James R. Balmforth: The CFPB’s Effect On Foreclosures

Consumer Financial Protection Bureau (CFPB) issued rules to establish new, strong protections for struggling homeowners facing foreclosure. The rules also protect mortgage borrowers from costly surprises and runarounds by their servicers. “For many borrowers, dealing with mortgage servicers has meant unwelcome surprises and constantly getting the runaround. In too many cases, it has led to unnecessary foreclosures.” Mortgage servicers are responsible for collecting payments from mortgage borrowers on behalf of loan owners. They also typically handle customer service, escrow accounts, collections, loan modifications, and foreclosures. Generally, borrowers have no say in choosing their mortgage servicers. Lenders frequently sell loans to investors after the mortgage deal is signed, and the investors, not the consumers, often choose the servicers. Even before the financial crisis, the mortgage servicing industry at times experienced problems with bad practices and sloppy recordkeeping.

As millions of borrowers fell behind on their loans as a result of the crisis, many servicers were unable to provide the level of service necessary to meet homeowners’ needs. Many simply had not made the investments in resources and infrastructure to service large numbers of delinquent loans. Consumers complained about getting the runaround and being hit with costly surprises. Now, with millions of homeowners in distress, many borrowers are continuing to experience serious problems seeking loan modifications or other alternatives to avoid foreclosure.

Strong Protections for Struggling Borrowers

The CFPB’s mortgage servicing rules ensure that borrowers in trouble get a fair process to avoid foreclosure. Borrowers shouldn’t have to worry about mortgage servicers cutting corners or losing applications for relief. They should be told about their options and given time to apply and be considered for loan modifications and other alternatives. Most of all, they shouldn’t be surprised by the start of a foreclosure proceeding until they have had time to explore all available options. If they act diligently to seek alternatives, they should not face a foreclosure sale before their applications have been evaluated. The new protections for struggling borrowers include:

• Restricted Dual Tracking: Under the CFPB’s new rules, dual-tracking when the servicer moves forward with foreclosure while simultaneously working with the borrower to avoid foreclosure is restricted. Servicers cannot start a foreclosure proceeding if a borrower has already submitted a complete application for a loan modification or other alternative to foreclosure and that application is still pending review. To give borrowers reasonable time to submit such applications, servicers cannot make the first notice or filing required for the foreclosure process until a mortgage loan account is more than 120 days delinquent.

• Notification of Foreclosure Alternatives: Servicers must let borrowers know about their “loss mitigation options” to retain their home after borrowers have missed two consecutive payments. They must provide them a written notice that includes examples of options that might be available to them as alternatives to foreclosure and instructions for how to obtain more information.

• Direct and Ongoing Access to Servicing Personnel: Servicers must have policies and procedures in place to provide delinquent borrowers with direct, easy, ongoing access to employees responsible for helping them. These personnel are responsible for alerting borrowers to any missing information on their applications, telling borrowers about the status of any loss mitigation application, and making sure documents get to the right servicing personnel for processing.

• Fair Review Process: The servicer must consider all foreclosure alternatives available from the mortgage owners or investors those with decision-making power over the loan to help the borrower retain the home. These options can range from deferment of payments to loan modifications. And servicers can no longer steer borrowers to those options that are most financially favorable for the servicer.

• No Foreclosure Sale Until All Other Alternatives Considered: Servicers must consider and respond to a borrower’s application for a loan modification if it arrives at least 37 days before a scheduled foreclosure sale. If the servicer offers an alternative to foreclosure, they must give the borrower time to accept the offer before moving for foreclosure judgment or conducting a foreclosure sale. Servicers cannot foreclose on a property if the borrower and servicer have come to a loss mitigation agreement, unless the borrower fails to perform under that agreement.
Mortgage borrowers should not be surprised about where their money is going, when interest rates adjust, or when they get charged fees. The CFPB’s rules help every borrower, whether struggling or not, by bringing greater transparency to the market with clear and timely information about mortgages. These rules include:

• Clear Monthly Mortgage Statements: Servicers must provide regular statements which include: the amount and due date of the next payment; a breakdown of payments by principal, interest, fees, and escrow; and recent transaction activity.

