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Mortgage Servicing

CFPB Releases Long-Awaited Proposal to Amend Regulation X Loss Mitigation Rules

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What Happened?

On July 10, 2024, the Consumer Financial Protection Bureau (CFPB or Bureau) proposed a rule to amend provisions of its Mortgage Servicing Rules to significantly revamp requirements relating to borrowers experiencing payment difficulties (the Proposed Rule).  The Proposed Rule includes a number of key changes to the servicing requirements in Regulation X (12 C.F.R. Part 1024), including limited English Proficiency requirements. While many of the key concepts were anticipated by the industry, the proposed provisions go much further than expected.

The Bureau is accepting comments on the Proposed Rule through September 9, 2024.

Why Does it Matter?

In June 2023, the Bureau signaled its intent to engage in rulemaking to streamline certain requirements and processes in the Mortgage Servicing Rules to significantly revamp requirements relating to borrowers experiencing payment difficulties (the Proposed Rule). The Proposed Rule would represent the first major changes to the Mortgage Servicing Rules since 2016 (although the Bureau has made targeted updates in the interim – such as the 2018 changes relating to periodic statements). We describe the key provisions below.

Loss Mitigation Procedures

Under the Proposed Rule, the CFPB would remove most of the existing application-based loss mitigation framework from § 1024.41, including the existing provisions regarding loss mitigation application reviews and notices; complete application evaluations and notices); “anti-evasion” facially-complete applications, and exceptions for short-term loss mitigation options and COVID-19-related options; notices of complete application; and the associated commentary.

The CFPB proposes to replace the existing loss mitigation framework with a new hand raise framework based on foreclosure procedural safeguards, as follows:

  • Loss Mitigation Review Cycle: Under the Proposed Rule, the foreclosure procedure safeguards begin once a “loss mitigation review cycle begins.”
    • A Loss Mitigation Review Cycle would be defined as a continuous period of time beginning when the borrower makes a request for loss mitigation assistance, provided the request is made more than 37 days before a foreclosure sale and ending when the loan is brought current or when the foreclosure process procedural safeguards (as discussed in Loss Mitigation Procedures) are met. A loss mitigation review cycle continues while a borrower is in a temporary or trial modification and the loan has not yet been brought current.
    • A Request for Loss Mitigation Assistance would include any oral or written communication occurring through any usual and customary channel for mortgage servicing communications whereby a borrower asked a service for mortgage review, including a borrower expresses an interest in pursuing a loss mitigation option. There are a few things to note in this definition. The definition is to be interpreted broadly to include (i) a borrower who expresses an interest in pursuing a loss mitigation option, (ii) a borrower who indicates that they have experienced a hardship and asks the servicer for assistance with making payments, retaining their home, or avoiding foreclosure, or (iii) in response to a servicer’s unsolicited offer of a “loss mitigation option” (as that term is currently defined in Regulation X), a borrower expresses an interest in pursuing either the loss mitigation option offered or any other loss mitigation option. According to the Proposed Rule’s preamble, “a servicer should presume that a borrower who experiences a delinquency has made a request for loss mitigation assistance when they contact the servicer unless they clearly express some other intention.” The proposal clarifies that certain informal types of communications (such as social media messaging or handwritten notes on payment coupons) would not constitute a request for loss mitigation assistance but fails to provide servicers flexibility to designate where borrowers can make such requests.
  • Foreclosure Procedural Safeguards: Under the Proposed Rule, once a “loss mitigation review cycle” begins, a servicer would be prohibited from beginning or advancing the foreclosure process until one of the following procedural safeguards is met:
    • The servicer has reviewed the borrower for all available “loss mitigation options,” a defined term under existing Regulation X, and no available loss mitigation options remain, the servicer has sent the borrower all required notices required, and the borrower has not requested any appeal within the applicable time period or, if applicable, all of the borrower’s appeals have been denied; or
    • The borrower has not communicated with the servicer for at least 90 days despite the servicer having regularly taken steps to communicate with the borrower regarding their loss mitigation review and, if applicable, the servicer’s loss mitigation determination.

Importantly, the Proposed Rule would no longer require a borrower to submit a complete loss mitigation application in order to enjoy foreclosure protections. Rather, borrowers would receive the proposed foreclosure protections as soon as they request loss mitigation assistance.

  • Prohibition on Advancing Foreclosure: Currently, servicers are prohibited from making the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process under certain circumstances, as well as from moving for foreclosure judgment or order of sale or conducting a foreclosure sale under other circumstances. However, currently, servicers may still proceed with other interim foreclosure actions, such as mediation or arbitration.

Under the Proposed Rule, if a borrower requests loss mitigation assistance more than 37 days before a foreclosure sale, a servicer would be prohibited from initiating or advancing foreclosure (which would also include sale scheduling or completion) unless one of the above foreclosure procedural safeguards are met. The CFPB notes that, under the proposed rule, advancing the foreclosure process would include any judicial or non-judicial actions that advance the foreclosure process and were not yet completed prior to the borrower’s request for a loss mitigation option. Such actions might include, for example, certain filings, such as those related to mediation, arbitration, or reinstatement that take place prior to final order or sale; certain affidavits, motions, and responses that advance the foreclosure process; or recordings or public notices that occur before a final foreclosure judgment or sale. Notably, the CFPB is not proposing to require servicers to dismiss pending foreclosures; however, a servicer may be required to make necessary filings to pause the foreclosure proceedings until the safeguards are met.

