As COVID-19 infections continue to decline in the United States, Americans slowly are coming out of isolation and returning to a sense of normalcy—a return to on-site work and school, a return to indoor dining, a return to travel, a return to in-person visits with friends and loved ones, and a return to sports arenas, ballparks, and arts venues, among other types of returns. But a return to normalcy is not a positive for all. A case in point: There are many home loan mortgagors for whom forbearance from their regularly scheduled monthly mortgage payments soon will come to end, along with an end to the moratorium on initiations and continuations of foreclosure.
Will a return to normalcy for delinquent mortgagors necessarily mean a rapid return to home foreclosures? That is the question that the Consumer Financial Protection Bureau (the "CFPB") is trying to answer in the negative in its proposed amendments to the default servicing regulations that are part of Regulation X under the Real Estate Settlement Procedures Act ("RESPA"); the comment period on the proposed amendments (the "Proposal") closed on May 10, 2021, with a proposed effective date of August 31, 2021.1 This laudable public policy goal, however, raises interesting questions about the CFPB's legal authority to impose additional temporary limitations on a loan holder's right to pursue foreclosure against delinquent mortgagors. This Legal Update synthesizes certain of the comments to the Proposal regarding an attempt to increase the time before a loan holder or servicer may initiate a foreclosure.
The context is well known to those in the residential mortgage industry and related stakeholders. It has been over a year since Congress enacted the CARES Act, which, among lots of other provisions, gave mortgagors during the "covered period" the right to receive forbearance for up to a year on their regularly scheduled home mortgage payments if they attested to a financial hardship directly or indirectly caused by COVID-19. The law also imposed a moratorium on home foreclosures and evictions during the "covered period." The CARES Act only applied to loans that were sold to Fannie Mae or Freddie Mac, insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs or the Department of Agriculture—labeled "federally-backed mortgage loans"—but various states enacted somewhat similar provisions.
While the CARES Act failed to define the term "covered period," the relevant federal entities, either at their own initiative or as a result of a subsequent executive order by President Biden, extended the time limits on forbearance and the foreclosure/eviction moratoria. But the time limits are rapidly approaching. As the CFPB noted in its Proposal, "...the foreclosure moratoria that apply to most mortgages are scheduled to end in late June 2021. In addition, most borrowers with loans in forbearance programs as of the publication of this proposed rule are expected to reach the maximum term of 18 months in forbearance available for federally-backed mortgage loans between September and November of this year and will likely be required to exit their forbearance program at that time." And that is just for federally-backed mortgage loans, although the extension of forbearance from 12 months to 18 months is limited to certain borrowers. Forbearance and foreclosure relief voluntarily provided by private investors or required under applicable state law also will soon sunset or may already have ended.
Unless they have been making regularly scheduled monthly mortgage payments notwithstanding their award of forbearance, mortgagors generally are delinquent for the number of months they were in forbearance and even more if they were delinquent before the commencement of forbearance, because they had not paid the amounts due under the terms of their loan documents. This means that a graduation from forbearance likely results in a seriously delinquent borrower who may not be eligible for home retention loss mitigation options and, as a result, risks the loss of the borrower's home.
EXISTING REGULATION X
The existing Regulation X prohibits a precipitous push to foreclosure. Unlike the CARES Act, the applicability of Regulation X is not limited to "federally-backed mortgage loans." It does not require a residential mortgage loan holder or servicer to offer a borrower any loss mitigation at all or any particular types or forms of loss mitigation. But it requires servicers of residential mortgage loans to follow detailed procedures to ensure that the borrower is informed by the servicer of available loss mitigation options, given the opportunity to apply and be timely considered for such options, appeal the denial of any loan modification option, and is not subject to a dual track of foreclosure while the borrower's application for loss mitigation is being evaluated. To afford sufficient time for a borrower to be evaluated for available alternatives to foreclosure, Regulation X presently prohibits a servicer, including a small servicer, from making the first notice or filing required under applicable law for any judicial or non-judicial foreclosure process unless: (1) the mortgage loan is more than 120 days delinquent; (2) the foreclosure is based on a borrower's violation of a due-on-sale clause; or (3) the servicer is joining the foreclosure of a superior or subordinate lienholder.2 This is referred to as the required "pre-foreclosure review." Of course, borrowers exiting a COVID-19 forbearance may be well over 120-days delinquent. In other words, the pre-foreclosure review period under existing regulations already would have expired.
