By Jon Hill

Law360 (June 28, 2021, 9:05 PM EDT) -- The Consumer Financial Protection Bureau on Monday finalized new requirements for mortgage servicers that are aimed at curbing unnecessary foreclosures as pandemic-related relief measures wind down, though the finished package narrows previously proposed restrictions on new foreclosure referrals.

In a final rule, the CFPB adopted temporary additions to its mortgage-servicing regulations that will, among other provisions, provide servicers with more flexibility to offer loan modifications to struggling homeowners and require increased outreach and disclosure to delinquent borrowers.

The rule, which is set to go into effect on Aug. 31, also institutes a more limited version of the "special pre-foreclosure review period" that the CFPB originally proposed to give delinquent borrowers more time to pursue foreclosure alternatives once COVID-19 forbearance programs and foreclosure moratoriums start to end later this year.

As proposed in the spring, the review period would have generally prohibited servicers from initiating foreclosures on primary residences through the end of 2021, but the CFPB said Monday it is moving forward with a "more narrowly tailored approach" that essentially adds several key exemptions to this review period.

Those exemptions will allow servicers to start the foreclosure process before Jan. 1 in cases where a property has been abandoned, a delinquent borrower is unresponsive to contact efforts, or a complete loss mitigation evaluation has yielded no other workable alternatives to foreclosure.

This review period would also not apply to mortgages that were already seriously delinquent before March 1, 2020, when a pandemic had not yet been officially declared.

In a call with reporters Monday, acting CFPB Director Dave Uejio stressed that his agency's new servicing requirements do not impose a blanket foreclosure moratorium and said the goal was instead to foster a "smooth and equitable" post-pandemic recovery for the housing market, including a "measured return to foreclosures."

"Past recoveries have seen harder-hit and economically distressed communities and families left behind because support systems are dismantled and shut down once the country is deemed recovered," Uejio said.

"I am committed to avoiding any actions that stop or reverse community economic gains, nor will I leave distressed or underserved families to fend for themselves. Protecting the most vulnerable families will help all of us," Uejio added.

When it first proposed temporary pandemic-related rules for mortgage servicers in April, the CFPB cited concerns about an anticipated surge in homeowners exiting COVID-19 forbearances this fall that could strain servicer operations and result in otherwise preventable foreclosures.

To help mitigate such risks, the agency's proposal called for allowing servicers to approve borrowers for certain "streamlined loan modifications" based on less paperwork and requiring that borrowers be given additional information about available assistance as part of standard pre-foreclosure outreach.

Those provisions were incorporated largely unchanged into Monday's final rule, which Uejio said will help homeowners get set up with more affordable mortgage payment plans more quickly and ensure that servicers are working hard to keep other borrowers apprised of their mortgage options.

"We believe this rule is in line with what responsible servicers are already doing," Uejio told reporters.

The broad restrictions on foreclosure filings included in April's proposal had been criticized by some industry groups as overly blunt, counterproductive and outside the CFPB's legal authority to impose.

Instead, the agency has reframed the proposed review period as temporary "procedural safeguards" that a servicer must satisfy before initiating foreclosure proceedings.

Under these safeguards, the foreclosure process may begin if all alternatives have been fully explored and ruled out for a borrower, if a borrower has abandoned the property securing their mortgage, or if a borrower has not responded to servicer outreach efforts for at least 90 days.

Servicers would also still have to comply with existing protections that, for example, forbid foreclosure referrals until borrowers are more than 120 days behind on their mortgages.

But the new safeguards don't apply if the borrower was already more than 120 days delinquent when the pandemic hit. They also are not required for foreclosure referrals made starting Jan. 1, according to the final rule.

CFPB officials told reporters on Monday that they expect to see a gradual resumption of foreclosure activity in the coming months under the new rule, starting with the oldest cases involving pre-pandemic delinquencies and moving on to those involving abandoned properties and borrowers who have gone radio silent despite attempts at engagement.

Agency officials also argued the CFPB did not flinch in scaling back its original moratorium-like "review period," which they said was never intended to stop foreclosures across the board.

Instead, the CFPB believes the newly finalized safeguards can more effectively prevent a spike in avoidable foreclosures while also supporting a return to a more normal housing market, according to officials.

Monday's rule is "in addition to the other work we are doing in supervision and enforcement, in consumer engagement and partnership with the wider administration to do what we can to make sure every family has a chance to avoid foreclosure if they can," Uejio said.

"Over the coming months, the CFPB will be working alongside other federal agencies to ensure an orderly transition to the post-pandemic housing market," Uejio added. "The CFPB will significantly increase outreach to borrowers to share information about mortgage options through direct contact as well as working with mortgage servicers and the media."

Consumer advocates generally welcomed Monday's final rule, with the Center for Responsible Lending's senior policy counsel Melissa Stegman singling out the streamlined loan modification provision as a "critical" measure for preventing unnecessary foreclosures.

"It will help servicers offer, and enable borrowers to easily accept, a payment reduction modification and preserve homeownership," Stegman said in a statement.

The National Consumer Law Center and Americans for Financial Reform Education Fund also described the rule as providing "important" consumer protections that should help keep borrowers in their homes, but they urged the CFPB to keep the foreclosure safeguards in place for longer and "vigorously enforce" them.

"Many borrowers will still need these safeguards after Dec. 31, 2021," Linda Jun, senior policy counsel at the Americans for Financial Reform Education Fund, said in a statement. "The CFPB should extend the protections so they apply to borrowers with forbearances coming to an end in 2022."

--Editing by Karin Roberts.

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