by Wendy Lee, Esq.

McCalla Raymer Leibert Pierce, LLP

USFN Member (AL, CA, CT, FL, GA, IL, MS, NV, NJ, NY, OR, WA)

On June 28, 2021, the Consumer Financial Protection Bureau released its Final Rule amending the loss mitigation procedures contained within Regulation X, making it effective on August 31, 2021. These amendments are a huge focus for our industry at the moment. Servicers, investors and industry participants are still digesting the 208 pages, operationalizing the concepts and trying their best to allow the movement of compliant cases through the loss mitigation and eventually the foreclosure process. It is no easy feat to do this while the laws, regulations, executive orders, and pretty much every other aspect of the legal foundations we base our operations on are changing. Never has there been a more daunting time to be a mortgage servicing professional and never have the stakes been higher on all sides. With rising home prices, the exit strategies are not easy for the distressed homeowner who might be able to obtain a great price for their house, but the options to rent or downsize to a less expensive house are not easy to navigate. Servicers will have extreme pressure from investors to make perfect decisions without perfect information for these quickly promulgated rules.

The Temporary Safeguards
The first question many clients ask: “Is there a private right of action for borrowers to enforce the loss mitigation procedures contained within Reg X?” The answer is yes and with that said, according to the Bureau’s small entity compliance guide, the rules weren’t intended to allow a particular loss mitigation option, but only to provide the borrower with a guarantee of process. That is something to keep in mind as servicers look at moving from forbearance relief into permanent modifications, however it shouldn’t change the compliance focus of the operation. If a safeguard or exception isn’t properly applied, there is a risk of private litigation as well as regulatory enforcement.

Because the safeguards aren’t effective until the end of the month, and they are only effective until December 31, 2021, there is a huge investment being made to move cases through for a three- or four-month timeline advantage. But that investment is likely to pay off as the process for restarting will be slow, vendors need a chance to ramp up and our industry risks losing talent who may never return to this instable area of law.

The safeguards are simple on the surface: 1. Loans where the borrower was evaluated for loss mitigation based upon a complete application and didn’t otherwise qualify, 2. Loans secured by currently abandoned property, and 3. Loans where the borrower is unresponsive to servicer outreach.

The Excluded Loans
There are some loans that aren’t subject to the safeguards, or the enhanced loss mitigation solicitation requirements. The safeguards and other restrictions on proceeding to first notice or filing are not required in the following circumstances:

o   Foreclosure process begins on or after January 1, 2022.

o   Borrower was more than 120 days delinquent prior to March 1, 2020.

o   The applicable statute of limitations will expire before January 1, 2022.

o   The foreclosure process began before August 31, 2021.

o   The loan is otherwise exempt from the general foreclosure protection requirements including HELOCs, reverse mortgages and any loan secured by property that isn’t a borrower’s principal residence (to name the most prominent exclusion categories).

Documentation Requirements
The Bureau describes in its compliance guide that servicers should consider maintaining call logs, servicing notes, other systems of record cataloguing communications showing the absence of contact from the borrower during the relevant period. Also, the record of payments including escrow transactions are relevant during this time frame as well. Consider further that the opinions on an expiring statute of limitations as a necessary artifact could be helpful in the process.

Conclusion
While the real-world scenarios are starting to refer their way into our law firm and trustee organizations, we need to be reviewing closely, paying attention to which safeguard, or exclusion is being utilized to allow the case to move forward into first notice or filing. Even seemingly minor differences like whether a loan needed to be due for October 31, 2019, or November 1, 2019 to meet the exclusion for loans more than 120 days delinquent prior to March 1, 2020 could make a difference.

According to the Bureau, it is able to take questions at its regulatory inquiry site and will be publishing and updating its FAQ to respond to some of these technical questions that were not contemplated with the interpretations. I anticipate we will see something updated before the end of the month as everyone is taking a close look at their portfolios to see where and how these rules land.

Copyright © 2021 USFN. All rights reserved.

August 2021 e-Update