As COVID-19 infections are declining and a sense of normalcy begins to return, an estimated 1.75 million mortgage loan borrowers, many of whom have been negatively impacted by the COVID-19 global pandemic, are still in a forbearance program provided by their mortgage loan servicers.1 These borrowers may be at a heightened risk of foreclosure as forbearance programs begin to expire and foreclosure moratoriums come to an end.
On June 28, 2021, the US Consumer Financial Protection Bureau ("CFPB" or "Bureau") announced that it had finalized revisions to the Regulation X default servicing rules that are designed to assist delinquent borrowers impacted by the pandemic.2 The revisions: (1) establish procedural safeguards on the initiation of foreclosures that essentially restrict many such initiations through the end of 2021, (2) require mortgage servicers to provide certain loss mitigation information to delinquent borrowers and borrowers in forbearance plans, and (3) give servicers additional flexibility to offer loss mitigation options to borrowers impacted by the pandemic. The CFPB explained that the revisions are intended to ensure that delinquent borrowers have a meaningful opportunity to be evaluated for loss mitigation options before servicers initiate foreclosure as federal and state foreclosure protections come to an end.
The revisions to Regulation X will become effective on August 31, 2021. Interestingly, on June 29, 2021, the day after the CFPB announced its final regulation amending the Regulation X default servicing rules, the US Federal Housing Finance Agency ("FHFA") announced that Fannie Mae and Freddie Mac (the "GSEs") servicers will not be permitted to make a first notice or filing for foreclosure that would be prohibited by the CFPB's revisions to Regulation X before the revisions take effect, to ensure that borrowers with loans sold to Fannie Mae and Freddie Mac will be protected from foreclosure after the GSEs' foreclosure moratoriums expire on July 31, 2021.3
In this Legal Update, we describe the unique challenges facing servicers and borrowers that prompted the CFPB to amend Regulation X and discuss the key provisions of the new rules.
Background: Forbearance Programs and Foreclosure Moratoriums Ending
Under the CARES Act, a borrower with a federally backed mortgage loan who experienced a financial hardship directly or indirectly due to the COVID-19 national emergency can request up to 360 days of forbearance.4 Fannie Mae, Freddie Mac, the US Department of Housing and Urban Development ("HUD"), the Federal Housing Administration ("FHA"), the US Department of Veterans Affairs ("VA"), and the US Department of Agriculture ("USDA") have previously adopted forbearance programs that provide forbearance pursuant to the CARES Act and, for certain borrowers, have expanded their forbearance programs beyond the minimum amount of time required by the CARES Act to a maximum of 18 months of forbearance.5 We understand that some private investors are offering similar forbearance programs.
Certain borrowers that entered into a CARES Act forbearance in March or April of 2020 will reach the maximum period of forbearance in September or October of this year, and the foreclosure moratoriums for FHFA, FHA, VA, and USDA loans are set to expire on July 31, 2021.6
Regulation X currently prohibits a servicer from initiating foreclosure until a borrower's mortgage loan obligation is more than 120 days past due.7 While forbearance plans pause payments, they often do not pause a borrower's delinquency. Borrowers who are in a CARES Act or similar forbearance program for the maximum period may be well over 120 days delinquent when they exit forbearance. For this reason, under existing RESPA regulations, a servicer may be able to refer a loan to foreclosure almost immediately after a borrower exits forbearance unless the borrower has an outstanding complete loss mitigation application.8
Compounding this issue, the CFPB believes that many borrowers may not realize the seriousness of the risk that their loan will be referred to foreclosure at the conclusion of a forbearance plan if all other requirements that must be met prior to foreclosure referral have been satisfied.9 Because borrowers have been able to request several extensions to their forbearance plans, some may not fully appreciate that their forbearance period truly is ending and that moratoriums on foreclosure activities are also ending. In addition, borrowers may plan to consider loss mitigation options only after their forbearance ends, not realizing that their loan could be referred to foreclosure soon after their forbearance ends.