  • Sequential Loss Mitigation Review: Under the Proposed Rule’s loss mitigation framework, a servicer would no longer be required to collect a complete loss mitigation application for all available options prior to making a determination about whether to deny or to offer a loss mitigation option to a borrower. Accordingly, a servicer would be permitted, but not required to, review a borrower for loss mitigation options sequentially rather than simultaneously. Notably, the CFPB clarifies in the preamble to the Proposed Rule, that “[i]nvestor guidelines, including what are commonly referred to as waterfalls, will continue to determine whether any loss mitigation option is available and whether the borrower qualifies for a given option.”
  • Fee Prohibition: The CFPB is proposing to replace the temporary COVID-19 procedural safeguards in § 1024.41 with a proposed requirement that during a loss mitigation review cycle, no fees beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract shall accrue on the borrower’s account.

The CFPB states that the proposed fee protection “would be broad, and would restrict the accrual of interest, penalties, and fees during the loss mitigation review cycle.” The Bureau also acknowledges that “this broad prohibition may result in servicers making payments to third party companies for delinquency-related services that servicers may not be able to recoup[.]” However, the CFPB states that it has preliminarily “determine[d] that borrowers who have made a request for loss mitigation assistance should not continue accruing fees that make it harder for them to resolve the delinquency and avoid foreclosure” and “that fee protections may create incentives for servicers under the proposed new framework to efficiently process a borrower’s request for loss mitigation assistance and evaluate them for loss mitigation solutions quickly and accurately.” That said, given that the loss mitigation review framework could go on almost indefinitely, as noted below, it is hard to see how such efficiencies or incentives would be realized.

  • Duplicative Requests: Currently, a servicer is required to comply with the requirements of Regulation X for a borrower’s loss mitigation application, unless the servicer has previously complied with the requirements of that section for a complete loss mitigation application submitted by the borrower and the borrower has been delinquent at all times since submitting the prior complete application.

Significantly, the Proposed Rule would require that servicers comply with the requirements of proposed § 1024.41 for a borrower’s request for loss mitigation assistance during the same loss mitigation review cycle unless one of the procedural safeguards is met. Notably, the Proposed Rule would not appear to prohibit a borrower from re-requesting loss mitigation assistance indefinitely (and, thus, beginning a new loss mitigation review cycle with new foreclosure procedural safeguards), unless otherwise provided by investor guidelines.

Loss Mitigation Determination Notices

  • Coverage of Determination Notices Expanded: Currently, Regulation X requires that loss mitigation determination notices state, in relevant part, which loss mitigation options, if any, the servicer will offer to the borrower on behalf of the owner or assignee of the mortgage, the specific reason or reasons a borrower’s complete loss mitigation application is denied for any trial or permanent loan modification option available to the borrower and, if applicable, that the borrower has the right to appeal the denial of any loan modification option as well as the amount of time the borrower has to file such an appeal and any requirements for making an appeal.

The Proposed Rule would expand § 1024.41’s loss mitigation determination notice provisions to require that servicers provide determination notices for all types of loss mitigation offers and denials, including forbearances, deferrals, and partial claims.  In other words, servicers would be required to include in determination notices the specific reason or reasons a borrower’s loss mitigation request is denied for any loss mitigation option (not just loan modification options) available to the borrower as well as information regarding the borrower’s appeal rights (which would extend to all loss mitigation denials).

  • Expanded Information on Determination Notices: Under the Proposed Rule, in addition to disclosing the amount of time the borrower has to accept or reject an offer, the borrower’s right to appeal the loss mitigation determination, and the specific reason or reasons for that loss mitigation determination, a servicer’s determination notice would be required to include the following additional information:
    • Information about key borrower-provided inputs that served as the basis for the loss mitigation determination;
    • A telephone number, mailing address, and website address, where the borrower can access a list of non-borrower provided inputs used by the servicer in making the loss mitigation determination;
    • Information that would enable a borrower to access a list of all loss mitigation options that may be available from the investor; and
    • Information about all other loss mitigation options that may remain available, previously offered options that the borrower did not accept, and whether any offered option will remain available if the borrower requests review for additional options prior to accepting or rejecting the offer.

The expanded information requirements, as proposed, raise a number of unanswered questions.

For example, it is unclear what would constitute a “key” borrower-provided input. The preamble to the Proposed Rule suggests that any borrower-provided input that served as the basis for the servicer’s determination would arguably be covered. Similarly, it is unclear what is the scope of non-borrower provided inputs servicers must permit borrowers to access. For example, it is unclear whether servicers would be required to list that, among other things, the property is secured by a first-lien mortgage loan, the property is owner-occupied, and/or the borrower’s loan meets specified delinquency requirements (if applicable).

