As COVID-19 infections continue to decline in the United States,
Americans slowly are coming out of isolation and returning to a
sense of normalcy—a return to on-site work and school, a
return to indoor dining, a return to travel, a return to in-person
visits with friends and loved ones, and a return to sports arenas,
ballparks, and arts venues, among other types of returns. But a
return to normalcy is not a positive for all. A case in point:
There are many home loan mortgagors for whom forbearance from
their regularly scheduled monthly mortgage payments soon will come
to end, along with an end to the moratorium on initiations and
continuations of foreclosure.
Will a return to normalcy for delinquent mortgagors necessarily
mean a rapid return to home foreclosures? That is the question that
the Consumer Financial Protection Bureau (the “CFPB”) is
trying to answer in the negative in its proposed amendments to the
default servicing regulations that are part of Regulation X under
the Real Estate Settlement Procedures Act (“RESPA”); the
comment period on the proposed amendments (the
“Proposal”) closed on May 10, 2021, with a proposed
effective date of August 31, 2021.1 This laudable public policy goal,
however, raises interesting questions about the CFPB’s legal
authority to impose additional temporary limitations on a loan
holder’s right to pursue foreclosure against delinquent
mortgagors. This Legal Update synthesizes certain of the comments
to the Proposal regarding an attempt to increase the time before a
loan holder or servicer may initiate a foreclosure.
BACKGROUND
The context is well known to those in the residential mortgage
industry and related stakeholders. It has been over a year since
Congress enacted the CARES Act, which, among lots of other
provisions, gave mortgagors during the “covered period”
the right to receive forbearance for up to a year on their
regularly scheduled home mortgage payments if they attested to a
financial hardship directly or indirectly caused by COVID-19. The
law also imposed a moratorium on home foreclosures and evictions
during the “covered period.” The CARES Act only applied
to loans that were sold to Fannie Mae or Freddie Mac, insured by
the Federal Housing Administration or guaranteed by the Department
of Veterans Affairs or the Department of Agriculture—labeled
“federally-backed mortgage loans”—but various
states enacted somewhat similar provisions.
While the CARES Act failed to define the term “covered
period,” the relevant federal entities, either at their own
initiative or as a result of a subsequent executive order by
President Biden, extended the time limits on forbearance and the
foreclosure/eviction moratoria. But the time limits are rapidly
approaching. As the CFPB noted in its Proposal, “…the
foreclosure moratoria that apply to most mortgages are scheduled to
end in late June 2021. In addition, most borrowers with loans in
forbearance programs as of the publication of this proposed rule
are expected to reach the maximum term of 18 months in forbearance
available for federally-backed mortgage loans between September and
November of this year and will likely be required to exit their
forbearance program at that time.” And that is just for
federally-backed mortgage loans, although the extension of
forbearance from 12 months to 18 months is limited to certain
borrowers. Forbearance and foreclosure relief voluntarily provided
by private investors or required under applicable state law also
will soon sunset or may already have ended.
Unless they have been making regularly scheduled monthly
mortgage payments notwithstanding their award of forbearance,
mortgagors generally are delinquent for the number of months they
were in forbearance and even more if they were delinquent before
the commencement of forbearance, because they had not paid the
amounts due under the terms of their loan documents. This means
that a graduation from forbearance likely results in a seriously
delinquent borrower who may not be eligible for home retention loss
mitigation options and, as a result, risks the loss of the
borrower’s home.
EXISTING REGULATION X
The existing Regulation X prohibits a precipitous push to
foreclosure. Unlike the CARES Act, the applicability of Regulation
X is not limited to “federally-backed mortgage loans.” It
does not require a residential mortgage loan holder or servicer to
offer a borrower any loss mitigation at all or any particular types
or forms of loss mitigation. But it requires servicers of
residential mortgage loans to follow detailed procedures to ensure
that the borrower is informed by the servicer of available loss
mitigation options, given the opportunity to apply and be timely
considered for such options, appeal the denial of any loan
modification option, and is not subject to a dual track of
foreclosure while the borrower’s application for loss
mitigation is being evaluated. To afford sufficient time for a
borrower to be evaluated for available alternatives to foreclosure,
Regulation X presently prohibits a servicer, including a small
servicer, from making the first notice or filing required under
applicable law for any judicial or non-judicial foreclosure process
unless: (1) the mortgage loan is more than 120 days delinquent; (2)
the foreclosure is based on a borrower’s violation of a
due-on-sale clause; or (3) the servicer is joining the foreclosure
of a superior or subordinate lienholder.2 This is referred to
as the required “pre-foreclosure review.” Of course,
borrowers exiting a COVID-19 forbearance may be well over 120-days
delinquent. In other words, the pre-foreclosure review period under
existing regulations already would have expired.