• Early Warning before Interest Rate Adjusts: Servicers must provide a disclosure before the first time the interest rate adjusts for most adjustable-rate mortgages. And they must provide disclosures before interest rate adjustments that result in a different payment amount.

• Options for Avoiding Costly “Force-Placed” Insurance: Servicers typically must make sure borrowers maintain property insurance and if the borrower does not, the servicer generally has the right to purchase it. The CFPB’s rules ensure consumers will not be surprised by this insurance, which often can be more expensive than the insurance borrowers buy on their own. The rules say servicers must provide more transparency in this process, including advance notice and pricing information before charging consumers. Servicers must also have a reasonable basis for concluding that a borrower lacks such insurance before purchasing a new policy. If servicers buy the insurance but receive evidence that it was not needed, they must terminate it within fifteen days and refund the premiums. When mortgage servicers make mistakes, records get lost, payments are processed too slowly, or servicer personnel do not have the latest information about a consumer’s account, the consumer suffers the consequences. The CFPB’s rules will require common-sense policies and procedures for handling consumer accounts and preventing runarounds. These rules include:

• Payments Promptly Credited: Servicers must credit a consumer’s account the date a payment is received. If the servicer places partial payments in a “suspense account,” once the amount in such an account equals a full payment, the servicer must credit it to the borrower’s account.

• Prompt Response to Requests for Payoff Balances: Servicers must generally provide a response to consumer requests for the payoff balances of their mortgage loans within seven business days of receiving a written request.

• Errors Corrected and Information Provided Quickly: Servicers must generally acknowledge receipt of written notices from consumers regarding certain errors or requesting information about their mortgage loans. Generally, within 30 days, the servicer must: correct the error and provide the information requested; conduct a reasonable investigation and inform the borrower why the error did not occur; or inform the borrower that the information requested is unavailable.

• Maintain Accurate and Accessible Documents and Information: Servicers must store borrower information in a way that allows it to be easily accessible. Servicers must also have policies and procedures in place to ensure that they can provide timely and accurate information to borrowers, investors, and in any foreclosure proceeding, the courts.
Recognizing that small servicers approach servicing quite differently, the CFPB made certain exemptions to today’s mortgage servicing rules for small servicers that service 5,000 or fewer mortgage loans that they or an affiliate either own or originated. These servicers are mostly community banks and credit unions servicing mortgages for their customers or members. The mortgage servicing rules take effect in January 2014. The CFPB plans to work with mortgage servicers to ensure an easy transition to implementation. To help with compliance, the CFPB will, among other things, be issuing plain language implementation guides and, in coordination with other agencies, releasing materials that help servicers understand supervisory expectations. For many of the new rules that require specific notifications, the rule contains model and sample forms. As the effective date approaches, the CFPB will also give consumers information about their new rights under these rules.

Consumer Financial Protection Bureau Expands Foreclosure Protections
The changes also help ensure that surviving family members and others who inherit or receive property generally have the same protections under the CFPB’s mortgage servicing rules as the original borrower. “The Consumer Bureau is committed to ensuring that homeowners and struggling borrowers are treated fairly by mortgage servicers and that no one is wrongly foreclosed upon.” “These updates to the rule will give greater protections to mortgage borrowers, particularly surviving family members and other successors in interest, who often are especially vulnerable.” Mortgage servicers are responsible for collecting payments from the mortgage borrower and forwarding those payments to the owner of the loan. They typically handle customer service, collections, loan modifications, and foreclosures. To address widespread mortgage servicing problems, the CFPB established common-sense rules for servicers that went into effect on January 10, 2014. The CFPB issued proposed amendments to those rules in November 2014, and the final rule issued today adopts many of the proposed provisions. However, the Bureau made a number of changes in the final rule after considering comments received from the public. The rule issued today establishes new protections for consumers, including:

• Requiring servicers to provide certain borrowers with foreclosure protections more than once over the life of the loan: Under the CFPB’s existing rules, a mortgage servicer must give borrowers certain foreclosure protections, including the right to be evaluated under the CFPB’s requirements for options to avoid foreclosure, only once during the life of the loan. Today’s final rule will require that servicers give those protections again for borrowers who have brought their loans current at any time since submitting the prior complete loss mitigation application. This change will be particularly helpful for borrowers who obtain a permanent loan modification and later suffer an unrelated hardship such as the loss of a job or the death of a family member that could otherwise cause them to face foreclosure.