Further, the expanded notice requirements are likely to create significant operational challenges for servicers. For example, servicers will likely need to track not only the loss mitigation options generally made available by the owner or assignee of each loan they service, but also the loss mitigation options previously offered to each borrower, the options each borrower did not accept, and whether any previously offered option will remain available if a borrower requests review for additional options prior to accepting or rejecting the offer. These operational complexities are compounded by the fact that investors and agencies routinely update their loss mitigation guidelines.

  • Denial Due to Missing Documents or Information Not in Borrower’s Control: In addition to relocating the current requirements relating to when a servicer may deny a loss mitigation application due solely to missing information not in the borrower’s or servicer’s control, the Proposed Rule would also amend the requirements to align with other proposed changes.

First, the Proposed Rule would prohibit servicers from denying a request for loss mitigation assistance due solely to missing information not in the borrower’s or servicer’s control unless the servicer has “regularly taken steps” to obtain the missing information and has been unable to obtain the information for at least 90 days. The CFPB indicated that it “expects that regularly taking steps would minimally include repeated attempted contact through the 90-day period with the relevant third party from whom the servicer needs to obtain the information.” The intent is to “ensure that servicers are making efforts to obtain needed information before denying a loss mitigation application due to missing information.”  While the Bureau proposes to replace the term “reasonable diligence” with “regularly taking steps,” the CFPB “does not intend to reduce or to lessen a servicer’s current obligation to obtain missing documents or information not in the borrower’s control.”

Second, the Proposed Rule would require servicers to provide a notice to borrowers if they deny such a request for loss mitigation assistance. The notice would retain certain information currently required, including requiring a statement that the servicer will complete its evaluation of the borrower for all available loss mitigation options promptly upon receiving the missing third-party information, but also would provide borrowers with additional information, including informing the borrower that the servicer will complete its evaluation of the request for loss mitigation assistance if the servicer receives the referenced missing documents or information within 14 days of providing the missing information determination notice to the borrower.

Third, the Proposed Rule would require servicers to provide borrowers with detailed information, which includes, among other things, a list of all other loss mitigation options that are still available to the borrower and a statement describing the next steps the borrower must take to be reviewed for those loss mitigation options, or a statement that the servicer has reviewed the borrower for all available loss mitigation options and none remain.

  • Unsolicited Loss Mitigation Offers: The Proposed Rule would require that a servicer provide the borrower with a notice when it offers a loss mitigation option based solely on information that the servicer already has instead of new borrower-provided information. The notice would be required to include the amount of time the borrower has to accept or reject the offer of loss mitigation and information notifying the borrower, among other things, of all other loss mitigation options that may remain available to the borrower and investor information.

Notably, the Proposed Rule would not revise the definition of “loss mitigation option,” which includes, among other things, refinancings. Moreover, the requirement to provide notice for unsolicited loss mitigation offers would not be limited to delinquent borrowers. As a result, it is unclear whether a lender/servicer that makes an unsolicited refinancing offer based solely on information that the lender/servicer already has (such as for a streamline refinancing) would be subject to the proposed notice requirement.

Loss Mitigation Error Resolution and Appeals

The CFPB proposes two significant changes to the notice of error provisions:

  • Covered Errors Expanded: The CFPB proposes to clarify that a failure to make an accurate loss mitigation determination on a borrower’s mortgage loan is a covered error, subject to the procedural requirements of § 1024.35.  According to the Bureau, this is merely clarifying its longstanding position, although courts have thought differently.
  • Notice of Appeal Also Covered Error: The Bureau is proposing that a notice of appeal could also be subject to the error resolution procedural requirements and vice versa.  More specifically, when an appeal meets the error resolution procedural requirements of § 1024.35, the proposed rule would require servicers to treat it as a notice of error and comply with the procedural requirements.  Similarly, if a borrower submits a notice of error under § 1024.35 relating to a loss mitigation determination, the notice of error would also constitute an appeal under Regulation X if the borrower submits the notice of error within 14 days after the servicer provides its loss mitigation determination.  When a notice of error is also an appeal, the Proposed Rule would require a servicer to complete the notice of error response requirements in § 1024.35 prior to making a determination about the borrower’s appeal.  So, a servicer would need to comply with the 30-day time period for a notice of appeal even in those instances where the notice of error provisions provides a longer response time.

Early Intervention

In addition to removing language relating to the COVID-19 pandemic, the Proposed Rule would make the following changes to the early intervention requirements in existing § 1024.39:

  • Written Early Intervention Notice Requirements: Under the Proposed Rule, servicers would be required to include the following additional information in the written early intervention notice:
    • The name of the owner or assignee of the borrower’s loan along with a statement providing a brief description of each type of loss mitigation option that is generally available from the investor of the borrower’s loan;
    • A website address and telephone number where the borrower can access a list of all loss mitigation options that may be available from the owner or assignee of the borrower’s loan; and
    • If applicable, a statement informing the borrower how to make a request for loss mitigation assistance.
  • Alternative Early Intervention Requirements for Performing Borrowers in Forbearance: The Proposed Rule would partially exempt servicers from the live contact and written early intervention notice requirements while a borrower is performing pursuant to the terms of a forbearance.
  • Terms of a Forbearance: The Proposed Rule would require that, at least 30 days, but no more than 45 days, before the scheduled end of the forbearance, the servicer establish, or make good faith efforts to establish, live contact with the borrower. During this contact, the servicer would be required to inform the borrower of the date the borrower’s current forbearance is scheduled to end and of the availability of loss mitigation options, if appropriate. In addition, the Proposed Rule would require that the servicer to provide a written notice, that discloses the date the borrower’s current forbearance is scheduled to end as well as the information required by the proposed written early intervention notice, at least 30 days, but no more than 45 days, before the scheduled end of the forbearance. The Proposed Rule also would require that, when a forbearance ends for any reason, a servicer must resume compliance with the early intervention and live contact requirements on the next payment due date following the forbearance end date.