PROPOSED AMENDMENT TO REGULATION X RELATING TO SPECIAL
PRE-FORECLOSURE REVIEW
As an overlay or supplement to the existing requirement for a
120-day pre-foreclosure review, the Proposal calls for a temporary
COVID-19 emergency special pre-foreclosure review period that would
generally prohibit servicers from making the first notice or filing
required by applicable law for any judicial or non-judicial
foreclosure process until after December 31, 2021. The CFPB asked
commentators to consider two potential exceptions. The first
exception would permit a servicer to make the first notice or
filing before December 31, 2021, if the servicer has completed a
loss mitigation review of the borrower and the borrower is not
eligible for any non-foreclosure option. The second exception would
permit a servicer to make the first notice or filing before
December 31, 2021, if the servicer has made certain efforts to
contact the borrower and the borrower has not responded to the
servicer’s outreach. In addition, while not an explicit
exemption, because the Proposal only applies to loans secured by
the borrower’s principal residence, loans secured by abandoned
properties may not be subject to this extension of the
pre-foreclosure review period, depending on the facts and
applicable state law.3 Moreover, unlike the existing
pre-foreclosure review period under Regulation X, “small
servicers” would be exempt from the proposed special
pre-foreclosure review period.
PUBLIC COMMENTS TO THE PROPOSAL RELATING TO THE SPECIAL
PRE-FORECLOSURE REVIEW
The relatively short duration of the extension of the
pre-foreclosure review coupled with the potential exceptions render
the Proposal a relatively modest step to forestall foreclosures,
and the public comments the CFPB received in response to the
Proposal reflect that conclusion. The comments generally break down
into four categories: (i) is the special pre-foreclosure review
period practically necessary or counterproductive; (ii) if adopted,
should the special pre-foreclosure review period be based on a
specific calendar date, December 31, 2021, for all borrowers or
instead on a specific number of days following the end of
forbearance for any particular borrower; (iii) should the
exceptions be expanded and clarified; and (iv) does the CFPB have
the legal authority to impose the special pre-foreclosure review
period.
Is the Special Pre-Foreclosure Review Period Practically
Necessary or Counterproductive?
Perhaps because of the potential availability of broad
exceptions to the special pre-foreclosure review period, public
comments focused less on the imposition of such an extended review
period and more on what it should look like. The Housing Policy
Council (“HPC”) and the Bank Policy Institute
(“BPI”), however, together expressed concern in their
comment letter “…that the brief time when the review period
will be effective suggests that the need for this regulatory change
is limited and the proposal is unnecessarily complicated.”
They expressed their belief that the existing protections afforded
borrowers under the loss mitigation provisions of Regulation X,
along with standard state foreclosure proceedings, are sufficient
to achieve the CFPB’s general objective to provide every
borrower with ample opportunity to avoid foreclosure when a
borrower’s circumstances would permit such avoidance.
The Urban Institute (“UI”) in its comment letter makes
a more practical point—namely, that the existing procedures
for evaluating mortgagors for alternatives to foreclosure, whether
by regulation or investor policies, “…require[] multiple
rounds of communication and borrower notice and take several weeks
or months.” This could take the foreclosure decision beyond
December 31, 2021. And for those borrowers who were delinquent
pre-pandemic and already found to be ineligible for loss mitigation
alternatives to foreclosure, additional time is unlikely to change
the result and “[d]elaying the inevitable would serve neither
the borrower nor the neighborhood in which the home is
located.”
Moreover, UI highlights the fact that the current economic
environment is different than the economic environment during the
last housing crisis that featured a crashing real estate market
with a substantial number of underwater loans. In light of the
substantial home equity experienced by most borrowers resulting
from strong home appreciation, “[m]ost uncurable loans,
whether agency or non-agency, will be resolved via a market
sale.” The foreclosure route, as a result, will be much more
limited. According to UI, “[t]his would render the proposed
prohibition largely redundant-and counterproductive-as properties
would be held back from the market at a time when supply is
tight.”
