Mortgage Servicing: Getting Reg X Reform Right is a Top Priority for Next Year

Brendan Kelleher is Director of Loan Administration at the Mortgage Bankers Association, where he manages MBA’s legislative and regulatory strategy for residential loan servicing and works with federal housing regulators, investors and guarantors to improve and streamline servicing requirements.

Preventing foreclosures requires active collaboration between servicers and homeowners.

MBA President and CEO Bob Broeksmit, CMB, recently published a blog emphasizing the critical role servicers play in providing payment relief to homeowners in times of stress so that homeowners can remain in their homes. In fact, recent hurricanes Helene and Milton demonstrate how servicers are pivotal in helping homeowner recover from disasters and other hardships. However, outdated and rigid regulations hinder their ability to offer effective, timely relief. To address these issues, the Consumer Financial Protection Bureau must amend Regulation X to balance homeowner protections with operational efficiency. As MBA stated in its comments, doing so will achieve the shared goal of helping distressed homeowners reach favorable outcomes.

Room For Improvement: Encouraging Homeowner Engagement

The CFPB recently proposed sweeping changes to Regulation X’s loss mitigation framework. In place of the existing servicing rules that provide homeowners with foreclosure protections upon receipt of a complete loss mitigation application, the Bureau proposed a new “loss mitigation review cycle” to provide homeowners with protections upon a request for loss mitigation assistance (informally known as the hand-raise concept). This proposal includes prohibitions on recovering servicing fees and third-party costs and a ban on advancing the foreclosure process after the homeowner requests assistance. To justify its proposal, the CFPB incorrectly asserts that mortgage servicers must be “incentivized” to review homeowners quickly and accurately for loss mitigation assistance.

The perception that servicers are not incentivized to review homeowners quickly and accurately for loss mitigation assistance is misguided. The annual cost of servicing a non-performing loan is $1,857, which is in stark contrast to the nominal $176 cost of servicing a performing loan. These costs increase as a homeowner proceeds further into the foreclosure process, where servicers face additional penalties from investors – including the nonrecovery of fees from homeowners – for failing to complete loss mitigation reviews quickly, along with extensive investor-specific state foreclosure timelines. Similarly, Regulation X already provides strict requirements servicers must fulfill to engage distressed homeowners early in their delinquency and evaluate them for loss mitigation timely upon receipt of a complete application for assistance.

This incorrect framing results in unfortunate and unhelpful outcomes in the proposal. Though the Bureau is correct to defer to evolving investor loss mitigation guidelines, the proposed loss mitigation review cycle suffers several flaws that harm homeowners. As proposed, the loss mitigation review cycle is an ambiguous and undefined standard that makes it difficult for servicers to determine when foreclosure and fee protections should appropriately start and stop. Further, the procedural safeguards that define when protections start and stop do not motivate homeowners to engage with their servicer early in the loss mitigation review process and instead promote perpetual avoidance of loss mitigation or foreclosure. Misaligned incentives can lead to adverse consequences for homeowners that do not respond promptly to their servicer as the delinquency increases, equity erodes and fewer loss mitigation options remain.

Sidebar: Did You Know?

A recent survey showed most homeowners were satisfied with their servicers’ assistance during the COVID-19 pandemic, during which servicers provided more than 8 million homeowners with forbearance protections.

Mortgage delinquencies and foreclosure rates remain at historic lows, thanks in part to effective loss mitigation practices.

The proposed CFPB rules limit loss mitigation options and eligibility, could have the effect of increasing mortgage rates and reducing access to credit if thoughtful revisions are not made at the final rule stage.

A Rebalanced Approach is Necessary to Promote Effective Homeowner Relief

Effective loss mitigation requires active engagement from both homeowners and servicers.

In that regard, regulatory reform of mortgage servicing is necessary, and a recalibration of the proposal to positively influence homeowner behavior should be a priority. To that end, we encourage the CFPB to rebalance the engagement and communication between servicers and homeowners. The Bureau must amend its proposal to motivate homeowners to contact their servicers and pursue loss mitigation assistance early in the default process.

Specifically, the CFPB must:

Provide clear and reasonable parameters for servicers to determine when dual tracking protections begin and end under the new “loss mitigation review cycle.” Providing protections instantly at a homeowner’s presumed hand-raise creates confusion and unnecessary operational complexity without sufficient homeowner engagement. A request for assistance must be an affirmative request, such as Fannie Mae’s and Freddie Mac’s quality right party contact (QRPC) standard, to commence a loss mitigation review. Similarly, the proposed procedural safeguards – that no loss mitigation options remain available, and that the homeowner is non-responsive – are unworkable without bright line parameters to allow servicers to set proper expectations with homeowners regarding the availability of protections. The Bureau must incorporate specific milestones that align with existing investor loss mitigation waterfalls and incentivize active homeowner engagement in the loss mitigation process.

Reinstate Regulation X’s existing “one review per delinquency” standard. The new and vague definition of a “duplicative request” left unresolved the question of how servicers should handle subsequent requests for loss mitigation review. The Bureau should clarify that, while investors can continue to maintain “sequential” loss mitigation hierarchies, protections are required for only one review during a homeowner’s delinquency cycle.

Eliminate the prohibition on fees. The homeowner and mortgage lender agree in the mortgage note that certain fees are due in the event of a delinquency. Some fees, such as late fees, are often waived when a homeowner successfully completes loss mitigation, while other charges are in place as there are costs incurred by servicers when servicing a delinquent loan. For instance, charges for maintaining the property and mortgage collateral are required by investors, and the costs resulting from foreclosure and litigation activities are based on court rules and investor requirements. The long-term effect of banning the recovery of costs and fees mutually agreed upon by homeowner and servicer—in addition to being an instance of legal overreach by the Bureau—harms credit access and mortgage servicing values to the disadvantage of homeowners.

Conclusion: A Call for Pragmatic Regulatory Reform

The consequences of the Bureau’s proposal – akin to an automatic and extended forbearance program with no eligibility requirements and the potential for indefinite foreclosure holds – are clear. Requiring broad and protracted foreclosure and fee prohibitions without motivating homeowner engagement early in the loss mitigation review process is likely to delay homeowner communication and increase arrearages, making it more difficult for a homeowner to reinstate their loan or qualify for a loss mitigation option designed to get homeowners back on their feet quickly.

Servicers are essential partners in helping homeowners maintain their homes during difficult times. The Bureau must amend its servicing rules to maintain consumer protections while supporting servicers in providing payment relief. The success of the housing market depends on an equitable collaboration between regulators, servicers, and homeowners.