PROPOSED AMENDMENT TO REGULATION X RELATING TO SPECIAL PRE-FORECLOSURE REVIEW
As an overlay or supplement to the existing requirement for a 120-day pre-foreclosure review, the Proposal calls for a temporary COVID-19 emergency special pre-foreclosure review period that would generally prohibit servicers from making the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process until after December 31, 2021. The CFPB asked commentators to consider two potential exceptions. The first exception would permit a servicer to make the first notice or filing before December 31, 2021, if the servicer has completed a loss mitigation review of the borrower and the borrower is not eligible for any non-foreclosure option. The second exception would permit a servicer to make the first notice or filing before December 31, 2021, if the servicer has made certain efforts to contact the borrower and the borrower has not responded to the servicer's outreach. In addition, while not an explicit exemption, because the Proposal only applies to loans secured by the borrower's principal residence, loans secured by abandoned properties may not be subject to this extension of the pre-foreclosure review period, depending on the facts and applicable state law.3 Moreover, unlike the existing pre-foreclosure review period under Regulation X, "small servicers" would be exempt from the proposed special pre-foreclosure review period.
PUBLIC COMMENTS TO THE PROPOSAL RELATING TO THE SPECIAL PRE-FORECLOSURE REVIEW
The relatively short duration of the extension of the pre-foreclosure review coupled with the potential exceptions render the Proposal a relatively modest step to forestall foreclosures, and the public comments the CFPB received in response to the Proposal reflect that conclusion. The comments generally break down into four categories: (i) is the special pre-foreclosure review period practically necessary or counterproductive; (ii) if adopted, should the special pre-foreclosure review period be based on a specific calendar date, December 31, 2021, for all borrowers or instead on a specific number of days following the end of forbearance for any particular borrower; (iii) should the exceptions be expanded and clarified; and (iv) does the CFPB have the legal authority to impose the special pre-foreclosure review period.
Is the Special Pre-Foreclosure Review Period Practically Necessary or Counterproductive?
Perhaps because of the potential availability of broad exceptions to the special pre-foreclosure review period, public comments focused less on the imposition of such an extended review period and more on what it should look like. The Housing Policy Council ("HPC") and the Bank Policy Institute ("BPI"), however, together expressed concern in their comment letter "...that the brief time when the review period will be effective suggests that the need for this regulatory change is limited and the proposal is unnecessarily complicated." They expressed their belief that the existing protections afforded borrowers under the loss mitigation provisions of Regulation X, along with standard state foreclosure proceedings, are sufficient to achieve the CFPB's general objective to provide every borrower with ample opportunity to avoid foreclosure when a borrower's circumstances would permit such avoidance.
The Urban Institute ("UI") in its comment letter makes a more practical point—namely, that the existing procedures for evaluating mortgagors for alternatives to foreclosure, whether by regulation or investor policies, "...require multiple rounds of communication and borrower notice and take several weeks or months." This could take the foreclosure decision beyond December 31, 2021. And for those borrowers who were delinquent pre-pandemic and already found to be ineligible for loss mitigation alternatives to foreclosure, additional time is unlikely to change the result and "[d]elaying the inevitable would serve neither the borrower nor the neighborhood in which the home is located."
Moreover, UI highlights the fact that the current economic environment is different than the economic environment during the last housing crisis that featured a crashing real estate market with a substantial number of underwater loans. In light of the substantial home equity experienced by most borrowers resulting from strong home appreciation, "[m]ost uncurable loans, whether agency or non-agency, will be resolved via a market sale." The foreclosure route, as a result, will be much more limited. According to UI, "[t]his would render the proposed prohibition largely redundant-and counterproductive-as properties would be held back from the market at a time when supply is tight."