• Expanding consumer protections to surviving family members and other homeowners: If a borrower dies, existing CFPB rules require that servicers have policies and procedures in place to promptly identify and communicate with family members, heirs, or other parties, known as “successors in interest,” who have a legal interest in the home. Today’s final rule establishes a broad definition of successor in interest that generally includes persons who receive property upon the death of a relative or joint tenant; as a result of a divorce or legal separation; through certain trusts; or from a spouse or parent. The final rule ensures that those confirmed as successors in interest will generally receive the same protections under the CFPB’s mortgage servicing rules as the original borrower.

• Providing more information to borrowers in bankruptcy: Under the CFPB’s existing mortgage rules, servicers do not have to provide periodic statements or early intervention loss mitigation information to borrowers in bankruptcy. Today’s final rule generally requires, subject to certain exemptions, that servicers provide those borrowers periodic statements with specific information tailored for bankruptcy, as well as a modified written early intervention notice to let those borrowers know about loss mitigation options. Servicers also currently do not have to provide early intervention loss mitigation information to borrowers who have told the servicer to stop contacting them under the Fair Debt Collection Practices Act. Today’s final rule generally requires servicers to provide modified written early intervention notices to let those borrowers also know about loss mitigation options.

• Requiring servicers to notify borrowers when loss mitigation applications are complete: Whether a borrower is entitled to key foreclosure protections depends in part on the date a borrower completes a loss mitigation application. If consumers do not know the status of their application, they cannot know the status of those foreclosure protections. Today’s final rule requires servicers to notify borrowers promptly and in writing that the application is complete, so that borrowers know the status of the application and have more information about their protections.

• Protecting struggling borrowers during servicing transfers: When mortgages are transferred from one servicer to another, borrowers who had applied to the prior servicer for loss mitigation may not know where they stand with the new servicer. Today’s final rule clarifies that generally the new servicer must comply with the loss mitigation requirements within the same timeframes that applied to the transferor servicer, but provides limited extensions to these timeframes under certain circumstances. If a borrower submits an application shortly before transfer, the new servicer must send an acknowledgment notice within 10 business days of the transfer date. If the borrower’s application was complete prior to transfer, the new servicer must evaluate it within 30 days of the transfer date. If the new servicer needs more information to evaluate the application, the borrower would retain some foreclosure protections in the meantime. If the borrower submits an appeal, the new servicer has 30 days to make a determination on the appeal.

• Clarifying servicers’ obligations to avoid dual-tracking and prevent wrongful foreclosures: The CFPB’s existing rules prohibit servicers from taking certain actions in foreclosure once they receive a complete loss mitigation application from a borrower more than 37 days prior to a scheduled sale. However, in some cases, borrowers are not receiving this protection, and servicers’ foreclosure counsel may not be taking adequate steps to delay foreclosure proceedings or sales. The CFPB’s new rule clarifies that, if a servicer has already made the first foreclosure notice or filing and receives a timely complete application, servicers and their foreclosure counsel must not move for a foreclosure judgment or order of sale, or conduct a foreclosure sale, even if a third party conducts the sale proceedings, unless the borrower’s loss mitigation application is properly denied, withdrawn, or the borrower fails to perform on a loss mitigation agreement. The clarifications will aid servicers in complying with, and assist courts in applying, the dual-tracking prohibitions in foreclosure proceedings to prevent wrongful foreclosures.

• Clarifying when a borrower becomes delinquent: Several of the consumer protections under the CFPB’s existing rules depend upon how long a consumer has been delinquent on a mortgage. Today’s final rule clarifies that delinquency, for purposes of the servicing rules, begins on the date a borrower’s periodic payment becomes due and unpaid. When a borrower misses a periodic payment but later makes it up, if the servicer applies that payment to the oldest outstanding periodic payment, the date the borrower’s delinquency began advances. The final rule also allows servicers the discretion, under certain circumstances, to consider a borrower as having made a timely payment even if the borrower’s payment falls short of a full periodic payment. The increased clarity will help ensure borrowers are treated uniformly and fairly.