CFPB Finalizes Notable Revisions to Regulations X and Z
On August 4, 2016, the Consumer Financial Protection Bureau (the “CFPB” or the “Bureau”) announced that it had finalized revisions to its regulations concerning the servicing of residential mortgage loans. The goal of the changes is to provide greater protections to mortgage borrowers, particularly their successors in interest, and to prevent borrowers from being wrongly foreclosed upon, according to CFPB Director Richard Cordray. The CFPB initially proposed revisions to the regulations in November 2014. It ultimately modified its proposal to address concerns from the public, the industry, and other commenters.
The final modifications make seven notable changes to Regulations X and Z:
If a borrower brings his account current after having previously submitted a complete loss mitigation application, the borrower is entitled to receive certain loss mitigation and foreclosure protections again.
The CFBP adopted an expanded definition of “successor in interest.” Thus, this expanded group will receive certain protections under the mortgage servicing rules.
If a borrower has filed for bankruptcy, then that borrower should receive periodic statements with information tailored for bankruptcy and a tailored, written early intervention notice regarding his loss mitigation options. If a borrower has asked that a servicer cease contacting him under the Fair Debt Collection Practices Act (“FDCPA”), whether in bankruptcy or not, servicers are now required to provide early intervention notices to inform the borrower of his loss mitigation options. The CFPB has also issued an advisory opinion for purpose of providing a limited safe harbor from FDCPA liability.
Servicers must affirmatively notify a borrower in writing when his loss mitigation application is complete.
If a loan is transferred to a servicer from a prior servicer, the new servicer must comply with the loss mitigation requirements within the same timeframes that applied to the prior servicer. Limited exceptions and extensions may apply to the new servicer.
Having received a timely loss mitigation application, a servicer cannot move for a foreclosure judgment, order of sale, or conduct a foreclosure sale unless the borrower’s loss mitigation application is properly denied, withdrawn, or the borrower fails to perform on a loss mitigation agreement.
The CFBP clarified when a borrower’s delinquency begins for purposes of the regulations.
The majority of the rule changes will take effect 12 months after publication in the Federal Register, although some will take effect 18 months from publication. The paragraphs below focus on certain aspects of the revised regulations.
Successors In Interest
The CFPB received more comments on the proposed “successor in interest” provisions than on any other aspect of the proposed rule changes. Having received reports from consumer advocates regarding the difficult interactions that many consumers faced as successors in interest, the CFBP sought to clarify who constitutes a successor in interest, what documentation is needed to prove successor in interest status, and to apply certain mortgage servicing rules (Regulation X’s subpart C and §§ 1024.17, 1026.20(c), (d), and (e), 1026.36(c), 1026.39, and 1026.41) to confirmed successors in interest.
Servicers should be aware that successors in interest now include: the spouse or children of the borrower who have become an owner of the property; a person to whom residential property was transferred as a result of a decree of divorce, legal separation, or an incidental property settlement agreement; an inter vivos trust in which the borrower is a beneficiary; or a person who has received a transfer of the property as described in the regulations from the Federal Home Loan Bank Board. The CFBP relied heavily on section 341(d) of the Garn-St Germain Act for these changes.
The regulations require that servicers maintain policies and procedures designed to facilitate communications with potential or confirmed successors in interest having first been notified of the borrower’s death or other transfer of the property. If a servicer receives written notification that a person or trust is a successor in interest, the servicer is obligated to respond to that notification in writing. The response must describe the documents the servicer reasonably requires to confirm the person’s identity and ownership interest in the property. The final rule does not provide potential successors in interest a private right of action or a notice of error procedure for claims that a servicer made an inaccurate determination about a person or trust’s status as a successor in interest. However, confirmed successors in interest will have a private right of action under RESPA to enforce the rules that apply to them.
Privacy concerns led the CFBP to add § 1024.36(d)(3), which allows servicers to limit the information that confirmed successors in interest may obtain under § 1024.36 about other borrowers related to the loan and to limit the information that borrowers may obtain under § 1024.36 about potential and confirmed successors in interest who are not the requesting party.
Loan Servicing and the FDCPA
The CFBP has created new rules and exemptions for loans for which a borrower has invoked his or her rights under section 805(c) of the FDCPA. The revised and new rules, as well as the CFPB’s advisory opinion, are designed to give servicers a clearer understanding of their obligations to borrowers who have invoked section 805(c) protections. The CFPB has also provided servicers with a safe harbor in limited factual scenarios. For example, under new § 1024.39(d)(2), a servicer will be exempt from the written notice requirements of § 1024.39(b) when a borrower has provided a notification pursuant to FDCPA section 805(c) if no loss mitigation option is available or a borrower is a debtor in bankruptcy under Title 11. Conversely, a servicer must comply with the written notification requirement if loss mitigation options are available. This limited communication, the CFBP has stated, is not a violation of the FDCPA.
