Disruptions caused by the unfolding COVID-19 pandemic have the potential to trigger sharply increased delinquencies on consumer debt. It is impossible not to think back to lessons learned and pathways forged during the 2008 global financial crisis. In response to that crisis, the US Dodd-Frank Act and the Consumer Financial Protection Bureau (“CFPB”) created an extensive framework for servicing residential mortgage loans. That framework was in reaction to “pervasive consumer protection problems across major segments of the mortgage servicing industry”¹ and to the lack of infrastructure, staff, and policies and procedures among mortgage servicers to manage the high volumes of delinquent loans and loss mitigation requests.² While the COVID-19 crisis presents different problems for the consumer finance industry, the default servicing framework created for residential mortgage loans after the financial crisis could provide a helpful roadmap.
The CFPB’s default mortgage servicing rules do not require a servicer to modify a loan under any particular circumstances, or to provide any other type of loss mitigation or foreclosure avoidance relief. Instead, the rules include extensive protocols for (1) early intervention to ensure borrowers are notified of loss mitigation options that are available, soon after the borrowers become delinquent, (2) continuity of contact requirements to ensure delinquent borrowers can easily and timely obtain accurate information related to their mortgage loan and loss mitigation options, and (3) diligent evaluation of loss mitigation applications.
Importantly, while the CFPB rules govern the servicing only of mortgage loans, the principles on which they are based may provide helpful guidance to servicers of other consumer debt during the current crisis. While other types of consumer loans may be subject to other regulatory, contractual and other requirements, the CFPB mortgage servicing rules can provide companies with a roadmap for potentially addressing increased borrower hardship and delinquencies.
While we do not attempt to describe the CFPB’s mortgage servicing rules in detail, we discuss their broad principles below.
The CFPB’s mortgage servicing rules require servicers to make good faith efforts to notify borrowers of loss mitigation options, to the extent those options are available, soon after the borrowers become delinquent. Specifically, servicers generally are required to attempt to make live contact with borrowers, which servicers typically make by phone, no later than the 36th day of a borrower’s delinquency to inform the borrower of their loss mitigation options.³ Servicers also generally must provide borrowers with a written notice no later than the 45th day of a borrower’s delinquency. Among other things, the notice must include descriptions of the types of loss mitigation that may be available to the borrower.4 If the borrower remains delinquent, this outreach generally must be repeated at regular intervals.
Given the potential for widespread delinquencies in the wake of the pandemic’s impact on borrowers, the timelines set forth in the CFPB’s mortgage servicing rules may not be achievable, especially when coupled with the challenges servicers face in light of the work-from-home and shelter-in-place directives that continue to be issued. For these reasons, mortgage industry trade associations are seeking guidance from the CFPB to clarify that servicers will not be liable for regulatory violations if they have made good faith efforts to comply with servicing timelines during periods of declared national emergencies such as the current pandemic.
In the case of other consumer asset classes where there are no prescribed timelines, servicers should consider establishing their own good faith timelines within which to reach out to delinquent borrowers. These timelines could include qualifications to account for company resources and contractual requirements.
Continuity of Contact
In addition to early intervention requirements, the CFPB’s mortgage servicing rules include provisions designed to ensure that servicers have the appropriate dedicated staff to provide assistance to delinquent borrowers and that when borrowers call their servicer to discuss their mortgage, they are not given the runaround. The CFPB has labeled these provisions “continuity of contact” requirements.
These provisions require servicers to maintain policies and procedures reasonably designed to provide delinquent borrowers with access to assigned personnel to assist them with loss mitigation.5 Servicers are required to assign the dedicated personnel by the time the servicer provides the early intervention notice to the borrower. The policies and procedures must ensure that if the assigned personnel is not available when the borrower contacts the personnel, the servicer provides a live response in a timely manner.
