The CFPB released its much-anticipated proposed update to the mortgage servicing rules last month that would make permanent many of the temporary servicing rules enacted in response to the COVID-19 pandemic. The proposed changes would represent a large shift in servicer practices by allowing servicers to offer loss mitigation relief to borrowers earlier than servicers can do now and without a “complete application” under the current mortgage servicing rules. The proposed rule would also provide updated borrower protections related to loss mitigation options, early intervention communications, and language requirements for borrower communications.
The proposed new requirements would not apply to small servicers. Comments on the proposal are due by September 9, 2024.
Streamlined Loss Mitigation Procedures
Under the proposed rule, many of the existing mandates requiring servicers to obtain a borrower’s complete loss mitigation application would be removed and replaced with a new framework based on a borrower’s request for loss mitigation assistance and foreclosure procedural safeguards. Currently, a servicer generally must collect a complete loss mitigation application for all available loss mitigation options—and evaluate a borrower with respect to those loss mitigation options simultaneously—before the servicer may decide which loss mitigation options, if any, it will offer a borrower. The new framework scraps the completed-application requirement and would allow a servicer flexibility to review a borrower for loss mitigation options sequentially (although a simultaneous review would still be permitted).
While a servicer is reviewing a borrower for loss mitigation options, called the “loss mitigation review cycle,” the proposed rules would generally prohibit a servicer from advancing a foreclosure, that is, performing any judicial or non-judicial actions that advance the foreclosure process and were not yet completed prior to the borrower’s request for a loss mitigation option. Contrast this with the current rule, which generally only prohibits a servicer from initiating a foreclosure or completing a foreclosure sale after the borrower has submitted a complete loss mitigation application more than 37 days before the foreclosure sale.
During the review cycle, servicers are also unable to charge “fees beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full[.]” According to the CFPB, examples of fees that could be prohibited during the review cycle include interest and penalties. The Bureau recognized that this broad fee prohibition may result in servicers making payments to third-party companies for delinquency-related services that servicers may not be able to recoup; however, the CFPB believes that this result may create incentives for servicers to process loss mitigation applications quickly and accurately to minimize cost and lost revenue.
Considering this potential fee prohibition, servicers may need to rethink their fee and compensation structures to account for expenses incurred during a loss mitigation review cycle. For example, servicers might have to make up for costs during a borrower’s loss mitigation review cycle by obtaining higher fees or other compensation from across the entire loan portfolio, not just from non-performing loans. However, with the CFPB’s focus on so-called junk fees, servicers should be cautious when identifying and potentially raising fees in the servicing process. If the servicer is a non-bank company, state law must also be consulted when reviewing fee practices; and if the servicer is a national bank, fee restrictions will have to be analyzed under the Supreme Court’s recent decision in Cantero v. Bank of America, N.A. to determine if state law must be followed or is preempted.
The proposed rule would define the start of the loss mitigation review cycle as when a borrower requests loss mitigation assistance more than 37 days before a foreclosure sale. A loss mitigation review cycle would end when a servicer implements a loss mitigation solution for the borrower so that the borrower’s loan is brought current, or when one of the foreclosure “procedural safeguards” is satisfied, that is: (1) the servicer reviews the borrower for all available loss mitigation options and no available options remain, or (2) the borrower remains unresponsive for at least 90 days despite the servicer regularly taking steps to reach the borrower. A request for loss mitigation assistance means “[A]ny oral or written communication, occurring through any usual and customary channel for mortgage servicing communications, whereby a borrower asks a servicer for mortgage relief.”
While the proposed rule would require servicers to act on any oral or written requests for loss mitigation received through “usual and customary” channels, the proposed rule does not define what is considered a “usual and customary” channel. However, the CFPB clarified that informal channels, such as social media messaging or handwritten notes on payment coupons, would not be “usual and customary” channels unless the servicer used such channels for mortgage servicing communications. Operationally, servicers would need to exercise caution and ensure that the channels borrowers may request loss mitigation through are clearly defined for the borrower.
If a servicer uses an informal channel to provide the borrower with communications regarding the servicing of the borrower’s loan, then the servicer would need to be prepared to also accept loss mitigation requests through this channel. This may require additional training and systems integration to ensure that loss mitigation requests received through informal channels are properly acted on. Regardless, servicers can, and likely should, provide the borrower with clear instructions about the channels the borrower should use to submit their loss mitigation request. Servicers would be advised to specify on periodic statements and other borrower-facing communications the channels through which a borrower can request loss mitigation to ensure that servicers can limit loss mitigation requests to channels monitored by personnel with the proper training and resources to handle such requests.
