How mortgage servicers can prepare for a crackdown from the CFPB

The Consumer Financial Protection Bureau is drawing a line in the sand for the mortgage servicing industry with new guidance and proposed revisions to its mortgage servicing rules. The CFPB expects that the impending expiration of federal foreclosure and forbearance protections for mortgagees will increase the risk of borrower harm and produce a wave of foreclosures. In a spate of activity from March to early May, the bureau ended any hopes of leniency for mortgage servicers, as the industry continues to grapple with the complex patchwork of federal, state and investor rules and guidance for working with affected borrowers. The overarching message from the CFPB is clear: For mortgage servicers, noncompliance is not an option.

In particular, the bureau noted the expected expiration of state and federal foreclosure moratoria and forbearance protections and a corresponding influx of borrowers at risk of foreclosure, and expressed its concern that servicers may not effectively communicate loss mitigation options to borrowers, particularly minorities and those in high-risk populations. Seemingly as a response to its own concerns, the CFPB proposed revisions to Regulation X that would establish pandemic-specific early intervention and loss mitigation procedures and prohibit foreclosure referrals through the end of 2021. At the same time, the bureau also rescinded seven policy statements providing COVID-19 regulatory flexibility.

The CFPB released two key reports in May. The first report found that Black and Hispanic borrowers are significantly more likely to be in forbearance or delinquent on their loans than other borrowers, and thus may drive an increase in the bureau’s fair lending and servicing efforts. The second report — a “Complaint Bulletin” — noted the CFPB received the greatest monthly mortgage complaint volume since 2018, with an apparent focus on servicers’ failure to provide adequate information regarding loss mitigation as well as delays and denials of loan modifications.

Taken together, these actions make clear that the CFPB will prioritize mortgage servicing in the coming months. Reading this guidance, servicers should consider the following areas, and what they can do to prepare in advance of action from the bureau:

Early Intervention. In addition to the existing timing and staffing requirements in Regulation X, the CFPB incorporated additional early intervention requirements in its proposed rule and has indicated that it expects servicers to contact borrowers proactively before any forbearance period expires. Even if the proposed rule is not enacted it provides valuable insight into the bureau’s expectations, and servicers should take these into account in assessing their early intervention programs and whether there are additional steps they may want to take to assist struggling borrowers.

Loss Mitigation Evaluations. The CFPB will also scrutinize servicers’ ability to evaluate loss mitigation applications timely, and if a borrower does not qualify for loss mitigation, whether servicers are complying with the foreclosure restrictions in Regulation X — as well as other federal and state laws. In response to these concerns, servicers should ensure they have adequate staffing to manage an expected increase in loss mitigation applications and should closely track evolving federal and state foreclosure moratoriums.

Continuity and Content of Contact. The bureau has indicated that it will emphasize its own continuity of contact requirements and whether borrowers receive accurate information regarding loss mitigation options. Servicers should reevaluate their call centers staffing and train their employees on all existing and new forbearance/loss mitigation programs. The CFPB specifically noted it will judge servicers’ performance by comparing their “hold times” against industry standards.

Discrimination. The pandemic has had a disproportionate effect on limited English proficiency communities, dovetailing with the CFPB’s continuing focus on LEP borrowers. Further, the bureau will enforce the Equal Credit Opportunity Act’s prohibition on discrimination based upon the source of income — a potential complication because COVID-19 relief programs involve increased unemployment payments and direct grants to borrowers. Servicers should ensure that they have the resources to assist LEP borrowers and revisit their income qualification guidelines in light of changes to government benefits.

As we witnessed in the wake of the Great Recession, we expect the CFPB both to aggressively bring its own enforcement actions in this space and to partner with state attorneys general where state foreclosure restrictions are at issue. We also expect the CFPB to liberally leverage its UDAAP authority to address servicer acts and omissions that the bureau perceives to be CARES Act violations or investor requirements, especially where Regulation X may not apply.

The CFPB missives are an early and unmistakable warning that the era of COVID-19 flexibility is over. The positive news, if any, is that the CFPB is providing notice now — before the perceived wave of loss mitigation activity and foreclosures arrives — so that servicers can redouble their efforts from the last 12 months and continue to meet borrowers’ anticipated needs and effectively navigate the enhanced scrutiny from the CFPB.