Given the narrow time frame (15 days) within which servicers must establish, or make good faith efforts to establish, live contact with a borrower before the scheduled end of the borrower’s forbearance, this proposed requirement may create operational challenges for servicers.

Language Access

Currently, Regulation X does not contain requirements concerning serving limited English proficient borrowers. In its proposal, the Bureau strongly states that it “expects mortgage servicers to assist borrowers with limited English proficiency.”  To that end, and without clear statutory authority and without providing proposed regulation text, the CFPB proposes the following:

  • Specified Written Communications Required in Spanish: Servicers would be required to accurately (which term is not defined) translate into Spanish the specified written communications, meaning the early intervention notices (but not the website listing loss mitigation options that the CFPB is proposing) and notices whose forbearances will soon end, as well as written notices concerning loss mitigation. A servicer would be required to provide the Spanish and English versions to all borrowers.
  • Translations of Certain Written and Oral Communications in Five Additional Languages: Upon borrower request, servicers would be required to provide accurate translations of the specified written communication in one of the servicer-selected languages. Additionally, upon borrower request, the servicer would be required to make available and establish a connection with interpretative services before or within a reasonable time of establishing connection with the borrower during the specified oral communications to the extent that the borrower’s requested language is one selected by the servicer under the Proposed Rule. The specified oral communications would be the live contact and continuity of contact requirements. The servicer would be required to select five of the most frequently used languages from languages spoken by a significant majority of their non-Spanish speaking borrowers with limited English proficiency.
  • In-language Statements: Servicers would also be required to provide five brief statements accurately translated into the five languages selected by the servicer in the English version of the specified written communications. These statements would identify the availability of translation and interpretative services for the specified written and oral communications in the five languages and how borrowers can request such services.
  • Solicitation through Servicing: Under the Proposed Rule, if a borrower received marketing for their mortgage loan before origination in a language other than English, and the servicer knows or should have known of that marketing, the servicer would be required to make available translations or interpretations for that language even if it is not one of the servicer-selected languages.
  • Accurate translations: Failure to provide accurate translations or interpretations would result in a violation of the proposed requirement and the underling requirement.

Other Servicing Issues

In addition to the principal changes outlined above, the CFPB is seeking comments on a number of other topics that impact borrowers and servicers’ practices, to include credit reporting, zombie mortgages, and successors in interest.

  • Credit Reporting: The CFPB notes in its proposal that credit reporting issues arise with borrowers undergoing loss mitigation, specifically with respect to the accuracy and consistency of the information that servicers furnish. Specifically, the CFPB calls out the examples of:
    • after a borrower and servicer have agreed to a loss mitigation option, and the borrower is performing under the terms of that option, the servicer furnishing information to a credit reporting agency indicating that the borrower is delinquent based on the loan terms in place prior to the loss mitigation option; and
    • a servicer inconsistently using, or failing to use, appropriate industry guidance when reporting tradeline data for borrowers affected by a natural disaster, especially with respect to reporting optional data or reporting data without appropriate context.

In light of these issues, the Bureau is requesting public comment about how it could ensure that servicers furnish accurate and consistent credit reporting information for borrowers in connection.  Specifically, the CFPB is soliciting comment on:

    • What servicer practices may result in the furnishing of inaccurate or inconsistent information about mortgages undergoing loss mitigation review?
    • What protocols or practices do servicers currently use to ensure that mortgages are reported accurately and consistently? Are there specific protocols or practices for ensuring that loans in forbearance, or affected by natural disasters, are reported accurately and consistently?
    • Would it be helpful to have a special code to flag all mortgages undergoing loss mitigation review in tradeline data?
    • What steps should the CFPB take to ensure that servicers furnish accurate and consistent tradeline data?
  • Zombie Mortgages: Over the past year, the CFPB has become increasingly vocal about the issues that “zombie” (i.e., dormant, subordinate-lien) mortgage debt may pose to consumers, opining that certain protections under TILA, RESPA, and the Mortgage Servicing Rules apply to the collection of such debt. To guide further action, the Bureau is requesting public comment on the prevalence of zombie mortgages, whether such mortgages are likely to cause consumer harm in the future, and what action the CFPB could take to protect borrowers.
  • Successors in Interest: The Bureau’s major amendments to the Mortgage Servicing Rules in 2016 included the addition of provisions relating to successors in interest (using the framework established by the Garn-St. Germain Depository Institutions Act of 1982). The CFPB notes in the introduction to the Proposed Rule that it continues to receive feedback on challenges these provisions pose – whether by restricting the ability of successors in interest to take advantage of the protections, or by unintentionally excluding certain categories of consumers from the definition of a successor in interest.  Accordingly, the Bureau is requesting comment, data, and information on the prevalence of issues relating to successors in interest, as well as comment on what additional actions it could take to better protect potential, confirmed, and prospective successors in interest.