The HPC/BPI comment letter identifies another counterproductive result of the proposed special pre-foreclosure review period. As the CFPB acknowledged in the preamble to its Proposal, the letter notes the notification of the foreclosure process "is the impetus to engage with the servicer" for some borrowers and "[d]elaying that notice may exacerbate this problem."
If Adopted, Should the Special Pre-Foreclosure Review Period Be Based on a Specific Calendar Date or a Specific Number of Days Following the End of Forbearance?
While the UI comment letter asserts that a special pre-foreclosure review period ending at the end of this calendar year does not offer protection for those whose forbearance ends after that date, it did not suggest either an extension of that deadline or the replacement with a fixed number of days. Consumer advocates see the same problem and, not surprisingly, propose a different solution. The Center for Responsible Lending ("CRL") and National Community Stabilization Trust ("NCST") in their joint comment letter opine that "...a rule that pauses foreclosures until December 31 would do nothing for those whose forbearance runs through or beyond that cutoff and who also face a risk of an avoidable home loss." They prefer a 120-day grace period at the end of a borrower's forbearance period to a "one-size-fits-all pre-foreclosure review period." Aside from wanting to protect borrowers who do not come out of forbearance until next year, the CRL/NCST letter expresses concern that "...servicer capacity to engage in effective loss mitigation will be strained with a large number of foreclosures filed at the beginning of 2022."
The National Consumer Law Center (the "NCLC") articulates the same position as the CRL and NCST in even in more detail. It supports a 120-day grace period at the end of a borrower's forbearance period instead of a December 31, 2021, deadline. Its long list of objections to the December 31st proposal includes the "immense pressures on the entire foreclosure system if hundreds of thousands of foreclosures begin in January 2022," the lack of protection for those whose forbearance ends after December 31, 2021, and the arguable incentives to servicers to begin foreclosures before the new rule takes effect given that the effective date will not occur for several more months.
The HPC/BPI letter takes a different tack. While it does not support a special pre-foreclosure review period in the first place, it recommends a shorter 60-day period if the CFPB elects to establish such a period.
Should the Exceptions to the Special Pre-Foreclosure Period Be Expanded and Clarified?
As noted above, the Proposal asks commenters to consider two possible exemptions to the special pre-foreclosure review period, although the Proposal does not include explicit language for the potential exceptions. The first exception would permit a servicer to make the first foreclosure notice or filing before December 31, 2021, if the servicer has completed a loss mitigation review of the borrower and the borrower is not eligible for any non-foreclosure option. The second exception would permit a servicer to make the first foreclosure notice or filing before December 31, 2021, if the servicer has made certain efforts to contact the borrower and the borrower has not responded to the servicer's outreach. Not surprisingly, the major lender trade associations support both exceptions, albeit with clarification.
The possible exemption for completed loss mitigation reviews raises the question of when the review must have been completed. For example, the CFPB questioned whether the exemption only should be available for reviews after the effective date of the final rule. Both the Mortgage Bankers Association ("MBA") and the American Bankers Association ("ABA") in their respective comment letters advocate that the exemption should apply to loss mitigation evaluations completed prior to the effective date of the final rule, while the HPC comment letter provides that the exemption should include evaluations made within the six months prior to the effective date to account for the time frame (after March 1, 2021) when the various COVID-19 loss mitigation government programs currently available were put into effect. The MBA and ABA letters also recommend that this exemption be expanded to include borrowers who have declined the proposed loss mitigation options or have failed to perform on the selected loss mitigation option.
The NCLC rejects the exemption for previously completed loss mitigation reviews, arguing that "...evidence from the Great Recession and from government note sales, as well as from current borrower experiences, demonstrates that loss mitigation reviews are often incomplete or inaccurate." It believes that borrowers may not realize that they previously have been denied a loss mitigation option and mistakenly believe that they are safe until the end of the calendar year. Perhaps more importantly, the NCLC comment letter agrees with the concern expressed by the CFPB in the Proposal that prior evaluations may have been completed prior to the borrower's recovery from financial hardship and thus do not account for the borrower's present financial circumstances.
