Memorandum Regarding the CFPB’s Proposed Amendments to Regulation X

Date: [Date]

To: General Counsel

From: Chief Compliance Officer


Re: Summary of CFPB Proposed Mortgage Servicing Rules and Implications

Overview

The CFPB's recent proposed amendments to Regulation X aim to overhaul mortgage servicing, with particular focus on loss mitigation and foreclosure processes. These changes are driven by lessons from the pandemic, aiming to improve borrower support and streamline loss mitigation. The proposed rules encompass a range of borrower protections and servicing adjustments that will have significant compliance, financial, and operational impacts on mortgage servicers.

Key Proposed Changes

  1. Loss Mitigation and Foreclosure Protections

    • The CFPB proposes that servicers may not initiate or advance foreclosure while evaluating a borrower’s loss mitigation request. The proposed rule mandates that no fees beyond scheduled mortgage payments can accrue during loss mitigation review cycles, effectively pausing additional charges, including legal fees related to foreclosure or third-party servicing costs (e.g., attorney fees for delinquency proceedings).

    • This restriction could impact servicers’ ability to recover costs and potentially lead to increased operational expenses as servicers absorb costs usually passed on to borrowers. This protection applies unless the borrower fails to communicate for at least 90 days, despite the servicer’s repeated efforts to maintain contact.

  2. Expanded Borrower Appeal Rights

    • The CFPB has proposed a broadening of appeal rights, allowing borrowers to appeal any loss mitigation outcome (not limited to loan modification denials), which could increase review times and delay resolutions. Each appeal also triggers obligations for servicers to address potential servicing errors. This measure intends to protect borrower interests but will require additional staffing and procedural safeguards for compliance.

  3. Enhanced Early Intervention Requirements

    • Servicers are required to provide comprehensive loss mitigation information in early intervention notices, including specific information on loss mitigation options for each loan investor and, if applicable, notice of the investor’s identity. For loans exiting forbearance, servicers must reinitiate full early intervention protocols, creating additional administrative steps.

  4. Limited English Proficiency (LEP) Support

    • The proposal introduces specific requirements to provide early intervention notices in languages other than English, where relevant. This change will necessitate new processes and documentation, potentially requiring servicers to expand language support capabilities, which could mean increased training and cost for multilingual services.

  5. Credit Reporting and Successor-in-Interest Provisions

    • The CFPB has sought comments on accurate credit reporting during the loss mitigation process and potential additional disclosures on payment deferrals. Comments are also solicited on simplifying processes for confirmed successors-in-interest. These changes reflect a move towards transparency but will also add complexity to compliance, especially for data reporting and successor documentation.

Financial Implications

  • For Consumers: Borrowers may experience greater protections and flexibility through broader appeal rights, fee restrictions, and enhanced communication requirements. These changes aim to prevent foreclosure and provide equitable access to information, particularly for LEP borrowers, but could also delay foreclosure resolutions for non-communicative borrowers.

  • For Servicers: The CFPB’s fee restrictions and heightened procedural requirements will increase the costs of managing delinquent loans. Servicers may see elevated operational costs from enhanced language services, expanded appeal and review processes, and unrecouped legal and administrative fees associated with delayed foreclosures. The pause on delinquency fees during loss mitigation reviews represents a significant financial impact, potentially creating cash flow challenges.

Regulatory Change Management Considerations

  • Compliance Program Adjustments: Servicers will need to update loss mitigation protocols, particularly in the areas of appeal rights, communication requirements, and foreclosure holds. Procedures should be adapted to ensure compliance with expanded language requirements, documentation standards, and additional disclosures.

  • Staffing and Training Requirements: Implementation will necessitate increased training for frontline staff and loss mitigation teams, particularly to handle expanded appeal rights, document new procedural requirements, and manage enhanced LEP communications.

  • Operational System Updates: Systems must be updated to ensure compliance with restrictions on fee assessments during loss mitigation, prompt cessation of foreclosure processes, and integrated workflows for successor-in-interest verifications and investor-specific disclosures.

Conclusion

The CFPB's proposed rule changes present both challenges and opportunities. While beneficial to consumer protection, the expanded requirements may create significant operational and financial burdens for servicers. Strategic planning and regulatory change management will be essential to comply efficiently with these new standards while minimizing impacts on financial performance.

Action Items:

  1. Conduct a gap analysis to identify current processes that will require adjustments.

  2. Develop a training program focused on the new early intervention and appeals process.

  3. Begin system modifications to address the regulatory requirements outlined above.

This proposed rule will necessitate substantial operational and financial adjustments across our servicing division. Prompt action in preparing for these changes is essential to minimize risk and ensure seamless compliance.