Early Intervention Live Contacts and Written Notices
Under the current rule, servicers are required to make live contact with a borrower and send written notices to the borrower when the borrower becomes delinquent. There are various deadlines and follow-up communications that are required by the current rule. Under the proposed rule, servicers would continue to be required to make live contact with the borrower, but servicers would also be required to provide additional information in written early intervention notices. The notices would have to include the following additional information, among other things:
- The name of the owner or assignee of the borrower’s mortgage loan
- A brief description of each type of loss mitigation option that is generally available from that owner or assignee
- A telephone number and website by which to access a list of all loss mitigation options that may be available from that owner or assignee of the loan
However, if the borrower is performing under the terms of a forbearance, the proposed rule would partially exempt servicers from making live contact or sending the early intervention notices, described above. Instead, the proposed rule would require servicers to make live contact and send alternative written notices, which take into account the fact that the loan is in forbearance. Specifically, the proposal would require servicers to attempt to establish live contact with and to send written notices to delinquent borrowers nearing the scheduled end of their forbearance (live contact at least 30 days, but no more than 45 days, before the scheduled end of the forbearance; written notice at least 30 days, but no more than 45 days, before the scheduled end of the forbearance). During the live contact, servicers would be required to notify delinquent borrowers of the date their forbearance is scheduled to end and of the availability of loss mitigation options, if appropriate. The written early intervention notice would disclose the date that the borrower’s current forbearance is scheduled to end, as well as the content of the general written early intervention notice, described above. These requirements would apply only to delinquent borrowers in forbearance. Borrowers that can cure their delinquency during their forbearance period would not need the early intervention communications.
Loss Mitigation Determination Notices and Appeals
Under the proposed rule, when a servicer has received a request for loss mitigation assistance and after the servicer has decided whether to offer or deny loss mitigation assistance, the servicer must “promptly” provide the borrower a written notice with the servicer’s determination. The proposal would require additional information on the determination notices, including, among other things:
- Key borrower-provided inputs, if any, that served as the basis for the determination
- A telephone number, mailing address, and website where the borrower can access a list of non-borrower-provided inputs, if any, used by the servicer in making the loss mitigation determination
- A list of other loss mitigation options that are still available to the borrower, if any, including, if applicable, a list of any loss mitigation options that the servicer previously offered to the borrower that remain available but the borrower did not accept
- A clear statement describing the next steps the borrower must take to be reviewed for other 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 telephone number and website that can be used to access a list of all loss mitigation options that may be available from the owner or assignee of the loan
The proposed rule would then require servicers to provide appeal rights to borrowers regarding the servicer’s determination. Currently, borrower appeals rights regarding loss mitigation determinations are available only for loan modification denials. However, the CFPB proposes to expand the loss mitigation appeal process provisions to cover all loss mitigation determinations, instead of only loan modification denials.
Additionally, the CFPB is clarifying that, for purposes of the mortgage servicing rules’ error resolution procedures, errors related to loss mitigation determinations are considered a “covered error” and are subject to the error resolution procedures. The CFPB said in the proposal that when it initially promulgated the mortgage servicing rules in 2013, it considered, but declined, to explicitly list a servicer’s failure to correctly evaluate a borrower for a loss mitigation option as a “covered error.” However, the Bureau stated that it did not intend to conclude that errors related to loss mitigation determinations were excluded from the error resolution procedures. Accordingly, the proposal would provide expressly that failure of a servicer to make an accurate loss mitigation determination on a borrower’s mortgage loan would be a covered error for purposes of the error resolution procedures.
In practice, under the proposed rule, servicers will have to carefully analyze and understand whether a borrower’s communication regarding an improper loss mitigation review is a notice of error, an appeal, or both. If the borrower files a notice of error within 14 days of being denied a loss mitigation option, then the proposed rule requires the servicer to treat such notice of error as both a notice of error and an appeal to the servicer’s loss mitigation decision. In this dual notice of error and appeal scenario, servicers must follow the 30-day response timeline for appeals instead of the timelines for responding to notices of error, which permit servicers to respond to some notices of error within 45 days. If a borrower’s communication does not conform to the notice of error procedural requirements, then the servicer must still treat such a communication as an appeal of the loss mitigation determination, assuming it was received within 14 days of the denial decision.
Language Access
Last, the CFPB is proposing to require servicers to provide borrowers with limited English proficiency greater access to certain early intervention and loss mitigation communications in languages other than English. The CFPB did not draft regulatory text for this proposed language access requirement; instead it described the potential requirement in the proposal’s preamble.
In general, the CFPB would require a mortgage servicer to provide Spanish-language translations of certain written communications to all borrowers and to provide interpretation services for certain oral communications in Spanish upon the borrower’s request. The servicer would need to select at least five languages, in addition to Spanish, that it makes available for translation and interpretation services upon the borrower’s request. As proposed, the selected languages must collectively address the needs of at least a significant majority of the servicer’s non-Spanish-speaking borrowers with limited English proficiency. Finally, upon the borrower’s request, the servicer would need to offer translation or interpretation services of certain written and oral communications in languages that the servicer knew or should have known were used to market the mortgage loan to the borrower.
The written communications subject to the language requirement would include:
- Written early intervention notices
- Alternative written early invention notices for borrowers whose forbearances are ending
- Written notices regarding loss mitigation
The oral communications subject to the language requirements would include both early intervention live contact communications and oral, continuity-of-contact communications.
The CFPB also clarified that the translations or interpretation services provided by the servicer must be accurate. The CFPB would view an inaccurate translation or interpretation as violating not only the language access requirement but also the underlying communications’ content requirement.
In sum, servicers would need to potentially provide interpretation and translations services for many languages, other than English: Spanish, the servicers’ five selected languages, and any language used to market the loan to the borrower that is not English, Spanish, or one of the selected languages. Moreover, servicers would need to obtain accurate information about what language was used to market each mortgage loan to borrowers from loan originators, lenders, or prior servicers and ensure its records accurately maintain that language information.
* * * * *
The CFPB’s proposal to revise the mortgage servicing rules would represent a large shift in how servicers operate, particularly regarding loss mitigation. Comments on this proposal are due next month.