The assigned personnel must be able to provide borrowers with accurate information on a variety of topics including loss mitigation options, the actions a borrower should take to be evaluated for loss mitigation, information about the status of a borrower’s loss mitigation application, and the circumstances under which the servicer may refer a borrower’s loan to foreclosure.6 This requirement may become especially relevant if servicers offer newly developed forms of loss mitigation to borrowers impacted by the pandemic or revise their foreclosure processes to comply with a foreclosure moratorium. The servicing rules require the assigned personnel to be up-to-date on these topics so they can accurately answer borrower questions. Moreover, the servicing rules require assigned personnel must be able to retrieve certain information and documents for the borrower, such as a record of the borrower’s payment history and information on submitting a complaint or inquiry, in a timely manner.7
As indicated above, the CFPB’s loss mitigation requirements do not mandate that servicers offer any particular foreclosure alternatives, such as loan modifications, or even that servicers offer any foreclosure alternatives at all. Instead, the rules require servicers to evaluate borrowers for any loss mitigation options made available to borrowers by the owner of the borrower’s mortgage loan pursuant to a prescribed process that includes deadlines and notice requirements. As the CFPB has explained, the rules provide protections “regarding the process (but not the substance) of those evaluations.”8
The CFPB’s loss mitigation rules provide that, among other things, if a servicer receives a loss mitigation application 45 days or more before a foreclosure sale, it must promptly review the application to determine whether it is complete, send a written notice to the borrower within five days of receipt of the loss mitigation application that acknowledges the application, and exercise reasonable diligence to obtain documents and information required to complete the application.9 If a servicer receives a complete loss mitigation application more than 37 days before a foreclosure sale, the servicer must evaluate the borrower for all loss mitigation options that may be available to the borrower, including both retention options (such as a loan modification or a repayment plan) and non-retention options (such as a short sale or deed in lieu of foreclosure) and provide a notice to the borrower within 30 days of receipt of the complete application stating which loss mitigation options, if any, the loan owner will offer the borrower.10 If a borrower is denied for a loan modification, servicers generally must allow the borrower to appeal the decision.11
As noted above, given the potential for widespread delinquencies in the wake of the pandemic’s impact on borrowers, mortgage industry trade associations are seeking guidance from the CFPB to clarify that servicers will not be liable for regulatory violations if they have made good faith efforts to comply with servicing timelines, including those that apply to loss mitigation evaluations, during periods of declared national emergencies such as the current pandemic. Servicers of other consumer asset classes for which there are no mandated loss mitigation timelines could develop their own timelines for the evaluation of any consumer requests for loss mitigation.
In addition, while the foreclosure process is largely regulated by state law, the CFPB’s loss mitigation rules provide borrowers with some foreclosure-related protections. Servicers generally are prohibited from making the first notice or filing required for foreclosure unless a borrower’s loan is more than 120 days delinquent.12 In addition, the rules prohibit “dual tracking” where a servicer evaluates a borrower for loss mitigation at the same time it moves forward with the foreclosure process. Along these lines, even if the servicer has already filed for foreclosure, if the borrower submits a loss mitigation application more than 37 days before a foreclosure sale, the servicer must evaluate the application and may not move for foreclosure judgment or order of sale or conduct a sale unless the borrower is not eligible for loss mitigation, rejects all loss mitigation, or fails to perform on a loss mitigation option.13
The requirements related to the evaluation of incomplete loss mitigation applications may be especially relevant as servicers navigate the pandemic. As noted above, servicers generally must exercise reasonable diligence to pursue the completion of loss mitigation applications.14 The rules further provide that servicers generally may not base an offer of loss mitigation on a review of an incomplete loss mitigation application.15 However, an exception allows servicers to offer short-term forbearance and short-term repayment plans based on a review of an incomplete application.16 In addition, the CFPB has explained that servicers may also offer loss mitigation to borrowers when the offer is not based on any evaluation of information submitted by the borrower in connection with a loss mitigation application.17 According to the CFPB, these options give servicers the flexibility to offer “relief to borrowers affected by a major disaster or emergency without first having to collect a complete application,” which can be especially useful in an emergency situation when it may be more difficult for borrowers to obtain the documents and information necessary to complete the application in a timely manner.18
Servicers should be mindful of the fact that offers of loss mitigation in emergencies may trigger other obligations under the rules. For example, the CFPB cited servicers that automatically provided short-term forbearance plans to borrowers in a disaster area if the borrowers experienced home damage or incurred a loss of income from the disaster for the failure to provide required follow-up disclosures to those borrowers.19 Although the borrowers did not submit any written applications for the program, the servicers called the borrowers and spoke with them about their financial concerns. The CFPB stated that it considered these oral conversations to be loss mitigation applications,20 triggering a requirement that the servicer send borrowers a letter stating, among other things, that other loss mitigation options may be available and that the borrower could submit an application to be evaluated for those options.21
Other Relevant Requirements
The CFPB scrutinizes default servicing activities not only to ensure servicers follow the detailed servicing regulations, but also to ensure their practices do not violate the prohibition on unfair, deceptive, and abusive acts or practices (“UDAAPs”). UDAAPs may be particularly relevant during the current crisis. For example, the CFPB has stated that failing to convert a trial loan modification into a permanent loan modification in a timely manner can be an unfair practice.22 The pandemic may increase the likelihood of these types of delays; the strain on servicers’ capacities caused by an increase in loss mitigation requests combined with a decrease in servicers’ staffing levels may make it more difficult for servicers to timely convert loan modifications. As another example, the CFPB has found some loss mitigation offer letters to be deceptive when they misrepresented whether and when outstanding fees, charges, and advances would be assessed.23 During the pandemic, servicers may offer newly developed loss mitigation options. Because these offer letters may not be as thoroughly vetted as other offer letters servicers have used for years, there may be an increased risk that the letters contain material the CFPB could consider to be deceptive.