Similarly, as part of the Proposed Rule the CFPB is considering updates to its commentary to Regulation X, particularly as it relates to a request for loss mitigation assistance received from a potential successor in interest prior to confirming that individual’s identity and ownership interest in the property, and to the application of the Proposed Rule’s foreclosure procedural safeguards.

Impact on “Small Servicers”

Important to note is that the requirements of the Proposed Rule would not apply to a “small servicer,” meaning an entity that:

  • Services (together with any affiliates) 5,000 or fewer mortgage loans, for all of which the servicer (or an affiliate) is the creditor or assignee;
  • Is a Housing Finance Agency (as defined in 24 C.F.F. § 266.5); or
  • Is a non-profit entity (i.e., a 501(c)(3)) that services 5,000 or fewer mortgage loans on behalf of associated non-profit entities, for all of which the servicer or associated entity is the creditor.

What Do I Need to Do?

Given that this represents the first widespread changes to the Mortgage Servicing Rules in eight years, the Proposed Rule could result in significant changes to industry practices – requiring investment of time and other resources as servicers consider the move toward implementing new requirements.  At the Proposed Rule stage – when the opportunity for public comment remains open – servicers should carefully review the Bureau’s proposal to consider how it would impact servicing practices, and whether they can offer public comment or data that would be beneficial to guiding the CFPB as it moves forward in implementing amendments to Regulation X.  Servicers should consider submitting a comment letter to ensure that the Bureau receives any necessary feedback on the Proposed Rule and its invitations for data and other information.

 

Large Nonbank Ginnie Mae Issuers: Ginnie Mae Wants Your Recovery Plans

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What Happened?

Following the release of the Financial Stability Oversight Council (FSOC) Report on Nonbank Mortgage Servicing, Ginnie Mae announced in APM 24-08 that certain large nonbank Ginnie Mae Issuers will now be required to prepare and submit recovery plans to address the event of a material adverse change in business operations or failure.  Such issuers will also be required to attest to the content in the recovery plans every to two years.

Why Does it Matter?

To understand why it matters, it is important to consider some interesting statistics.  According to the recent report of FSOC (an interagency panel of regulators commissioned by the Dodd Frank Act to monitor financial stability) on nonbank mortgage servicing, the share of loans serviced by nonbank mortgage servicers for Ginnie Mae rose from 34 percent in 2014 to 83 percent in 2023.  For the last several annual reports, FSOC has highlighted the vulnerabilities of nonbank mortgage companies.  In its most recent report specific to nonbank mortgage servicing, FSOC has indicated that such concerns are becoming “more acute” because of government’s increasing exposure to nonbank mortgage companies, the strain on mortgage origination due to the high interest rate environment, and the fact that “vulnerabilities in mortgage origination can bleed into mortgage servicing.”  FSOC is particularly concerned with the ability of nonbank mortgage companies to carry out their responsibilities in times of stress and provides, in relevant part, that “[t]he federal government has an interest in addressing servicing risks due to . . . the direct responsibility for Ginnie Mae’s guarantee to bond investors.” FSOC encourages Congress to provide Ginnie Mae more tools to manage counterparty risk.  If and until that occurs, it should come as no surprise that Ginnie Mae is utilizing its existing tools for managing the failure of servicers (such as facilitating servicing transfers), by requiring its nonbank Issuers to document how they would proceed if an adverse event were to occur.

What Do I Need to Do?

First, it is important to determine if your company is subject to these new obligations.  Generally speaking, nonbank Ginnie Mae Issuers whose portfolios equal or exceed a remaining principal balance of $50 billion at the end of December 31, 2024 will be required to prepare and submit recovery plans to Ginnie Mae by no later than June 30, 2025. Of note, the requirements do not apply to bank holding companies, banks, wholly owned subsidiaries of bank holding companies that are consolidated for purposes of regulatory oversight, thrifts, savings and loan holding companies, and credit unions.

Second, it is important to start developing a plan which, at a high level, must include:

  • Business Operations Description: For business operations relevant to the Ginnie Mae MBS Program (i.e., single-family, multi-family, manufactured housing and HECM), the plan must provide a detailed description of the company’s corporate structure, identify the interconnections and interdependencies among the company and its key stakeholders, related financial entities, and critical operations of the core business. The plan must also identify major counterparties, to whom the company had pledged MBS collateral, and the locations of its servicing operations.
  • Information Systems: In the event that Ginnie Mae must complete a servicing transfer, it is requiring companies to provide a detailed inventory and description of all key management information systems and applications in servicing Ginnie Mae loans along with a mapping of such systems and a description of how ancillary systems feed into the core servicing system.
  • Recovery Planning: Companies will need to consider and respond to a series of questions including but not limited to, providing a general framework for the order in which the company’s assets would be liquidated in the event of a material adverse event, identifying whether funding has been set aside to continue operations for a certain period. Ginnie Mae also requires how intercompany services would continue under such circumstances and to provide excerpts of its business continuity plan relevant to this recovery planning exercise.
  • Current Documentation: Ginnie Mae requires the plan to identify senior management official who will serve as a point of contact and a vendor directory for material vendors.

