On Compliance: Be Ready to Update Your Loss Mitigation Procedures

The Consumer Financial Protection Bureau’s COVID-19-pandemic-related rules continue to evolve as America reopens for business.

Notably for credit unions, the Federal Housing Finance Agency’s foreclosure moratorium on government-sponsored enterprise-related mortgages is scheduled to expire on June 30, 2021, meaning that most institutions’ pandemic-related mortgage forbearance programs will likely terminate at that time.  

A recent CFPB compliance bulletin and a proposed rule to amend the agency’s Real Estate Settlement Procedures Act Regulation X “loss mitigation” rule are intended to help avert a wave of post-forbearance mortgage foreclosures. If finalized as proposed, the amendments to Regulation X would establish a temporary COVID-19 emergency pre-foreclosure review period for borrower’s principal residences until Dec. 31, 2021, and create a new mortgage loan modification option that could be offered to borrowers facing foreclosure even if they have not submitted a complete loss mitigation application.

CFPB has made several changes to its pandemic-related rules since Dave Uejio became the agency’s acting director in January 2021 following President Biden’s inauguration.  

On March 31st, the agency rescinded several policy statements it issued earlier in the pandemic, including its signature on the interagency statement on loan modifications and reporting that CFPB issued jointly with the National Credit Union Administration and the federal banking regulatory agencies in April 2020. The following day CFPB issued a compliance bulletin premised on existing legal requirements that warned mortgage servicers to take steps now to prevent “avoidable foreclosures,” including:

• Being proactive by contacting borrowers before their forbearance ends so that they have time to apply for a loan modification or other loss mitigation options like a short sale;
• Working with borrowers to make sure that they have the necessary documentation to apply for loss mitigation;
• Communicating with borrowers who have a limited understanding of English in a language that they understand;
• Evaluating the borrower’s income from all sources, including public assistance, child support, alimony, part-time employment and retirement benefits;
• Having sufficient staff to handle an potentially high volume of loss mitigation requests, including promptly responding to inquiries from borrowers as well as maintaining the borrower’s continuity of contact with specific personnel at the mortgage servicer; and
• Preventing avoidable foreclosures by working with borrowers to achieve loan modifications or other loss mitigation options in a manner consistent with Regulation X and other federal and state laws.

While this CFPB compliance bulletin guidance is already in effect, the agency on April 6 also issued proposed amendments to Regulation X’s Section 1024.41 loss mitigation rule—which CFPB previously revised with respect to COVID-19-related loss mitigation options in June 2020—for a 30-day comment period. CFPB is likely to finalize this rule before June 30, 2021, when the foreclosure moratorium on GSE-related mortgages is scheduled to end. If the agency finalizes the rule as proposed, the updated loss mitigation rule would:

• Amend existing requirements for “live contact” with borrowers who are behind on their mortgages, whether or not they are in forbearance, to see if they are suffering a COVID-19-related hardship;
• Require contact at least 30 days before forbearance ends with borrowers who are in short-term forbearance arrangements (that are based on incomplete loss mitigation applications) to determine if the borrower wishes to file a complete loss mitigation application;
• Establish a temporary COVID-19 “pre-foreclosure review period” where a servicer is not permitted to make the first notice or filing for foreclosure on a principal residence until after December 31, 2021; and
• Allow mortgage modifications even if the borrower has not submitted a complete loss mitigation application so long as: (1) the modification would not extend the loan by more than 480 months from the date of the loan modification and would not increase the borrower’s periodic principal or interest payments; (2) deferred amounts (such as an amount deferred as a balloon payment until the loan is refinanced or the property is sold) would not accrue interest; (3) the servicer would not charge a fee for the modification and would waive accrued late fees, stop payment fees and similar fees upon acceptance of the loan modification; (4) the borrower is experiencing a COVID-19-related hardship; and (5) the borrower’s previous delinquency would be resolved by the modification (which the servicer could make contingent on the borrower completing a trial period first).

It is possible that CFPB may change the final version of this regulation in response to public comments. Credit union commenters supported some aspects of the proposal but were not generally supportive of the proposed pre-foreclosure review period, which seems intended to act as a de facto moratorium on foreclosures for COVID-19-affected borrowers’ principal residences until the end of 2021.  

The Credit Union National Association, for example, “strongly object[ed] to the Bureau’s proposed moratorium on foreclosures until 2022 as this is unnecessary, unsupported, in direct contravention to RESPA, and unconstitutional” and requested changes to the rule’s proposed requirements on communications with borrowers and reasonable diligence requirements. CUNA’s comments, however, did support the proposed rule’s streamlined modification procedures.

The National Association of Federally-Insured Credit Unions requested clarification concerning the rule’s early intervention and streamlined loan modification requirements and also commented that the organization did “not agree that the proposed pre-foreclosure review period prohibiting an initial foreclosure notice or filing until Dec. 31, 2021, will assist borrowers as intended, and request[ed] that the Bureau provide explicit exceptions to the prohibition should the agency finalize [sic] as proposed.”

Credit unions will not have long to wait and to see whether CFPB incorporates these comments into the final version of the regulation. CFPB is likely to finalize this rule soon because of the looming expiration of the GSE-foreclosure moratorium, which militates against the agency making significant changes from the proposal. In the meantime, credit unions should review CFPB’s compliance bulletin on “avoidable foreclosures” and be prepared to update their loss mitigation procedures once CFPB finalizes this updated rule.

Michael S. Edwards is an attorney-at-law with extensive experience representing credit unions, community banks and credit union organizations in the United States and around the world on a wide range of regulatory, compliance and other legal matters. Now with his own law firm based in the Washington, D.C., area, Edwards previously served as SVP/advocacy and general counsel of the World Council of Credit Unions and was senior assistant general counsel in the regulatory advocacy section of the Credit Union National Association.