Finally, it is the CFPB's position that it is not clear that servicers are well-positioned to handle the unprecedented volume of loans that may be facing foreclosure as forbearances expire on such a large scale. By and large, it appears that servicers have been much better positioned to handle the large number of borrowers needing assistance during the pandemic than they were during the 2008 global financial crisis.10 Servicers have made significant investments to enhance their default servicing capacity to comply with the Regulation X requirements that became effective in 2014. However, the CFPB has indicated that servicers have faced challenges responding to borrowers who have been negatively impacted by the COVID-19 national emergency and has cited servicers for, among other things, providing inaccurate information to borrowers about CARES Act forbearances and for not evaluating borrowers who submitted a complete loss mitigation application for a CARES Act forbearance.11 The CFPB believes servicers may benefit from additional time to add necessary staff and refine systems and practices before initiating foreclosure.
The revisions to Regulation X are designed to address these issues by implementing procedural safeguards that, for many borrowers, essentially restrict foreclosure initiations through December 31, 2021, providing borrowers with additional information about the status of their forbearance and available loss mitigation options and giving servicers the flexibility to offer borrowers certain loan modifications without requiring a complete loss mitigation application. We discuss each of these provisions in more detail below.
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1. Mortgage Bankers Association, "Share of Mortgage Loans in Forbearance Decreases to 3.50 Percent," July 19, 2021, available at: https://www.mba.org/2021-press-releases/july/share-of-mortgage-loans-in-forbearance-decreases-to-350-percent.
2. Consumer Financial Protection Bureau, "Protections for Borrowers Affected by the COVID-19 Emergency Under the Real Estate Settlement Procedures Act (RESPA), Regulation X," 86 Fed. Reg. 34848, June 30, 2021.
3. Federal Housing Finance Agency, "FHFA Protects Borrowers After COVID-19 Foreclosure and REO Eviction Moratoriums End," Jun. 29, 2021, available at https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Protects-Borrowers-After-COVID-19-Foreclosure-andREO-Eviction-Moratoriums-End.aspx.
4. 15 U.S.C. § 9056(b).
5. Federal Housing Finance Agency, "FHFA Extends COVID-19 Forbearance Period and Foreclosure and REO Eviction Moratoriums," Feb. 25, 2021, available at: https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Extends-COVID-19-Forbearance-Period-andForeclosure-and-REO-Eviction-Moratoriums.aspx; Press Release, The White House, "Fact Sheet: Biden Administration Announces Extension of COVID-19 Forbearance and Foreclosure Protections for Homeowners," Feb. 16, 2021, available at: https://www.whitehouse.gov/briefing-room/statements-releases/2021/02/16/fact-sheet-biden-administration-announcesextension-of-covid-19-forbearance-and-foreclosure-protections-for-homeowners/.
6. Federal Housing Finance Agency, "FHFA Extends COVID-19 Foreclosure and REO Eviction Moratoriums," June 24, 2021, available at: https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Extends-COVID-19-Foreclosure-and-REO-Eviction-Moratoriums.aspx; Press Release, The White House, "Fact Sheet: Biden-Harris Administration Announces Initiatives to Promote Housing Stability By Supporting Vulnerable Tenants and Preventing Foreclosures," June 24, 2021, available at: https://www.whitehouse.gov/briefingroom/statements-releases/2021/06/24/fact-sheet-biden-harris-administration-announces-initiatives-to-promote-housing-stabilityby-supporting-vulnerable-tenants-and-preventing-foreclosures/.
7. 12 C.F.R. § 1024.41(f)(1)(i).
8. In addition to prohibiting the initiation of foreclosure until the borrower is more than 120 days delinquent, Regulation X prohibits the initiation of foreclosure if the borrower has an outstanding complete loss mitigation application. Id. § 1024.41(f)(2).
9. Consumer Financial Protection Bureau, "Protections for Borrowers Affected by the COVID-19 Emergency Under the Real Estate Settlement Procedures Act (RESPA), Regulation X," 86 Fed. Reg. at 34876 - 77.
10. See, e.g., Consumer Financial Protection Bureau, "Protections for Borrowers Affected by the COVID-19 Emergency Under the Real Estate Settlement Procedures Act (RESPA), Regulation X," 86 Fed. Reg. 18840, 18863, April 9, 2021 (stating that "[s]ervicers should be in a much better position to handle the increased volume of default servicing at this time than they were during the 2008 crisis").
11. Consumer Financial Protection Bureau, Supervisory Highlights: COVID-19 Prioritized Assessments Special Edition, Issue 23, January 2021, available at https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-23_2021-01.pdf.
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