While the deadline for submitting recovery plans to Ginnie Mae is June 30, 2025, it is not too early to start gathering all the stakeholders, calendaring the deadline, and starting the framework for a thoughtful plan.

FHA and VA Announce New Loss Mitigation Options

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What Happened?

Both the FHA and VA have established new loss mitigation options to provide payment reduction to delinquent borrowers.  On February 21, 2024, the Federal Housing Administration (“FHA”) within the U.S. Department of Housing and Urban Development (“HUD”) issued a new mortgagee letter (ML 2024-02) which, among other things, establishes the Payment Supplement loss mitigation option for all FHA-insured Title II Single-Family forward mortgage loans (the “Payment Supplement”) and also extends FHA’s COVID-19 Recovery Options through April 30, 2025. The provisions of ML 2024-02 may be implemented starting May 1, 2024 but must be implemented no later than January 1, 2025. The Payment Supplement will bring a borrower’s mortgage current and temporarily reduce their monthly mortgage payment without requiring a modification.

And, on April 10, 2024 , the U.S. Department of Veterans Affairs (“VA”) announced the release of its much-anticipated Veterans Affairs Servicing Purchase (“VASP”) program, which is a new, last-resort tool in the VA’s suite of home retention options for eligible veterans, active-duty servicemembers, and surviving spouses with VA-guaranteed home loans who are experiencing severe financial hardship. The VASP program will take effect beginning on May 31, 2024.

Why Does it Matter?

FHA’s Payment Supplement

ML 2024-02 establishes the Payment Supplement as a new loss mitigation option to be added to FHA’s current loss mitigation waterfall. Specifically, if a servicer is unable to achieve the target payment reduction under FHA’s current COVID-19 Recovery Modification option, the mortgage must review the borrower for the Payment Supplement. The Payment Supplement is a loss mitigation option that utilizes Partial Claim funds to bring a delinquent mortgage current and couples it with the subsequent provision of a Monthly Principal Reduction (“MoPR”) that is applied toward the borrower’s principal due each month for a period of 36 months to provide payment relief without having to permanently modify the borrower’s mortgage loan. The maximum MoPR is the lesser of a 25 percent principal and interest reduction for 36 months, or the principal portion of the monthly mortgage payment as of the date the Payment Supplement period begins.

The Payment Supplement will temporarily reduce an eligible borrower’s monthly mortgage payment for a period of three years, without requiring modification of the borrower’s mortgage loan. At the end of the three-year period, the borrower will be responsible for resuming payment of the full monthly principal and interest amount. A borrower is not eligible for a new Payment Supplement until 36 months after the date the borrower previously executed Payment Supplement documents.

To be eligible for the Payment Supplement, servicers must ensure that:

  • that at least three or more full monthly payments are due and unpaid;
  • the mortgage is a fixed rate mortgage;
  • sufficient Partial Claim funds are available to bring the mortgage current and to fund the MoPR;
  • the borrower meets the requirements for loss mitigation during bankruptcy proceedings set forth in Section III.A.2.i.viii of FHA Single-Family Handbook 4000.1;
  • the principal portion of the borrower’s first monthly mortgage payment after the mortgage is brought current will be greater than or equal to a “Minimum MoPR” which must be equal to or greater than 5 percent of the principal and interest portion of the borrower’s monthly mortgage payment, and may not be less than $20.00 per month, as of the date the Payment Supplement period begins;
  • the MoPR does not exceed the lesser of a 25% principal and interest reduction for three years or the principal portion of the monthly mortgage payment as of the date the Payment Supplement period begins; and
  • the borrower indicates they have the ability to make their portion of the monthly mortgage payment after the MoPR is applied (servicers are not required to obtain income documentation from the borrower).

Servicers are responsible for making monthly disbursements of the MoPR from a Payment Supplement Account, which is a separate, non-interest bearing, insured custodial account that holds the balance of the funds paid by FHA for the purpose of implementing the Payment Supplement, and which must segregated from funds associated with the FHA-insured mortgage, including escrow funds, and any funds held in accounts restricted by agreements with Ginnie Mae. Neither the servicer nor the borrower has any discretion in how the Payment Supplement funds are used or applied.

Borrowers will be required to execute a non-interest-bearing Note, Subordinate Mortgage, and a Payment Supplement Agreement, which is a rider to and is incorporated by reference into the Payment Supplement promissory Note, given in favor of HUD, to secure the Partial Claim funds utilized and the amount of the MoPR applied toward the borrower’s principal during the 36-month period. The Note and Subordinate Mortgage do not require repayment until maturity of the mortgage, sale or transfer of the property, payoff of the mortgage, or termination of FHA insurance on the mortgage.