The HPC/BPI comment letter identifies another counterproductive
result of the proposed special pre-foreclosure review period. As
the CFPB acknowledged in the preamble to its Proposal, the letter
notes the notification of the foreclosure process “is the
impetus to engage with the servicer” for some borrowers and
“[d]elaying that notice may exacerbate this problem.”
If Adopted, Should the Special Pre-Foreclosure Review Period
Be Based on a Specific Calendar Date or a Specific Number of Days
Following the End of Forbearance?
While the UI comment letter asserts that a special
pre-foreclosure review period ending at the end of this calendar
year does not offer protection for those whose forbearance ends
after that date, it did not suggest either an extension of that
deadline or the replacement with a fixed number of days. Consumer
advocates see the same problem and, not surprisingly, propose a
different solution. The Center for Responsible Lending
(“CRL”) and National Community Stabilization Trust
(“NCST”) in their joint comment letter opine that
“…a rule that pauses foreclosures until December 31 would do
nothing for those whose forbearance runs through or beyond that
cutoff and who also face a risk of an avoidable home loss.”
They prefer a 120-day grace period at the end of a borrower’s
forbearance period to a “one-size-fits-all pre-foreclosure
review period.” Aside from wanting to protect borrowers who do
not come out of forbearance until next year, the CRL/NCST letter
expresses concern that “…servicer capacity to engage in
effective loss mitigation will be strained with a large number of
foreclosures filed at the beginning of 2022.”
The National Consumer Law Center (the “NCLC”)
articulates the same position as the CRL and NCST in even in more
detail. It supports a 120-day grace period at the end of a
borrower’s forbearance period instead of a December 31, 2021,
deadline. Its long list of objections to the December 31st proposal
includes the “immense pressures on the entire foreclosure
system if hundreds of thousands of foreclosures begin in January
2022,” the lack of protection for those whose forbearance ends
after December 31, 2021, and the arguable incentives to servicers
to begin foreclosures before the new rule takes effect given that
the effective date will not occur for several more months.
The HPC/BPI letter takes a different tack. While it does not
support a special pre-foreclosure review period in the first place,
it recommends a shorter 60-day period if the CFPB elects to
establish such a period.
Should the Exceptions to the Special Pre-Foreclosure Period
Be Expanded and Clarified?
As noted above, the Proposal asks commenters to consider two
possible exemptions to the special pre-foreclosure review period,
although the Proposal does not include explicit language for the
potential exceptions. The first exception would permit a servicer
to make the first foreclosure notice or filing before December 31,
2021, if the servicer has completed a loss mitigation review of the
borrower and the borrower is not eligible for any non-foreclosure
option. The second exception would permit a servicer to make the
first foreclosure notice or filing before December 31, 2021, if the
servicer has made certain efforts to contact the borrower and the
borrower has not responded to the servicer’s outreach. Not
surprisingly, the major lender trade associations support both
exceptions, albeit with clarification.
The possible exemption for completed loss mitigation reviews
raises the question of when the review must have been completed.
For example, the CFPB questioned whether the exemption only should
be available for reviews after the effective date of the final
rule. Both the Mortgage Bankers Association (“MBA”) and
the American Bankers Association (“ABA”) in their
respective comment letters advocate that the exemption should apply
to loss mitigation evaluations completed prior to the effective
date of the final rule, while the HPC comment letter provides that
the exemption should include evaluations made within the six months
prior to the effective date to account for the time frame (after
March 1, 2021) when the various COVID-19 loss mitigation government
programs currently available were put into effect. The MBA and ABA
letters also recommend that this exemption be expanded to include
borrowers who have declined the proposed loss mitigation options or
have failed to perform on the selected loss mitigation option.
The NCLC rejects the exemption for previously completed loss
mitigation reviews, arguing that “…evidence from the Great
Recession and from government note sales, as well as from current
borrower experiences, demonstrates that loss mitigation reviews are
often incomplete or inaccurate.” It believes that borrowers
may not realize that they previously have been denied a loss
mitigation option and mistakenly believe that they are safe until
the end of the calendar year. Perhaps more importantly, the NCLC
comment letter agrees with the concern expressed by the CFPB in the
Proposal that prior evaluations may have been completed prior to
the borrower’s recovery from financial hardship and thus do not
account for the borrower’s present financial circumstances.
