At the beginning of the year, Acting Director Dave Ujieo of the Consumer Financial Protection Bureau (CFPB) stated the agency would shift its focus to a more assertive role regarding enforcing regulations protecting consumers. Because of this shift, one of the chief enforcement priorities would be to emphasize protection and compliance with regulations for borrowers impacted by the COVID-19 pandemic. In addition, now that we are in the middle of 2021, the CFPB has published a report analyzing data on mortgage borrowers most affected by the pandemic and proposed a collection of rules extending protections at least until the middle of next year. Because of these publications, banks should prepare for a more significant regulatory emphasis on COVID-19 protections and fair lending practices.
According to the CFPB’s Special Issue brief titled Characteristics of Mortgage Borrowers, released May of this year, the COVID-19 pandemic’s financial impact on banks and mortgage customers has not been this vast and deep since the Great Recession of 2010.
Because of the pandemic’s economic reach, we have seen an increase in the availability of forbearance programs that temporarily allow borrowers to stop making payments even when delinquent. The CFPB analyzed the data and discovered that Black and Hispanic borrowers make up a significant percentage of all mortgage borrowers at 18%. However, this same group of borrowers makes up an even more substantial percentage of forbearance at 33% or delinquent at 27%. The CFPB also found that loans with a loan-to-value (LTV) ratio above 60% were more common for borrowers in forbearance or delinquent than those current with their mortgages. Additionally, the CFPB established those with an LTV ratio above 95% were most susceptible to defaulting on their mortgage.
The data shows that loans in forbearance or delinquent were more likely to be single-borrower loans with a sizable amount being delinquent for at least 30 to 60 days. In crystallizing these findings, forbearance and delinquency are more common for Black or Hispanic borrowers, have a higher LTV, or have difficulty paying other obligations. Acting Director Uejio stated, “Communities of color have been hit hard by the pandemic, and the latest data show that many borrowers are still hurting. The CFPB will continue to seek and actively respond to developments in the market, doing everything in our power to help families stay in their homes.”
This runs true with the CFPB’s priorities earlier this year in taking a more assertive role in enforcing consumer protections due to COVID-19 and taking steps to ensure racial equality in financial services.
In response to the hardships mortgage borrowers are experiencing due to the financial implications of this pandemic, the CFPB has issued several proposed amendments to the Mortgage Servicing Rules and provided a tentative effective date of Aug. 31, 2021. The notice of proposed rulemaking (NPRM) adds a general definition for “COVID-19-related hardship” that matches the CARES Act.
The proposition in the context of early intervention requires servicers to ask whether a borrower not in forbearance at the time of live contact is experiencing a COVID-19 related hardship. If the borrower indicates in the affirmative, the servicer would be required to list and describe available forbearance programs and explain how the borrower can apply for them.
The NPRM adds a temporary COVID-19 pre-foreclosure review period in which a servicer cannot make the first notice or filing for foreclosure.
Loss Mitigation
The NPRM also contains amendments to the loss mitigation procedures. Current rules require servicers to take reasonable due diligence in obtaining a complete application for loss mitigation. This rule specifically focuses on what would constitute due diligence for borrowers in short-term forbearance due to a COVID-19-related hardship. For example, suppose the program was offered in an applicable circumstance and was based on an incomplete application. In that case, the servicer must contact and determine if the borrower wants to complete their application and proceed with a total loss mitigation evaluation at least 30 days before the short-term program ends. When evaluating an application, the proposed rule would now allow servicers to offer certain modifications based on an incomplete application if specific criteria are met. This criterion includes the loan modification extending the loan length by no more than 40 years, and the borrower’s preexisting delinquency would be resolved by accepting the loan modification.
Foreclosure Implications
Another facet of the loss mitigation procedures impacted by the CFPB’s NPRM is foreclosures. While certain agencies and Government-Sponsored Enterprises (GSEs) have all placed their moratoria on foreclosure, the NPRM’s effect on foreclosures is not limited only to the secondary market or federally backed loans. The NPRM adds a temporary COVID-19 pre-foreclosure review period in which a servicer cannot make the first notice or filing for foreclosure. The current rule states a servicer is prohibited from making this notice or filing unless the borrower is more than 120 days delinquent. This new rule proposes to add an overarching prohibition against making the notice or filing for foreclosure because of any delinquency until after Dec. 31, 2021. Meaning, if this rule becomes final, foreclosures may not occur until after the year is over, providing extra protection for borrowers impacted by the pandemic.
If they have not already done so, banks should now take steps in preparing to provide customers impacted by COVID-19 more protections as well as comply with any regulations requiring them to do so. Further, true to the CFPB’s direction, banks should also be prepared from an examination scrutiny standpoint during the pandemic to emphasize fair lending. The year is already over halfway over, and it is readily apparent that the financial impact and consumer relief may carry on to the next.
Tim Dominguez serves as Associate General Counsel for Compliance Alliance, joining C/A after graduating from the University of Houston Law Center. During law school, he worked as an intern within the legal department of Frost Bank in San Antonio, TX. He also holds a Bachelor of Science in Communication Studies from The University of Texas at Austin. Before law school, Tim worked various jobs within the Texas state government, including the Texas Senate and the Texas Legislative Council. As one of our hotline advisors, Tim guides C/A members on a wide variety of regulatory and compliance issues, in addition to writing articles for our publications.
