall accrue on the borrower’s account.”

The CFPB’s proposed rule takes an expansive view of what type of fees would be prohibited to be charged to a borrower’s account during the loss mitigation review cycle. This includes foreclosure counsel’s attorney’s fees as well as “delinquency-related fees” like accrued interest, penalties, and fees. The CFPB acknowledged in its proposed rule that such a broad definition of prohibited fees could “result in servicers making payments to third-party companies for delinquency-related services that servicers may not be able to recoup… .”

2. Changes to Early Intervention Requirements (12 C.F.R. § 1024.39)

The Bureau’s proposed rule would also mean major changes to a servicer’s early intervention requirements. Specifically, the Bureau is proposing that a servicer’s early intervention notices be revised in three specific ways: (1) require additional information on all loss mitigation options a borrower may be eligible for, including where to obtain the information, as well as information on the owner/investor of the loan, (2) partially exempt servicers from providing certain disclosures and information to borrowers operating under a forbearance plan to avoid any unnecessary confusion; and (3) once a forbearance plan is over, a servicer would then be required to comply with the early intervention rules found at 12 C.F.R. § 1024.39.

3. Improper Loss Mitigation Determination Equals an Error in Servicing (12 C.F.R. § 1024.35)

12 C.F.R. § 1024.35 governs notices of errors related to the servicing of a mortgage loan. Since its enactment in 2014, courts have reached conflicting decisions on whether a purportedly erroneous loss mitigation determination constitutes an “error” in servicing under 12 C.F.R. § 1024.35. The Bureau’s proposed rule seeks to resolve this conflict by amending “§ 1024.35(b)(11) to specify that it covers a servicer’s failure to make an accurate loss mitigation determination.” According to the Bureau, this would not create any new rights for borrowers or any additional burdens for servicers because “[t]he CFPB has consistently viewed servicer activities related to whether a borrower is able to avoid foreclosure—including loss mitigation determinations—as core duties of mortgage servicing, fitting squarely within RESPA and Regulation X’s coverage and purpose.”

4. Seeking Comment on New Mortgage Servicing Issues

Finally, the Bureau’s proposed rule seeks comment on a litany of mortgage servicing issues that the Bureau has identified as problematic.

For example, the Bureau highlights issues surrounding “zombie” mortgages, which refer to the collection on a “long-dormant second mortgage.” The Bureau seeks comment on “whether and to what extent this issue may continue to cause consumer harm in the future, and any additional actions the CFPB could take, including amending existing rules, to better protect borrowers from harm caused by collection activity on these types of mortgages.”

The Bureau also highlighted whether certain disclosures should be required when deferring amounts due on a mortgage loan. The CFPB noted that such deferrals (where missed payments are simply added to the end of the loan) have become commonplace in loan modifications, and it is concerned that borrowers may be surprised to learn of these amounts when they come due.

The Bureau has also requested comments on issues surrounding successors-in-interest. Regulation X was substantially updated in 2016 to address successors-in-interest. Despite this, the Bureau contends it still receives reports of issues that successors-in-interest have communicating with servicers, along with other difficulties in confirming successor-in-interest status. As such, the Bureau seeks comments on “additional actions it could take, including amending existing rules, to better protect potential successors in interest, confirmed successors in interest, and homeowners who do not fit the current Regulation X definition of a successor in interest.”

Requests for comment are due to the Bureau no later than September 9, 2024, and interested parties can expect that, if adopted, the proposed rules would be implemented sometime in 2025 with an effective date of twelve months after publication of the final rule in the Federal Register.

[1] As defined in existing 12 C.F.R. § 1024.41(b), a complete application is an application in connection with which the 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.