CFPB proposes new mortgage servicing rule to aid struggling borrowers

The Consumer Financial Protection Bureau is proposing a new mortgage servicing rule to help struggling borrowers avoid foreclosure by adopting protections that it made available during the COVID-19 pandemic. The changes call for more detailed personalized notices to the borrower, and the elimination of dual tracking, which allowed servicers to begin the foreclosure process while considering loan modification solutions for the distressed borrower.

On Wednesday, the CFPB put forward changes that would require mortgage servicers to provide assistance immediately after a borrower asks for help. Servicers would only be allowed to move ahead with a foreclosure after exhausting all efforts — unless the borrower has stopped communicating with the servicer, the CFPB said. The proposal also would limit the fees a servicer can charge a borrower while reviewing possible options such as forbearance, deferrals and loan modifications. 

The proposal is a major shift from the highly prescriptive, document-intensive approach that the CFPB took after the 2008 mortgage crisis. It relies heavily on changes made during the pandemic when the CFPB adjusted its rules temporarily to permit servicers to provide forbearances, deferrals and loan modifications. The proposal is intended to create strong incentives for servicers to act quickly and fairly when borrowers request help. 

The American Bankers Association, the Mortgage Bankers Association and the Housing Policy Council praised the changes.

"We support updates that inform borrowers of all their options in a clear and timely manner, remove unnecessary barriers, better prepare for future national emergencies, and ultimately facilitate seamless resolutions for those who need it," the ABA and MBA said in a joint statement.

The Housing Policy Council said the changes were long overdue to update the Real Estate Settlement Procedures Act, also known as Regulation X.

"For years now, the industry has been requesting that the Bureau adopt sensible revisions to Reg X, to align the rules with government agency and [government-sponsored enterprise] loss mitigation program improvements," the council said in a press release.  

The 196-page proposed rule would amend regulations issued in 2013 by streamlining and revising existing requirements when borrowers seek assistance in times of distress. The CFPB said the proposed rule, if finalized, would increase the likelihood that investors and borrowers can be spared the costs of avoidable foreclosure.

"When struggling homeowners can get the help they need without unnecessary obstacles, it is better for borrowers, servicers, and the economy as a whole," CFPB Director Rohit Chopra said in a press release. "The CFPB's proposal would reduce avoidable foreclosures and make the mortgage market more resilient during future crises."

Currently, mortgage delinquencies and foreclosure rates remain near all-time lows. But the CFPB said foreclosures could increase in the future because consumers are grappling with higher levels of debt. Foreclosure starts have risen in recent months, increasing the risks to vulnerable consumers. 

The proposal builds on feedback the CFPB received from mortgage servicers, consumer advocates and trade associations in response to a 2022 request for information. 

One of the biggest changes is the effort to eliminate so-called dual tracking, in which a servicer proceeds with a foreclosure while also considering a borrower's application for a loan modification or another loss mitigation option. 

In another major change, servicers would be required to provide tailored notices to borrowers with information about who owns their loan and how to get assistance after a missed payment, according to the proposal. The notices would have to be provided in both English and Spanish and interpretation services must be made available to those speaking other languages, the CFPB said.

Small servicers that handle fewer than 5,000 loans are excluded from the proposal and typically have been exempt from the CFPB's loss mitigation rules. More than 90% of home loans are handled by large mortgage servicers. The proposal is open for public comment for 60 days. 

The bureau first suggested in April that it would propose streamlining mortgage servicing rules if doing so allowed mortgage servicers to respond more readily to future economic shocks while also ensuring borrowers are assisted promptly and fairly.

The CFPB has the authority to propose the changes under Regulation X and the Dodd-Frank Wall Street Reform and Consumer Protection Act.