Servicers also should ensure they employ their default servicing protocols in a manner that does not result in discrimination on a prohibited basis.
In addition, other federal and state regulators have been active in the mortgage space in the wake of the pandemic, and some have existing servicing rules that address default servicing. Of course, the CFPB requirements will need to be considered in conjunction with any other applicable requirements.
The disruptions caused by the current pandemic will inevitably put a strain on servicers’ infrastructure. Mortgage servicers certainly spent significant resources to enhance their default servicing capacity over the last several years and therefore may be positioned to meet borrowers’ needs. In facing the myriad impacts of this crisis that may affect borrowers of consumer loans (including residential mortgage loans, auto loans, or any other types of consumer credit), the servicers of those loans have many masters, including requirements imposed by federal and state laws, investors, and insurers. While the CFPB’s default servicing rules for residential mortgage loans in responding to the financial crisis of a dozen years ago may not work for servicers of every asset class, the rules’ broad principles may at least provide a helpful roadmap.
1 2012 Real Estate Settlement Procedures Act (Regulation X) Mortgage Servicing Proposal, 77 Fed. Reg. 57199 (Sept. 17, 2012).
2 Mortgage Servicing Rules Under the Real Estate Settlement Procedures Act (Regulation X), 78 Fed. Reg. 10695 (Feb. 14, 2013).
3 12 C.F.R. § 1024.39(a).
4 Id. § 1024.39(b).
5 Id. § 1024.40(a).
6 Id. § 1024.40(b).
8 Mortgage Servicing Rules Under the Real Estate Settlement Procedures Act (Regulation X), 78 Fed. Reg. 10695 (Feb. 14, 2013).
9 12 C.F.R. § 1024.41(b).
10 Id. § 1024.41(c).
11 Id. § 1024.41(h).
12 Id. § 1024.41(f)(1).
13 Id. § 1024.41(g). Servicers are also required to maintain policies and procedures reasonably designed to facilitate the sharing of accurate and current information about the status of any evaluation of a borrower’s loss mitigation application with servicer providers, such as outside counsel, handling foreclosure proceedings. Id. § 1024.38(b)(3).
14 Id. § 1024.41(b)(1).
15 Id. § 1024.41(c)(2)(i).
16 Id. § 1024.41(c)(2)(iii).
17 Comment 41(c)(2)(i)-1 to 12 C.F.R. § 1024.41(c).
18 Consumer Financial Protection Bureau, Statement on Supervisory Practices Regarding Financial Institutions and Consumers Affected by a Major Disaster or Emergency, Sept. 14, 2018, available at: https://files.consumerfinance.gov/f/documents/bcfp_statement-on-supervisory-practices_disaster-emergency.pdf
19 Consumer Financial Protection Bureau, Supervisory Highlights, Issue 21 (Feb. 2020) at 5-6, available at: https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-21_2020-02.pdf
20 12 C.F.R. § 1024.31 (defining “loss mitigation application” to mean “an oral or written request for a loss mitigation option that is accompanied by any information required by a servicer for evaluation of a loss mitigation option”).
21 Id. § 1024.41(c)(2)(iii).
22 Consumer Financial Protection Bureau, Supervisory Highlights, Issue 17 (Sept. 2018) at 6-7, available at: https://files.consumerfinance.gov/f/documents/bcfp_supervisory-highlights_issue-17_2018-09.pdf
23 Consumer Financial Protection Bureau, Supervisory Highlights, Issue 11 (June 2016) at 10, available at: https://files.consumerfinance.gov/f/documents/Mortgage_Servicing_Supervisory_Highlights_11_Final_web_.pdf