Additionally, the CFBP’s comments also state that a servicer does not violate FDCPA section 805(c) by providing loss mitigation information or assistance in response to a borrower-initiated communication after the borrower has invoked the cease communication right under FDCPA section 805(c). The CFBP makes clear, however, that the servicer does not violate the FDCPA so long as the servicer’s response to the borrower is limited to a discussion of any potentially available loss mitigation option. If the borrower has invoked section 805(c) and has also contacted the servicer regarding loss mitigation options, the 805(c) protections are not considered suspended or paused in any way.
Foreclosure Sale and Complete Loss Mitigation Applications
The CFPB has made clear in new comment 41(g)(3) and (5) that § 1024.41(g) imposes an absolute prohibition on a foreclosure sale when a complete loss mitigation application is pending more than 37 days prior to the scheduled foreclosure sale. The servicer may not allow the conduct of the sale unless one of the conditions under § 1024.41(g)(1) through (3) is met. Thus, if the only remaining way to avoid a foreclosure sale is to dismiss a foreclosure action, then the servicer must dismiss the suit. The onus is solely on the servicer to ensure that no sale occurs. Thus, servicers must promptly communicate with their foreclosure counsel promptly regarding when a loss mitigation application is completed, so that the servicer’s counsel can take the necessary, and often immediate, steps to avoid the sale. The CFPB recognized the costs that could fall on servicers in dismissing a case, but reasoned that while these costs could be significant as to an individual loan, it is not likely to be significant in general.
Multiple Loss Mitigation Applications
Under the prior version § 1024.41, servicers were only required to comply with the loss mitigation provisions one time over the course of a loan. Thus, if a delinquent borrower became current, and subsequently became delinquent again, an investor was not required to evaluate loss mitigation options for that borrower a second time. However, the CFPB has effectively changed 1024.41(i) to make it applicable to any borrower who becomes current on payments at any time since the borrower’s last complete loss mitigation application. There is no minimum period of time in the revised rule for which a borrower must remain current before which a servicer must again evaluate loss mitigation options for a borrower. Under revised 1024.401(i) a borrower need not consider a subsequent loss mitigation application only if the borrower has been delinquent at all times since the borrower’s last complete loss mitigation application. In making this change, the CFPB is not requiring any servicer to offer any particular loss mitigation options, and is not requiring that an investor or servicer eliminate any criteria for loss mitigation options. Thus, an investor or trust may still require that the borrower be current on a loan for some minimum period of time in order for that borrower to qualify for its loan mitigation options.
Periodic Statements for Consumers in Bankruptcy
The CFPB announced that it revised several provisions related to consumers in bankruptcy, including, for example, § 1026.41(e)(5) and (6). Revised § 1026.41(e)(5) limits the circumstances in which a servicer is exempt from the requirements that servicers provide borrowers with periodic statements. First, a consumer must either be a debtor in bankruptcy or the consumer has discharged personal liability for a mortgage loan through bankruptcy. Second, that consumer or agent of the consumer must satisfy a condition of § 1026.41(e)(5)(i)(B)(1) through (4), which include, for example, that the consumer or his agent requests that the servicer cease sending a periodic statement or an order of avoidance of the mortgage lien is entered by the bankruptcy court, or the bankruptcy plan provides for an avoidance of the mortgage lien. The primary differences between the proposal and the final rule is that the exemption applies at the loan level, and not the consumer level, and the exemption can be triggered by the consumer’s submission of the plan itself, rather than the Court’s confirmation of the plan. The exemption will no longer apply if, for example, the consumer decides he wants to receive periodic statements. Reasoning that consumers in bankruptcy often lack crucial information about their mortgage loan account if a servicer does not send the periodic statement, the CFBP is limiting the exemption from its previous iteration.
The notice provided under § 1026.41(e)(6) to consumers in bankruptcy now requires additional disclosures. First, the servicer must inform the consumer that it will no longer provide the consumer a periodic statement for each billing cycle. Second, the servicer must explain in its statement that the lien on the residence remains in place and that the consumer remains liable for the mortgage loan obligation and any obligations arising from or related to the property, which may include property taxes.
The revised regulations should be carefully considered by servicers, as there have been changes on many fronts which will require servicers to make adjustments within their servicing platforms and by their research and customer service centers. In particular, servicers should be promptly communicating with foreclosure counsel regarding the status of complete mitigation applications. The CFPB made it clear that servicers should be prepared to dismiss cases if it is the only way to avoid a foreclosure sale. The consequences of multiple dismissals, however, vary from state to state, and could have consequences that could preclude a foreclosure.