Cheat Sheet: Inside the CFPB's New Mortgage Servicing Proposal

WASHINGTON — The Consumer Financial Protection Bureau issued a proposal Thursday that would institute new foreclosure protections for consumers after the agency found its previous mortgage rules didn't go far enough.

The plan is meant to protect consumers from foreclosure throughout the life of the loan and prevent a wrongful foreclosure sale as well as fix problems with loan transfers and clarify the meaning of a delinquency.

Under the proposal, servicers would also be required to apply the same rules to any person who inherits the mortgage or property from the original borrower, rather than only doing so when the borrower is deceased.

"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," said CFPB Director Richard Cordray in a press release. "Today's proposal would give greater protections to mortgage borrowers."

The proposal comes in addition to the mortgage servicing rules that took effect in January which require servicers to maintain accurate records of mortgages and payments regardless of how many times the loan was sold; and to help struggling borrowers.

The CFPB said Thursday that those rules weren't enough to fix the market.

"Since the Bureau's mortgage servicing rules took effect, the CFPB has continued to engage in outreach with consumer advocacy groups, industry representatives, and other stakeholders," said the CFPB in a press release. "This proposal reflects our ongoing effort to ensure the rules are working as intended and to smooth the path for companies to better protect consumers and comply with the CFPB's rules."

Following are some of the key elements of the new proposal.

• Servicers would have to provide certain foreclosure protections more than once during the life of the loan if the borrower returned to good standing at any point after receiving an initial loss mitigation. Currently, servicers are only required to offer such foreclosure protections once.
• The plan would clarify that a delinquency begins the day after a borrower fails to make a periodic payment. The proposal says a servicer can advance the date of delinquency when a borrower makes up for missing a late payment and the servicer applies that amount to the oldest outstanding periodic payment. The proposal also gives servicers the discretion to say the borrower made the payment on time even if the payment was slightly short of the balance due, under certain circumstances. The CFPB said this "will help ensure borrowers are treated uniformly and fairly."
• If a mortgage that is in the middle of a loss mitigation process is transferred to a new servicer, the CFPB is proposing that the new servicer keep with the same mitigation requirements and time frames set by the previous servicer. There are also additional caveats and time frames, such as when the borrower has already completed the mitigation application before the loan was transferred. In that case, the new servicer would have to evaluate the application within 30 days of when the previous servicer received the application.
• The proposal would require servicers to allow any successor to assume the mortgage or property, regardless of whether the original borrower is deceased. This includes servicers having to promptly identify and communicate to a mortgage successor in the event of a divorce, through a family trust, from a parent to child, among other life events. The successor would also receive the same foreclosure protections as the original borrower.
• The plan adds a requirement for servicers to "promptly" notify borrowers when their loss mitigation application is complete so borrowers know when their foreclosure protections have kicked in.
• Servicers would be also required to give periodic statements of loss mitigation information tailored to a borrower in bankruptcy. Servicers would have to give "written early intervention notices" to borrowers who asked to stop being contacted under the Fair Debt Collection Practices Act.

Industry observers said many of the proposed requirements are clarifications and minor additions to the standards already adopted by the CFPB.
"Some of the points in here have been among the bureau's top priorities for a while, like the clarification on mortgage servicing transfers and how to deal with mortgages of surviving heirs," said Donald Lampe, a partner in the financial services group at Morrison & Foerster.

But he singled out the requirement that servicers offer mitigation more than once throughout the life of the loan as a new and unexpected requirement.

"That's new and we're going to need to look at that carefully and see the policies behind it and operationally, what impact it is going to have on the industry," Lampe said. "What we're seeing now is that there has been a large number or so-called reperforming loans so that [proposal] will require further study."

There are also concerns about whether a borrower who already underwent a modification could make just enough payments and then fall into delinquency in a repeated cycle in order to get multiple modifications and lower loan payments over prolonged periods of time.

"Some of these are best practices that servicers have been doing anyways, like offering foreclosure protection if a loan goes delinquent again," said Colgate Selden, counsel at Alston & Bird's financial services and products group, who previously worked at the CFPB. "Depending on how the rule is finalized, it could provide foreclosure protections that might open up room for abuse by borrowers so that is something everyone will want to take a close look at during the proposal stage."

The CFPB's proposal also includes changes to its mortgage servicing rules largely meant to give more flexibility to servicers. This includes some relief in complying with force-placed insurance requirements and exemptions in having to provide periodic statements under certain circumstances when the mortgage has been charged off. The CFPB also proposed further restrictions on servicers that continue to do dual-tracking by foreclosing on borrowers who are in the middle of a loss mitigation process.

The proposal will be open for public comment for 90 days once it is published in the Federal Register.