CFPB’s New COVID-19 Procedural Safeguard Rules Pose Significant Compliance Challenges for Mortgage Agents | Bradley Arant Boult Cummings LLP
Just two months after the Bureau of Consumer Financial Protection announced its final COVID-19 mortgage management rule, the effective date of August 31, 2021, has arrived. As we noted in our detailed breakdown of the Final Rule and the corresponding webinar, the Final Rule poses new risks and challenges for mortgage agents trying to navigate the already complex COVID-19 landscape.
If you are reading this article, you probably know that the new foreclosure “procedural guarantees” are arguably the most difficult aspect of the final rule. Over the past couple of months, we’ve spent a lot of time breaking down the guarantees and developing a detailed pre-foreclosure checklist to help our clients overcome the potential pitfalls associated with them. Since the feedback on the checklist has been overwhelmingly positive, we wanted to take the opportunity to highlight some of the potential compliance issues we identified along the way.
A threshold question that many repairers continue to grapple with is whether they will take advantage of one or more of the procedural safeguards that allow repairers to start new foreclosures. As a quick reminder, the final rule generally prohibits starting new seizures before January 1, 2022, unless one of the three procedural safeguards is met. Notably, the final rule includes a commentary explaining that, if a duty officer makes the first notice or deposit after satisfying a procedural guarantee, the duty officer’s records must include proof that the officer has complied with the rules. double monitoring of Regulation X and the applicable procedural guarantee. The commentary also suggests that records must prove compliance with every element of the applicable procedural guarantee that has been satisfied.
This can be a difficult requirement for navigation services. Suppose, for example, that a manager wishes to take advantage of the procedural guarantee allowing further foreclosure actions against unresponsive borrowers. As explained in the commentary, to meet the requirements of the final rule, the server agent would have to keep records demonstrating, among other things, that it did not receive any communications from the borrower during the relevant periods. In other words, at least part of the maintenance officer’s job is to prove a negative (i.e., no contact has taken place). The commentary notes that acceptable documents in this case may include: (1) call logs, memos and other communication cataloging documentation systems showing the absence of written or oral communication from the borrower during the relevant period; and (2) a table of all transactions credited or debited to the mortgage account, including any escrow account as defined in § 1024.17 (b) and any suspense account as required by § 1024.38 (c) (2) (i).
Will repairers have enough confidence in their maintenance systems and records to take advantage of warranties? It remains to be seen, but many traders naturally seem to be taking a cautious approach. Service providers who choose to proceed as part of a procedural safeguard should, at a minimum, add controls to their existing pre-foreclosure processes to ensure that they maintain proper documentation.
In what is undoubtedly an important “victory” for the industry, procedural guarantees only apply to accounts that have become overdue for more than 120 days as of March 1, 2020. Although this limitation on scope may seem relatively straightforward at first glance, the requirement may be more difficult to operationalize than you might think. The most important thing to keep in mind is that the account must have been more … than 120 days past due before on March 1, 2020, to be considered out of scope. If the account became more … than 120 days past due on or after March 1, 2020, a procedural guarantee must be satisfied. This typically means the account must have been at least 121 days past due on February 29, 2020, to be considered out of scope.
This distinction between 120 days and 121 days has a tangible impact on the loans that a servicer considers eligible for foreclosure. To be at least 121 days past due as of February 29, 2020, the loan must be due on or before October 31, 2019. Since most mortgages are due on the first of the month, the practical implication for most agents is that the loan must be due by October 1, 2019 or earlier. If the loan is due by November 1, 2019, the loan would be 120 days past due on February 29, 2020 and 121 days past due on March 1, 2020, meaning procedural safeguard rules would apply.
Another potential pitfall occurs if an account was over 120 days past due before March 1, 2020, but later a payment was made that reduced delinquency. It is not surprising that the rule does not provide express guidance in this scenario, but it should be noted that there is an argument under the definition of “delinquency” in Regulation X that loans with a due date due date is November 1, 2019 or later must meet a procedural guarantee, even if the account was more than 120 days past due before March 1, 2020.
Complete application protection
Under the full claim procedural guarantee, a duty officer can usually proceed with the first notice or first deposit if the borrower (a) has submitted a full loss mitigation claim, (b) has followed the entire loss mitigation process; and (c) not executing a loss mitigation option. Unfortunately, the final rule leaves several questions open for operators who intend to rely on this guarantee.
First, the rule does not include a temporal aspect of the safeguard, so it is not very clear whether a request received before the rule’s effective date, or even before the COVID-19 pandemic will – even, would qualify. In the absence of any specific time requirement, the repairer is theoretically free to rely on all full application already submitted, but there may be some risk in relying on a loss mitigation assessment that has taken place in the past, particularly if the investor’s loss mitigation requirements / options have been updates.
Second, the rule does not address how deficiencies in the loss mitigation review process affect the maintainer’s ability to use backup. For example, suppose an agent received and assessed a complete application and denied the borrower all options, but the assessment letter sent to the borrower did not include the required appeal verbiage or may have been sent outside the required 30 day timeframe. Can a service agent rely on this request to meet the procedural warranty? Or what if the appraisal notice was missing but the borrower subsequently failed to execute an agreed option? These are tough questions that ultimately boil down to whether the service agent considers strict compliance with the existing loss mitigation requirements of Regulation X as a prerequisite for the full procedural saving of the claim. While strict adherence to these requirements may not be required, if a provider intends to rely on a letter of evaluation in order to meet this procedural guarantee, it would likely be prudent for the provider to ensure that the evaluation letter meets the required timing and content requirements. .
Finally, the rule does not deal with how to handle situations where the borrower has submitted multiple full applications during a single delinquency. While a service agent is usually only required to review the borrower’s first complete application, we know that many agents will review subsequent applications free of charge. In cases where multiple requests are registered, do all requests have to meet the requirements of the procedural guarantee? Only the first application? Only the most recent? Typically, the repairer only needs to identify one compliant loss mitigation assessment to meet this procedural guarantee. Given the framework of the rule, it will often be a good idea for the duty officer to first review the most recent request. However, if that application fails the procedural backup test, and depending on the reason for the failure, the service agent may be able to take advantage of previously submitted applications to satisfy the backup.
In summary, mortgage agents who wish to take advantage of CFPB’s new COVID-19 procedural guarantees will do so at their own risk, as the guarantees pose significant compliance issues. As mentioned earlier, we’ve spent a considerable amount of time over the past few weeks dissecting these guarantees and creating a pre-foreclosure checklist that mortgage agents can use to ensure compliance.