The possible exemption based on unresponsive borrowers generated
many requests for specificity regarding the scope of the
“reasonable diligence” that the servicer must take before
concluding a borrower is unresponsive. The HPC supports the
CFPB’s recommendation to use the definition of “reasonable
diligence” in the Home Affordable Modification Program
(“HAMP”) and further recommends that the written notice
requirements may be satisfied by using notices already required
under Regulation X. The CRL/NCST also support the incorporation of
HAMP’s definition of “reasonable diligence,” but they
proposed to condition the availability of this exemption on the
adoption of another component of the CFPB’s
proposal—namely, that the servicer, after exercising
reasonable diligence in trying to reach the borrower, sends a
“streamline payment modification offer or solicitation”
to the borrower with a deadline for a response.
But the CFPB’s Proposal simply would permit a servicer to
offer a “stream line payment modification” without a
complete loss mitigation application. The CRL/NCST approach would
convert a voluntary process available to servicers into a condition
precedent to the availability of the exemption from the special
pre-foreclosure review based on an unresponsive borrower. The CRL
takes the same approach, claiming that an exemption based solely on
the inability of the servicer to establish contact with the
borrower “…would incentivize less rigorous, ineffective
contact attempts.”
Two additional exemptions from the special pre-foreclosure
review should be added according to some of the comment letters.
First, some of the trade associations representing servicers want
to exclude borrowers whose loans were delinquent prior to the onset
of COVID-19. For example, the HPC/BPI letter requests that the CFPB
clarify that the foreclosure review period does not apply to
foreclosures that were initiated prior to the final rule’s
effective date, regardless of whether state law requires refilling
or restarting the foreclosure. This is not really a new exemption,
given that the requirement for a special pre-foreclosure review
applies to the first notice or filing required by applicable law;
by its terms, this requirement would not apply to loans where the
servicer made this filing prior to the commencement of the
foreclosure moratorium, but the trades want to be sure that a
required refiling would not trigger the special pre-foreclosure
review. Interestingly, neither the CRL/NCST nor the NCLC letters
comment on this issue. The ABA calls for an explicit exemption for
borrowers who were 120-days delinquent on March 1, 2020, and, as of
September 1, 2021, remain more than 120-days delinquent. Rather
than seeking a new exemption or clarification of the Proposal, the
MBA would include within the “unresponsive borrower”
exemption borrowers who were seriously delinquent (over 120 days)
prior to March 1, 2020, and who have not requested assistance or
responded to servicer contact attempts made in accordance with
Regulation X.
An explicit exemption for abandoned properties also is a request
under some of the comment letters. As noted above, the Proposal
only applies to loans secured by the borrower’s principal
residence, which based on the facts and circumstances may result in
the exclusion of abandoned properties. For example, the HPC/BPI
letter asks the CFPB to “explicitly and clearly exempt
abandoned properties from the special pre-foreclosure review
period;” the ABA and MBA letters make similar requests. This
is an issue on which consumer advocates and servicers seem to be
aligned. The CRL/NCST letter highlights the concern that
“[V]acant or abandoned homes that do not go through
foreclosure risk blighting the community.” It wants a clear
definition for abandoned properties to “…encourage servicers
to foreclose on them and help avoid blight.” Both the HPC/BPI
and CRL/NCST letters ask the CFPB to consider adopting the
definition of “abandonment” contained in the Uniform Home
Foreclosure Procedures Act drafted by the National Conference of
Commissions on Uniform State Law, unless state law otherwise
defines the term.
Does the CFPB Have the Legal Authority to Impose a Special
Pre-Foreclosure Review Period?
When Congress enacted the CARES Act and imposed a home loan
foreclosure/eviction moratorium and granted borrowers a statutory
right to home loan forbearance, questions abounded whether the
actions could be overturned as an unlawful “taking” under
the Fifth Amendment of the US Constitution. This Amendment
provides: “Nor shall private property be taken for public use,
without just compensation.” But over the years courts have
distinguished between a so called “per se taking” and a
“regulatory taking,” accounting for the public interest
asserted to justify the taking in the latter case.4 While some may want
to attack the CFPB’s proposed special pre-foreclosure review as
an unconstitutional taking, none of the major trades did so. The
more likely question is whether the CFPB has sufficient delegation
of authority from Congress to require servicers to delay the
initial filing of a foreclosure.