The possible exemption based on unresponsive borrowers generated many requests for specificity regarding the scope of the "reasonable diligence" that the servicer must take before concluding a borrower is unresponsive. The HPC supports the CFPB's recommendation to use the definition of "reasonable diligence" in the Home Affordable Modification Program ("HAMP") and further recommends that the written notice requirements may be satisfied by using notices already required under Regulation X. The CRL/NCST also support the incorporation of HAMP's definition of "reasonable diligence," but they proposed to condition the availability of this exemption on the adoption of another component of the CFPB's proposal—namely, that the servicer, after exercising reasonable diligence in trying to reach the borrower, sends a "streamline payment modification offer or solicitation" to the borrower with a deadline for a response.
But the CFPB's Proposal simply would permit a servicer to offer a "stream line payment modification" without a complete loss mitigation application. The CRL/NCST approach would convert a voluntary process available to servicers into a condition precedent to the availability of the exemption from the special pre-foreclosure review based on an unresponsive borrower. The CRL takes the same approach, claiming that an exemption based solely on the inability of the servicer to establish contact with the borrower "...would incentivize less rigorous, ineffective contact attempts."
Two additional exemptions from the special pre-foreclosure review should be added according to some of the comment letters. First, some of the trade associations representing servicers want to exclude borrowers whose loans were delinquent prior to the onset of COVID-19. For example, the HPC/BPI letter requests that the CFPB clarify that the foreclosure review period does not apply to foreclosures that were initiated prior to the final rule's effective date, regardless of whether state law requires refilling or restarting the foreclosure. This is not really a new exemption, given that the requirement for a special pre-foreclosure review applies to the first notice or filing required by applicable law; by its terms, this requirement would not apply to loans where the servicer made this filing prior to the commencement of the foreclosure moratorium, but the trades want to be sure that a required refiling would not trigger the special pre-foreclosure review. Interestingly, neither the CRL/NCST nor the NCLC letters comment on this issue. The ABA calls for an explicit exemption for borrowers who were 120-days delinquent on March 1, 2020, and, as of September 1, 2021, remain more than 120-days delinquent. Rather than seeking a new exemption or clarification of the Proposal, the MBA would include within the "unresponsive borrower" exemption borrowers who were seriously delinquent (over 120 days) prior to March 1, 2020, and who have not requested assistance or responded to servicer contact attempts made in accordance with Regulation X.
An explicit exemption for abandoned properties also is a request under some of the comment letters. As noted above, the Proposal only applies to loans secured by the borrower's principal residence, which based on the facts and circumstances may result in the exclusion of abandoned properties. For example, the HPC/BPI letter asks the CFPB to "explicitly and clearly exempt abandoned properties from the special pre-foreclosure review period;" the ABA and MBA letters make similar requests. This is an issue on which consumer advocates and servicers seem to be aligned. The CRL/NCST letter highlights the concern that "[V]acant or abandoned homes that do not go through foreclosure risk blighting the community." It wants a clear definition for abandoned properties to "...encourage servicers to foreclose on them and help avoid blight." Both the HPC/BPI and CRL/NCST letters ask the CFPB to consider adopting the definition of "abandonment" contained in the Uniform Home Foreclosure Procedures Act drafted by the National Conference of Commissions on Uniform State Law, unless state law otherwise defines the term.
Does the CFPB Have the Legal Authority to Impose a Special Pre-Foreclosure Review Period?
When Congress enacted the CARES Act and imposed a home loan foreclosure/eviction moratorium and granted borrowers a statutory right to home loan forbearance, questions abounded whether the actions could be overturned as an unlawful "taking" under the Fifth Amendment of the US Constitution. This Amendment provides: "Nor shall private property be taken for public use, without just compensation." But over the years courts have distinguished between a so called "per se taking" and a "regulatory taking," accounting for the public interest asserted to justify the taking in the latter case.4 While some may want to attack the CFPB's proposed special pre-foreclosure review as an unconstitutional taking, none of the major trades did so. The more likely question is whether the CFPB has sufficient delegation of authority from Congress to require servicers to delay the initial filing of a foreclosure.
