Are you ready?
There is no question that the COVID-19 pandemic has created uncertainty for all of us. Throughout the pandemic, servicers and homeowners have faced unprecedented and related challenges: can homeowners make their payments? Can servicers manage increased loss mitigation and forbearance activities while staff members are remote? Will new rules be provided to servicers to assist borrowers? What will the end of forbearance look like?
In April, the Consumer Financial Protection Bureau (CFPB) announced a proposed rule regarding COVID-19 safeguards. After a comment period and analysis of industry feedback, the final rule for COVID-19 mortgage servicing was released on June 28th, providing additional clarity to both servicers and homeowners on what to expect as forbearance periods expire and permanent loss mitigation efforts are made with homeowners. The final rule and associated analysis came in at more than 200 pages with four main topics: foreclosure procedural safeguards, streamline modifications, reasonable diligence for forbearance, and early intervention live contact requirements.
On August 31st, the CFPB’s final rule goes into effect. For the past 60 days, servicers have been working diligently on assessing their capabilities and implementing these requirements. This is not a small feat, as the final rule impacts nearly every aspect of default mortgage servicing: borrower communication, loss mitigation, property inspection, foreclosure referral and processing, and record retention.
In order to comply with the rule, servicers will be required to demonstrate adherence to procedural safeguards prior to initiating foreclosure. For any loan referred to foreclosure between 9/1/2021 and 1/1/2022, the servicer must show that at least one of the three safeguards below applied prior to initiation of foreclosure:
- Evaluated a complete loss mitigation application
- The property has been abandoned
- The borrower has been unresponsive
While there are exceptions to these safeguards, particularly for loans that were delinquent prior to March 1, 2020 or in situations where a foreclosure statute of limitation will expire prior to January 1, 2022, these safeguards will apply to a large percentage of delinquent loans or loans currently subject to a forbearance agreement. Moreover, these rules apply to privately held loans, whereas other loss mitigation programs and foreclosure moratoria applied to federally backed loans.
With forbearance exits slowing, and with an estimated 1.9 million homeowners subject to a forbearance agreement, the rules pertaining to forbearance exits and foreclosure initiation present unique challenges to servicers: training staff members on the new requirements, managing and decisioning increased loss mitigation applications within required timeframes, notifications to borrowers impacted, developing or enhancing system flags for the procedural safeguards, updating policies and procedures, updating pre-foreclosure checklists, and documentation within servicing and imaging systems to demonstrate compliance.
While servicers have had more than 60 days to implement this rule, the challenges to implementation cannot be understated, as the procedural safeguards layer on additional requirements to existing loss mitigation timing compliance requirements. In addition, servicers will have to assess whether they have the tools and system triggers in place to comply with the procedural safeguards. Controls, including policies and procedures, ongoing monitoring, and loan-level reviews, will be critical to demonstrating compliance with these rules.
If you are a servicer, are you ready for implementing these rules? If you are a loan owner, is your sub-servicer prepared to manage the loans in your portfolio based on these rules? Contact us to learn how we can help in assessing your preparedness for implementing these rules.