After the Payment Supplement is finalized, servicers must send borrowers written disclosures annually and 60-90 days before the expiration of the Payment Supplement period. ML 2024-02 also sets forth servicers’ obligations if a borrower defaults during the Payment Supplement period.

Contemporaneous with the publication of ML 2024-02, HUD published the following model documents necessary to complete a Payment Supplement: (1) Payment Supplement Promissory Note and Security Instrument, (2) Payment Supplement Agreement Rider, (3) Annual Payment Supplement Disclosure, and (4) Final Payment Supplement Disclosure. However, servicers will need to ensure these model documents comply with applicable state law.

Given that the Payment Supplement only provides temporary relief, it is likely that borrowers will experience “payment shock” at the end of the Payment Supplement period. HUD has indicated that it is aware of this risk and intends to assess this issue on an ongoing basis as borrowers begin to reach the end of their Payment Supplement period to help inform future updates to FHA loss mitigation.

VA’s VASP Program

Effective May 31, 2024, VASP will be added as the final home retention option on the VA Home Retention Waterfall where the VA may elect to purchase a loan from the servicer under an expediated basis after the servicer evaluates the loans and certain criteria are met.  Unlike a traditional VA Purchase, a trial payment period may also be required before VA purchases the loan.

Importantly, a borrower cannot elect to use the VASP program. Rather, servicers must follow the VA’s home retention waterfall to determine the most appropriate home retention option. If the waterfall leads to VASP, then the servicer must determine if certain qualifying loan criteria are met, including:

  • the loan is between 3 to 60-months delinquent on the date the servicer submits to VALERI either the VASP TPP event or VASP with No TPP event;
  • the property is owner-occupied;
  • none of the obligors are in active bankruptcy at the time of the applicable VASP event;
  • the reason for default has been resolved and the borrower has indicated they can resume scheduled payments;
  • the loan is in first-lien position and is not otherwise encumbered by any liens or judgments that would jeopardize VA’s first-lien position;
  • the borrower has made at least six monthly payments on the loan since origination;
  • the borrower is the property’s current legal owner of record; and
  • the borrower and all other obligors agree to the terms of the VASP modification.

After determining that a loan qualifies for VASP, the servicer must determine the appropriate terms that may be offered to the borrower. Until further notice, all VASP loans will be modified at a fixed rate of 2.5% interest, with either a 360-month term or, if this does not realize at least a 20% reduction in the principal and interest payment, a 480-month term. Borrowers who cannot afford to resume monthly payments at the 480-month term are to be evaluated for and offered any appropriate alternatives to foreclosure. A three-payment trial payment plan will be required if (i) the loans is 24 months or more delinquent, or (ii) the principal and interest portion of the monthly payment is not reduced by at least 20%. Borrowers who fail three trial payment plans during a single default episode are no longer eligible for VASP.

Once VA has certified the VASP payment, servicers have 60 days to complete a standard transfer to VA’s contractor, after which the servicer must report the transfer event in VALERI.

Importantly, servicers that fail to properly evaluate the loan in accordance with VA’s requirements may be subject to enforcement action and/or refusal by VA to either temporarily or permanently guarantee or insure any loans made by such servicer and may bar such servicer from servicing or acquiring guaranteed loans. The risk of enforcement is exacerbated by the VASP program’s technical requirements, which may cause operational challenges for servicers.

What Do I Need to Do?

FHA’s Payment Supplement and VA’s VASP programs both have relatively short implementation timelines but will likely require substantial effort to operationalize given their technical requirements.  Therefore, servicers of FHA-insured and/or VA-guaranteed mortgage loans should begin reviewing the requirements of both programs now, as applicable, and ensure that they make any necessary updates to policies, procedures, systems, training, and other controls to ensure compliance with these programs once they take effect. Alston & Bird’s Consumer Financial Services team is well-versed in these programs and is happy to assist with such a review.

Fannie Mae Issues Guidance in Response to New York Foreclosure Abuse Prevention Act

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What Happened?

On March 13, 2024, Fannie Mae issued Servicing Guide Announcement (SVC-2024-02) (the “Announcement”), which announced, among other things, updates to Fannie Mae’s Loan Modification Agreement (Form 3179), with additional instructions in response to the New York Foreclosure Abuse Prevention Act (“FAPA”). Specifically, for all Loan Modification Agreements (Form 3179) sent to a borrower for signature on or after July 1, 2024, servicers are required to amend the modification agreement to insert the following as new paragraphs 5(e) and (f) for a mortgage loan secured by a property in New York:

(e) Borrower promises to pay the debt evidenced by the Note and Security Instrument.  Further, Borrower acknowledges and agrees that any election by Lender to accelerate the debt evidenced by the Note and Security Instrument and the requirement by Lender of immediate payment in full thereunder is revoked upon the first payment made under the Agreement; and, the Note and Security Instrument, as amended by the Agreement, are returned to installment status and the obligations under the Note and Security Instrument remain fully effective as if no acceleration had occurred.