A good example of challenging the delegation of congressional
authority to undertake regulatory action arose under the nationwide
eviction memorandum ordered by The Centers for Disease Control and
Prevention (“CDC”) on September 4, 2020. Concerned that
eviction of tenants would exacerbate the spread of COVID-19, the
CDC ordered a temporary prohibition on residential evictions. It
believed that it had the authority to issue this order based on its
statutory delegation of authority to “make and enforce such
regulations as in his [the Secretary] judgment are necessary to
prevent the introduction, transmission, or spread of communicable
diseases….”5 On May 5, 2021, the United States
District Court for the District of Columbia held that the CDC did
not have the statutory authority to order the temporary residential
eviction, finding that this order was invalid but staying its
opinion pending appeal.6
What about the CFPB? What is its statutory authority to require
a delay in filing foreclosures under RESPA regardless of whether a
loan is a “federally-backed mortgage loan” covered by the
CARES Act. Actually, this question about the CFPB’s statutory
authority predates the Proposal and harkens back to the original
issuance of the CFPB’s default servicing regulations in 2013.
The answer requires a review of the provisions of the Dodd-Frank
Act (the “DFA”) enacted by Congress on July 21, 2010.
The provisions in the voluminous DFA pertaining to residential
mortgage servicing are limited. The DFA amended RESPA to clarify a
servicer’s obligations with respect to “qualified written
requests,” escrow accounts and force-placed insurance. It
amended the Truth-in-Lending Act to clarify obligations with
respect to periodic statements, crediting of payments, and payoff
statements. That’s it! Virtually none of the extensive default
servicing regulations contained in Regulation X reflect specific
provisions in the DFA.
There is one potentially broad delegation of authority under the
DFA. Section 1463 of the DFA provides that “A servicer of a
federally related mortgage loan shall not…fail to comply with any
other obligation found by the Bureau of Consumer Financial
Regulation, by regulation, to be appropriate to carry out the
consumer protection purposes of this Act.”7 This statutory
provision purports to be very broad, but is limited by the consumer
protection purposes of RESPA. The comment letter from the
Structured Finance Association argues that the CFPB simply does not
have the statutory authority to impose the special pre-foreclosure
review. It notes, for example, “RESPA’s statement of
congressional purpose does not speak to servicing at all. And the
subjects to which Congress regulates servicers under Section 6 are
limited.” It further notes that “there is nothing from
the context of RESPA’s enactment to suggest that Congress
delegated authority to the Bureau to prohibit
foreclosures.”
Of course, under this argument, one could argue that the CFPB
did not have statutory authority to require the pre-foreclosure
review period in the original servicing amendments to Regulation X
following the enactment of DFA, much less the additional time
period occasioned by the proposed special pre-foreclosure review
period. Arguably, both or neither should be valid, although perhaps
there is a line in the sand that cannot be crossed before the
CFPB’s authority to regulate foreclosure is deemed
insufficient.
None of the other major trade associations raised this statutory
delegation of authority issue in their comment letters to the
Proposal. One reason may be the relatively modest scope and
duration of the proposed special pre-foreclosure review, as well as
their strong desire to work collaboratively with the CFPB to ease
delinquent borrowers’ transition from forbearance. But this
issue may gain added industry support if the comments of the
consumer advocates to expand the special pre-foreclosure review
find favor with the CFPB.
Footnotes
1 Protections for Borrowers Affected by
the COVID-19 Emergency Under the Real Estate Settlement Procedures
Act, Regulation X, 86 Fed. Reg. 18840 (proposed Apr. 9, 2021), https://www.federalregister.gov/documents/2021/04/09/2021-07236/protections-for-borrowers-affected-by-the-covid-19-emergency-under-the-real-estate-settlement.
2 12 C.F.R. §
1024.41(f)(1).
4 Penn Central Transportation Co. v.
New York City, 438 U.S. 104 (1978):
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Mayer Brown article provides information and comments on legal
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