June 29, 2021

The Consumer Financial Protection Bureau (“CFPB”) released its much-anticipated mortgage servicing final rule on June 28, 2021 in response to the challenges created in the servicing industry due to the COVID-19 pandemic.

The rulemaking amends Regulation X, and generally follows the proposal released by the CFPB in April 2021. The release of the final rule, which goes into effect on August 31, 2021, comes on the heels of the Biden-Harris Administration’s extension of the foreclosure moratorium on federally backed mortgages to July 31, 2021.

While there are several components to the final rule, the most notable is the moratorium on new foreclosure actions through December 31, 2021. Under the final rule, from August 31, 2021 to December 31, 2021, unless an exception applies, servicers must make sure at least one of the temporary procedural safeguards have been met before referring an account for foreclosure. The three procedural safeguards are:

1.     The borrower was evaluated based on a complete loss mitigation application and existing foreclosure protection conditions are met. In order to meet this safeguard, the servicer must confirm that the borrower submitted a complete loss mitigation application and the servicer evaluated the same, the borrower remained delinquent since the submission of the application, and all other conditions in the existing Mortgage Servicing Rules have been met.

2.     The property is considered abandoned by state or local law.

3.     The borrower has been unresponsive to servicer outreach. In order to meet this safeguard, the servicer must not have received communication from the borrower in the 90 days prior to foreclosure referral. The servicer must confirm that they have complied with the early intervention live contact requirements, that they have provided the early intervention 45-day written notice required by the Mortgage Servicing Rules (sent at least 10 but no more than 45 days prior to foreclosure referral), that they have complied with all loss mitigation notice requirements, and that if the borrower was in a forbearance program, the program ended at least 30 days prior to the foreclosure referral.

Notably, these safeguards are not required under certain exceptions to the final rule. These exceptions are additions to the proposed rules that were released in April and were added at the request of the mortgage servicing industry. Accounts that are not subject to the above temporary procedural safeguards include foreclosure referrals that occur on or after January 1, 2022, accounts in which the borrower was more than 120 days delinquent prior to March 1, 2020, or accounts under which the applicable statute of limitations will expire before January 1, 2022.

The final rule also affects modification options and live contact requirements that servicers are expected to attempt with borrowers. Under the CFPB’s new rule, the definition of “financial hardship” is expanded to mean any hardship that the pandemic brought on, either directly or indirectly, from March 2020 through February 2021. The new rule is meant to assist homeowners coming out of a COVID-19 forbearance plan and require servicers to take more extensive action to prevent “avoidable foreclosures.” Under the rule, servicers are permitted to offer streamline modifications to borrowers with pandemic related hardships without requiring a full loss mitigation package with supporting paperwork to be submitted. To meet the requirements for a streamline modification, servicers may not increase borrowers’ payments or extend the mortgage term beyond 40 years. Servicers are not able to charge any extra fees for a streamline modification, and if accepted, servicers must waive any late charges or penalties that were incurred on or after March 1, 2020. If the modification allows the borrower to delay payment of any portion of the amount owing until the property is sold, the mortgage is refinanced, or mortgage insurance terminates, then interest is not able to accrue on those amounts. Finally, the modification must end any delinquency when the borrower accepts the modification offer.

Further, servicers will be required to increase their outreach efforts to borrowers prior to initiating a foreclosure action. After establishing live contact, the rule requires a servicer to provide borrowers with additional information. For borrowers that are not in an active forbearance program, the servicer must inform the borrower of the availability of forbearance programs for borrowers experiencing a COVID-19 related hardship, must list and briefly describe the applicable programs and steps the borrower must take to be evaluated, and must inform the borrower of homeownership counseling services.

For borrowers already in active forbearance programs, servicers must inform them of the scheduled end date, a list and brief description of additional applicable programs, and homeownership counseling services. These additional requirements are only applicable through October 2022.

The Creditors Rights attorneys at Hill Wallack are continuing to monitor new regulations and legislation as it is released and will keep you updated on any developments.