CFPB Proposed Amendments to Regulation X to Slow Impending Foreclosure Crises

CFPB Proposed Amendments to Regulation X

In the wake of the COVID-19 world pandemic, millions of Americans are still battling financial hardships.  The Consumer Financial Protection Bureau, referred to as the CFPB, is a government agency accountable for protecting consumers financially.  Percolating ways to soften the impending housing crisis, on April 5th, 2021, the CFPB proposed amendments to Regulation X.  The United States Federal government has attempted to circumvent a housing crisis through moratoriums on evictions, moratoriums on foreclosures, plus concessions on forbearance enrollment.  In February, the Biden administration announced the latest moratoriums, an extension through June 30th, 2021.  The CFPB proposed amendments to Regulation X are intended to benefit both homeowners and mortgage servicers.  If passed, these new rules could prohibit foreclosures until 2022.

According to the Mortgage Bankers Association, or MBA, for nearly 3 months now, weekly data has shown a steady decline in the number of mortgage loans in forbearance.  However promising the steady decrease may seem, experts are still widely concerned about the impending housing crisis.  As of May 6th, 2021, the MBA's Forbearance and Call Volume Survey illustrated 4.22%, or around 2.1 million homeowners, are in forbearance on their mortgages.

What to Expect Here

First, we will go over the current protections available for Homeowners financially impacted by the pandemic.  Next, we will explain what Regulation X is, then go over the pending housing crisis and the potential wave of foreclosures in the fall of 2021.  Additionally, what are the CFPB proposed amendments to Regulation X?  What does this mean for homeowners?  Continue reading to find out.

Current Protections for Homeowners Under the CARES Act

• The Coronavirus Aid, Relief, and Economic Security Act, referred to as the CARES Act, enacted March 27th, 2020, provided up to 360 days of forbearance for borrowers with federally backed mortgages.
• Borrowers had to contact their loan servicer to request forbearance and attest that they were experiencing financial hardship due to the Covid-19 pandemic.
• In February of 2021, two extensions were granted for federally backed mortgages.  A standstill on foreclosures, the moratorium will now end on June 30th, and the forbearance period extended to 18 months.

What is Regulation X?

The Real Estate Settlement Procedures Act of 1974, known as RESPA, requires lenders to disclose the nature and costs associated with the real estate settlement process.  Regulation X implemented RESPA.  The 2013 RESPA Servicing Final Rule administered provisions of the Dodd-Frank Act requiring loan servicers to provide delinquent borrowers with access to servicer personnel, loss mitigation options, and evaluations on delinquent applications.

Potential for a Wave of Foreclosures in Fall 2021

A borrower's mortgage must be at least 120 days delinquent before a servicer can file for foreclosure.  While forbearance pauses payments, it does not stop the clock on delinquency.  If the CPFB proposed amendments to Regulation X do not go through, without a foreclosure moratorium in place, borrowers could face immediate foreclosure after forbearance.

According to Black Knight, 6.9 million borrowers entered forbearance since the beginning of the pandemic.  50% of these borrowers have resumed mortgage payments or paid their loan in full by refinancing or selling.  There are around 1.5 million borrowers delinquent by 90 days or more, and 98% of these delinquent borrowers have either been in forbearance or are actively participating in loss mitigation with their loan servicer.

Currently, there are 1.5 million delinquent borrowers by 90 days or more, and 98% of these homeowners have either been in forbearance or are actively participating in loss mitigation with their loan servicer.  If delinquent borrowers that applied for forbearance at the start of the pandemic extend their forbearance to the 18-month max, Black Knight estimates an alarming 800,000 borrowers will be exiting forbearance simultaneously in the Fall of 2021.

What are the CFPB Proposed Amendments to Regulation X?

Our country is facing a historic number of delinquencies.  Due to the sheer volume of borrowers facing foreclosures simultaneously, it will be nearly impossible for loan servicers to keep up with processing the delinquencies.  Servicers will need to hire new staff to meet the heightened demand for mitigation loss evaluations.  Training new staff while conforming to evolving regulations will be challenging.  The CFPB proposed amendments to Regulation X are proactive attempts to lessen servicers' burden and help protect homeowners.

CFPB Proposed Amendments to Regulation X

• Establish an emergency pre-foreclosure review period until December 31, 2021, to allow servicers time to evaluate delinquent borrowers' options for primary residence loss mitigation.  Servicers may be permitted to file for foreclosure during this pre-foreclosure review period on accounts that have already been reviewed and found to be ineligible for loss mitigation or in cases where the homeowner is not responding to a servicer attempts to contact.
• Allow servicers to temporarily offer streamlined loan modifications to borrowers with incomplete loss mitigation applications.  These loan modifications will have to meet the following criteria:
  1. There can be no increase in the monthly principal and interest payments.
  2. Any increase in loan terms cannot be more than 480 months.
  3. If the loan is refinanced, the property is sold, or the loan modification matures, any payments cannot accrue interest.
  4. The servicer must waive all late fees and penalties when the loan modification is accepted.
  5. The servicer must waive all late fees and penalties when the loan modification is accepted.
• If passed, early intervention requirements would be in place until August 31st, 2021.  These amendments would ensure that servicers are communicating loss mitigation options in a timely and accurate manner.
  1. The available forbearance programs must be disclosed and explained when the servicer makes live contact with a delinquent borrower experiencing a COVID-19 related hardship.
  2. If the borrower is in a COVID-19 related forbearance when the servicer makes live contact, the servicer must tell the borrower the date the forbearance period will end.  The servicer must also cover any forbearance extension, repayment options, and loss mitigation opportunities to resolve delinquency at the end of the forbearance period.
• Borrowers who have been determined to have an incomplete loss mitigation application and are in a  short-term COVID-19 related forbearance program must be contacted by the servicer at least 30 days before the forbearance period ends.  The servicers must offer a full loss mitigation evaluation.

Options for Borrowers Exiting COVID-19 Related Forbearance Programs

• Reduce the monthly payments with a lower interest rate by refinancing.
• Mortgage can be reinstated by paying all the missed payments in one lump sum.
• Borrowers who have resolved their financial hardships can be set up with payment plans.  They can make their original monthly payments plus an agreed-upon portion of their missed payments until the loan is brought current.
• Resume regular monthly payments and defer missed payments until the end of the loan term without accruing late fees and additional interest.
• Loan modifications: change the loan term, reduce the interest rate, or reduce the principal balance. There are streamlined application procedures available, including the GSE Streamlined Flex Modification and FHA's COVID-19 Modification.
• If a homeowner cannot recover from financial hardship, they can opt for a short sale or deed-in-lieu.
• Note: Small servicers with less than $10 billion in total assets are exempt from the proposed provisions.  Statistically speaking, these institutions service less than 5,000 loans, so the CFPB believes they will be equipped to provide loss mitigation evaluations without extending the pre-foreclosure review period.

Conclusion

Regulation X is a set of rules proposed by the CFPB to protect borrowers and assist ill-prepared loan servicers with the potential massive volume of foreclosures.  Current protections for homeowners include forbearance extensions and a moratorium on foreclosures until June 30th.  To utilize these protections, homeowners must contact loan servicers and attest to financial hardship directly due to the COVID-19 Pandemic.  If the CFPB Proposed Amendments to Regulation X are passed, this is a crucial step.  The borrower and servicer must establish communication lines.