On July 10, 2024, the Consumer Financial Protection Bureau (“CFPB”) issued its long-awaited Mortgage Servicing Proposed Rule to amend Regulation X. While mortgage servicers have operated under the current framework for more than 10 years – an approach that was refined following the Great Recession – the CFPB has telegraphed a desire post-pandemic to make modernizations to the Regulation X rules around default-servicing following the impact of the pandemic-era relief options.

Servicers took extraordinary efforts to successfully provide record amounts of relief to homeowners through pandemic-era programs, resulting in a significant decrease in foreclosure volume to an estimated .26% of all US properties compared to a peak of 2.23% in 2010 and 1.04% prior to the CFPB’s January 2014 effective date of its initial mortgage servicing rules. As expected, the CFPB focused the proposed rules on default servicing and loss mitigation changes. Mortgage servicers may have been surprised, however, that the CFPB opted for an entirely new loss mitigation framework in its proposed rules rather than using the pandemic-era ideas to make revisions to the existing framework. In addition to loss mitigation, the CFPB’s proposed rule makes significant changes around working with borrowers with limited English proficiency (LEP) and fees servicers may charge while customers are going through loss mitigation. The CFPB also raised a number of questions in its proposal that telegraph other issues that the CFPB is considered addressing in its final rule.

New Loss Mitigation Framework

The most significant changes to the CFPB’s loss mitigation rules include the following:

• New Framework: The existing application-based loss mitigation framework will be replaced by a new system centered on foreclosure procedural safeguards.
• Loss Mitigation Review Cycle: This new term describes the effective period for foreclosure safeguards, beginning when a borrower requests loss mitigation assistance and ending only when the borrower becomes current, becomes non-responsive for more than 90 days, or exhausts the safeguards completely.
• Request for Loss Mitigation Assistance: This term is defined to include any communication from the borrower requesting mortgage relief, which is significantly broader than the CFPB’s prior trigger of a “complete application.”
• Prohibition on Advancing Foreclosure: Foreclosure actions cannot proceed if a borrower requests loss mitigation more than 37 days before a foreclosure sale unless the procedural safeguards are met.
• Expanded Notices: Servicers must provide determination notices for all types of loss mitigation offers and denials, including forbearances and deferrals, which is significantly expanded from the current rules.
• Detailed Information: Written loss mitigation decision notices must include reasons for the determination of workouts offered or denied, inputs used, and all available loss mitigation options available from the investor.
• Unsolicited Offers: Notices are required when offering loss mitigation options based on existing information, such as a no-application streamline modification or workout.
• Forbearance: Servicers must contact borrowers before the end of a forbearance period and inform them of available loss mitigation options.

Language Access

The CFPB outlines its priorities to how servicers communicate with borrowers in languages other than English and seeks comment on how best to handle these changes in the final rule:

• Spanish Translations: Specified written communications must be translated into Spanish and provided alongside English versions to all borrowers.
• Other Languages: Translations of certain notices must be available in at least 5 languages selected by the Servicer, and interpretation services must be provided upon request.
• Marketing Language: If a loan was marketed to a consumer in a language other than English, translations or interpretations must be available in that language.

Other Issues and Open Questions

The CFPB continues their focus on so-called “junk fees” in servicing through this proposal. Under the Proposed Rules, servicers are prohibited from charging fees beyond scheduled contractual amounts during a loss mitigation review cycle.

The CFPB also seeks comments on the following questions:

• Credit Reporting: Comments are requested on ensuring accurate and consistent credit reporting for borrowers under loss mitigation.
• “Zombie Mortgages”: The CFPB seeks information on dormant second mortgages and potential borrower protections.
• Deferred Amounts: Comments are requested on reminding borrowers of deferred amounts due at the end of their loan terms.
• Successors in Interest: Comments are requested on protecting potential successors in interest.
• State Law Overlap: Comments are requested on potential overlaps with state laws and resulting burdens.

Conclusion

After significant compliance efforts by servicers to implement loss mitigation systems in the wake of the Great Recession, this proposed rule creates a significant new compliance burden on mortgage servicers. It may also reinvigorate consumer litigation over compliance with Regulation X as servicers work to implement these requirements once finalized.

These changes will require mortgage servicing companies to update their loss mitigation processes, enhance communication practices, and ensure compliance with new procedural safeguards. Servicers must also be prepared to provide language support and adapt their fees and credit reporting practices. Additionally, servicers must understand and address potential overlaps with existing state laws as they adapt their operations to the new framework.

The rules would be effective 12 months after the final rule, except for the LEP provisions which would go into effect 18 months after publication. The deadline for comments on the proposed rule is September 9, and industry trade groups and servicers are no doubt working to digest the substantial changes to weigh in before the comment period ends.