(f) Borrower further agrees to execute or cause to be executed by counsel, if applicable, a stipulation (to be filed with the court in the foreclosure action), that the Lender’s election to accelerate the debt evidenced by the Note and Security Instrument and requirement of immediate payment in full thereunder is revoked upon the first payment made under the Agreement and the debt evidenced by the Note and Security Instrument is deaccelerated at that time pursuant to New York General Obligations Law § 17-105, or other applicable law.

Fannie Mae encourages servicers to implement these changes immediately but requires that servicers do so for all modification agreements sent to the borrower for signature on and after July 1, 2024. Freddie Mac does not yet appear to have issued similar guidance.

Why Is It Important?

As we previously discussed in a prior blog post, FAPA reversed judicial precedent that permitted a lender, after default, to unilaterally undo the acceleration of a mortgage and stop the running of the statute of limitations in a foreclosure action through voluntary dismissal, discontinuance of foreclosure actions, or de-acceleration letters. For more than a year following FAPA’s enactment, the mortgage industry has grappled with how to address certain of the risks created by FAPA, including whether certain language could be adopted and incorporated into servicers’ loss mitigation documents to mitigate FAPA risk.

Fannie Mae’s Announcement is significant because it represents the first piece of guidance from a federal agency or government-sponsored enterprise (i.e., Fannie Mae or Freddie Mac) that provides some clarity as to what language may be appropriate to mitigate certain of the risks engendered by the New York FAPA.

What Do I Need to Do?

Servicers of Fannie Mae-backed mortgage loans (secured by property in New York) should evaluate their loss mitigation processes and make appropriate updates to ensure compliance with the Announcement.  Servicers should also continue to monitor for additional guidance or caselaw as this issue remains in flux.

CFPB and FTC Amicus Brief Signals Stance on “Pay-to-Pay” Fees under FDCPA

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What Happened?

On February 27, the Consumer Finance Protection Bureau (CFPB) and the Federal Trade Commission (FTC) filed an amicus brief in the 11th Circuit case Glover and Booze v. Ocwen Loan Servicing, LLC arguing that certain convenience fees charged by mortgage servicer debt collectors are prohibited by the Fair Debt Collection Practices Act (FDCPA).  This brief comes on the heels of an amicus brief Alston & Bird LLP filed on behalf of the Mortgage Bankers Association (MBA).  In its brief, the MBA urged the 11th Circuit to uphold the legality of the fees at issue.

While litigation surrounding convenience fees has spiked in recent years, there is no consensus on whether convenience fees violate the FDCPA.  Federal courts split on the issue, as there is little guidance at the circuit court level, and the issue before the 11th Circuit is one of first impression.  Consequently, the 11th Circuit’s ruling could significantly impact what fees a debt collector is permitted to charge, both within that circuit and nationwide.

Why is it Important?

Convenience fees or what the agencies refer to as “pay-to-pay” fees are the fees charged by servicers to borrowers for the use of expedited payment methods like paying online or over the phone.  Borrowers have free alternative payment methods available (e.g., mailing a check) but choose to pay for the convenience of a faster payment method.

Section 1692f(1) of the FDCPA provides that a “debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt,” including the “collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.”  The CFPB and FTC argues that Section 1692f(1)’s prohibition extends to the collection of pay-to-pay fees by debt collectors unless such fees are expressly authorized by the agreement creating the debt or affirmatively authorized by law.

First, the agencies contend that pay-to-pay fees fit squarely with the provision’s prohibition on collecting “any amount” in connection with a debt and that charging this fee constitutes a “collection” under the FDCPA.  Specifically, the agencies attempt to counter Ocwen’s argument that the fees in question are not “amounts” covered by Section 1692f(1) because the provision is limited to amounts “incidental to” the underlying debt. They argue that fees need not be “incidental to” the debt in order to fall within the scope of Section 1692f(1). In making this point, the agencies claim the term “including” as used is the provision’s parenthetical suggests that the list of examples is not an exhaustive list of all the “amounts” covered by the provision.  Further, the agencies attempt to counter Ocwen’s argument that a “collection” under the FDCPA refers only to the demand for payment of an amount owed (i.e., a debt). They argue that Ocwen’s understanding of “collects” is contrary to the plain meaning of the word; rather, the scope of Section 1692f(1) is much broader and encompasses collection of any amount , not just those which are owed.

Next, focusing on the FDCPA’s exception for fees “permitted by law,” the agencies contend that a fee is not permitted by law if it is authorized by a valid contract (that implicitly authorizes the fee as a matter of state common law). The agencies suggest if such fees could be authorized by any valid agreement, the first category of collectable fees defined by Section 1692(f)(1)—those “expressly authorized by the agreement creating the debt”—would be superfluous. Lastly, the Agencies argue neither the Electronic Funds Transfer Act nor the Truth in Lending Act – the two federal laws Ocwen relies on in its argument – affirmatively authorizes pay-to-pay fees.

What Do You Need to Do?

Stay tuned. The 11th Circuit has jurisdiction over federal cases originating in Alabama, Florida, and Georgia. Its ruling is likely to have a significant impact on whether debt collectors may charge convenience fees to borrowers in those states, and it could be cited as persuasive precedent in courts nationwide.