On November 20, 2014, the CFPB proposed several amendments to the mortgage servicing rules under Regulation X and Regulation Z, after previously implementing amendments to these regulations in January, 2014.  As previously described in this blog, the prior amendments addressed 9 key areas and included rules governing the transfer of servicing between servicers.  The new proposal expands consumer rights to avoid foreclosure and adds additional requirements for servicers engaged in transferring loans to another servicer. The proposal is also intended to clarify certain early intervention, loss mitigation, and information request requirements from the last amendments. A copy of the proposed rule can be found here.

Some of the key changes proposed are:

  • Servicers must provide certain borrowers with foreclosure protections more than once over the life of the loan: Currently, a mortgage servicer must give the borrower certain options to avoid foreclosure only once during the life of the loan.   If a borrower brings their loan current at any time since the last loss mitigation application, a servicer would have to give those protections again.
  • Expand consumer protections to surviving family members and other homeowners: If a borrower dies, CFPB rules currently require that servicers promptly identify and communicate with “successors in interest,” who have a legal interest in the home. The new proposal would expand the circumstances in which consumers would be considered successors under the rules and entitled to get information about the loan and the right to foreclosure protections. The expanded circumstances include when a property is transferred after a divorce, legal separation, through a family trust, between spouses, from a parent to a child or when a borrower who is a joint tenant dies.
  • Servicers must notify borrowers when loss mitigation applications are complete: When a borrower completes a loss mitigation application, key foreclosure protections take effect. The proposal would require servicers to notify borrowers promptly that the application is complete, so that borrowers know the status of the application.
  • Additional Servicing Transfer Requirements:  A transferee servicer must comply with the loss mitigation requirements within the same timeframes that applied to the transferor servicer. If the borrower’s application was complete prior to the transfer, the new servicer generally must evaluate it within 30 days of when the prior servicer received it. For involuntary transfers, the proposal would give the new servicer at least 15 days after the transfer date to evaluate a complete application.
  • Detail servicers’ obligations to avoid wrongful foreclosures: The rules currently prohibit a servicer from proceeding to foreclosure once they receive a complete loss mitigation application from a borrower more than 37 days prior to a scheduled sale.  The proposal clarifies that servicers who do not take reasonable steps to prevent the sale must dismiss a pending foreclosure action.
  • Servicers must provide more information to borrowers in bankruptcy: Currently, servicers do not have to provide periodic statements or loss mitigation information to borrowers in bankruptcy. The proposal would require servicers to provide periodic statements to those borrowers, with specific information tailored for bankruptcy. Servicers also currently do not have to provide certain disclosures to borrowers who have told the servicer to stop contacting them under the Fair Debt Collection Practices Act. The proposal would require servicers to provide written early intervention notices to let those borrowers know about loss mitigation options.

Practical Implications The practical effects of these rules are to make it significantly more costly and time consuming for mortgage servicers to foreclose.  The detailed procedures also have the unintended consequences of limiting servicer’s flexibility since a failure to follow CFPB rules will limit a servicer’s ability to foreclose on the property.  The new rules are rapidly changing the market and driving more banks to outsource their servicing, rather than take on the regulatory challenges created by these rules.  This will end up limiting the servicing business to a few large servicers and reducing choice for consumers, which seems contrary to the consumer mandate and goals of the CFPB.