By Jon Hill

Law360 (April 5, 2021, 7:27 PM EDT) -- The Consumer Financial Protection Bureau moved Monday to modify its mortgage servicing rules in light of an expected surge in borrowers exiting pandemic-related forbearances this fall, unveiling a package of proposals that includes a temporary moratorium on new foreclosures through the end of the year.

The proposed moratorium would take the form of a "pre-foreclosure review period" that would prohibit mortgage servicers from initiating foreclosure proceedings until after Dec. 31, a measure that the CFPB said is intended to give delinquent borrowers more time to work out alternatives to foreclosure as COVID-19 relief measures start to expire later this year.

"As many as 1.7 million borrowers will exit forbearance programs in September and the following months, a surge that dwarfs anything the servicing industry has confronted before," CFPB acting Director Dave Uejio said in a call with reporters on Monday. "Our driving principle is simple. Struggling homeowners should have the opportunity to fully explore ways of getting current on their loans and avoiding foreclosure if possible."

If finalized as written, the CFPB's proposed review period would go into effect at the end of August and would be in addition to the standard requirement that servicers can't begin the foreclosure process until a mortgage is 120 days delinquent.

The review period would apply both to federally backed and private mortgages for primary residences, whereas previous federal foreclosure moratoriums issued during the pandemic have applied only to federally backed loans.

The CFPB said it is considering adding exceptions to its proposed review period that would allow servicers to begin foreclosure before Dec. 31, however, such as when a borrower has already been deemed ineligible for a loan workout or is unresponsive to contact efforts.

The CFPB also said it is open to tying the end of this proposed review period to dates other than Dec. 31, including potentially reframing it as a "grace period" that would extend a certain number of days beyond a borrower's exit from forbearance.

But the review period is just one of several draft rule changes that the CFPB said it is mulling to help mortgage borrowers and servicers work together to avoid costly and painful foreclosures later this year, when the agency has expressed concerns about a wave of struggling homeowners emerging from forbearance and the strain that could put on servicer operations.

Among its other proposals, for example, the CFPB is floating changes that would give mortgage servicers more flexibility to offer loan modifications to pandemic-affected borrowers based on incomplete loss mitigation information. That could alleviate potential paperwork bottlenecks facing servicers when working with delinquent borrowers to get back on track after forbearance.

The CFPB is also proposing to add certain discussion topics that servicers would be required to bring up when they make "live contact" with a struggling borrower starting this fall. 

Those requirements would generally entail informing delinquent borrowers of their forbearance options if they aren't yet enrolled and are experiencing pandemic-related hardship. Borrowers already in forbearance, meanwhile, would have to be given information about when their relief ends and what next steps they can take.

"Our proposal would give struggling homeowners a critical lifeline while also ensuring mortgage servicers can do their work effectively," Uejio said. "We are going to use everything in our toolbox to prevent avoidable foreclosures, and this proposed rule is among our sharpest tools."

Monday's rulemaking proposal is consistent with the more aggressive, consumer-focused pandemic response that Uejio has mounted at the CFPB since taking over as its acting director in January, when his predecessor Kathleen Kraninger, a Trump appointee, stepped down as the agency's permanent director.

Last week, for example, the CFPB rescinded a swath of industry-focused regulatory relief measures that Kraninger issued at the start of the pandemic, with Uejio calling them "no longer prudent to maintain."

The agency also urged mortgage servicers last week to "take all necessary steps now" to ready themselves for an onslaught of borrowers seeking assistance later this year as the end approaches for many forbearances and other protections aimed at homeowners affected by the COVID-19 crisis.

In a compliance bulletin issued Thursday, the agency advised that it will pay particular attention to how servicers process and respond to these borrower requests for help, saying it will "look at a servicer's overall effectiveness at helping consumers manage loss mitigation … when using its discretion to address violations of federal consumer financial law in supervisory and enforcement matters."

"The bureau is sending a clear message to the industry that they're going to be closely scrutinizing servicers' performance in the next couple of years and will expect strict compliance with existing rules as well as new pandemic-related requirements," said Michael Gordon, a Bradley Arant Boult Cummings LLP partner and longtime consumer finance attorney.

Gordon, who was on the startup team that helped launch the CFPB, told Law360 that while Monday's rulemaking proposal does include provisions that show the agency is willing to provide flexibility for industry in certain situations, the general thrust fits with a broader message of high expectations and a desire to prevent any widespread servicing problems caused by the unique circumstances of the pandemic.

"The bureau's focus is on protecting consumers during this challenging time, and they expect servicers to do an excellent job preparing for and responding to the various stages of this crisis," Gordon said. "The message from the bureau's new leadership seems to be that they're not going to have a lot of patience for mistakes."

Public comments will be accepted on Monday's rulemaking proposal through May 10. 

--Editing by Michael Watanabe.

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