A good example of challenging the delegation of congressional authority to undertake regulatory action arose under the nationwide eviction memorandum ordered by The Centers for Disease Control and Prevention ("CDC") on September 4, 2020. Concerned that eviction of tenants would exacerbate the spread of COVID-19, the CDC ordered a temporary prohibition on residential evictions. It believed that it had the authority to issue this order based on its statutory delegation of authority to "make and enforce such regulations as in his [the Secretary] judgment are necessary to prevent the introduction, transmission, or spread of communicable diseases...."5 On May 5, 2021, the United States District Court for the District of Columbia held that the CDC did not have the statutory authority to order the temporary residential eviction, finding that this order was invalid but staying its opinion pending appeal.6
What about the CFPB? What is its statutory authority to require a delay in filing foreclosures under RESPA regardless of whether a loan is a "federally-backed mortgage loan" covered by the CARES Act. Actually, this question about the CFPB's statutory authority predates the Proposal and harkens back to the original issuance of the CFPB's default servicing regulations in 2013. The answer requires a review of the provisions of the Dodd-Frank Act (the "DFA") enacted by Congress on July 21, 2010.
The provisions in the voluminous DFA pertaining to residential mortgage servicing are limited. The DFA amended RESPA to clarify a servicer's obligations with respect to "qualified written requests," escrow accounts and force-placed insurance. It amended the Truth-in-Lending Act to clarify obligations with respect to periodic statements, crediting of payments, and payoff statements. That's it! Virtually none of the extensive default servicing regulations contained in Regulation X reflect specific provisions in the DFA.
There is one potentially broad delegation of authority under the DFA. Section 1463 of the DFA provides that "A servicer of a federally related mortgage loan shall not...fail to comply with any other obligation found by the Bureau of Consumer Financial Regulation, by regulation, to be appropriate to carry out the consumer protection purposes of this Act."7 This statutory provision purports to be very broad, but is limited by the consumer protection purposes of RESPA. The comment letter from the Structured Finance Association argues that the CFPB simply does not have the statutory authority to impose the special pre-foreclosure review. It notes, for example, "RESPA's statement of congressional purpose does not speak to servicing at all. And the subjects to which Congress regulates servicers under Section 6 are limited." It further notes that "there is nothing from the context of RESPA's enactment to suggest that Congress delegated authority to the Bureau to prohibit foreclosures."
Of course, under this argument, one could argue that the CFPB did not have statutory authority to require the pre-foreclosure review period in the original servicing amendments to Regulation X following the enactment of DFA, much less the additional time period occasioned by the proposed special pre-foreclosure review period. Arguably, both or neither should be valid, although perhaps there is a line in the sand that cannot be crossed before the CFPB's authority to regulate foreclosure is deemed insufficient.
None of the other major trade associations raised this statutory delegation of authority issue in their comment letters to the Proposal. One reason may be the relatively modest scope and duration of the proposed special pre-foreclosure review, as well as their strong desire to work collaboratively with the CFPB to ease delinquent borrowers' transition from forbearance. But this issue may gain added industry support if the comments of the consumer advocates to expand the special pre-foreclosure review find favor with the CFPB.
1 Protections for Borrowers Affected by the COVID-19 Emergency Under the Real Estate Settlement Procedures Act, Regulation X, 86 Fed. Reg. 18840 (proposed Apr. 9, 2021), https://www.federalregister.gov/documents/2021/04/09/2021-07236/protections-for-borrowers-affected-by-the-covid-19-emergency-under-the-real-estate-settlement.
3 The Proposal goes beyond the extension of the pre-foreclosure review period. It proposes (a) to permit servicers to offer certain streamlined loan modification options made available to borrowers with COVID-19-related hardships based on the evaluation of an incomplete application; (b) to amend the early intervention and reasonable diligence obligations to ensure that servicers are communicating timely and accurate information to borrowers about their loss mitigation options during the current crisis; and (c) to clarify servicers' reasonable diligence obligations when the borrower is in a short-term payment forbearance program made available to a borrower experiencing a COVID-19-related hardship based on the evaluation of an incomplete application.
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