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Consumer Harm & the Foreclosure Moratoria

Editor's note: This feature appears in the June 2021 print issue of DS News, available here. 

The Consumer Financial Protection Bureau (CFPB) once again raised warning flags for the mortgage industry with their recent proposal to prohibit servicers from initiating foreclosures until after December 31, 2021. However, regardless of the proposed rules, the need for streamlined, scalable processes to address a sudden influx of hardship requests is becoming increasingly urgent.  

Media outlets have focused on the CFPB’s message to servicers regarding its intent to strengthen oversight and enforcement action. Servicers should be going a step further to examine their preparedness for preventing unnecessary harm to their consumer base. While illegal or invalid foreclosure actions will continue to be closely monitored, the true exposure lies with actions that can potentially trigger unfair, deceptive, or abusive acts or practices (UDAAP) violations.  

The existing rule under Reg X generally prohibits a servicer from noticing or filing a foreclosure action until the borrower is more than 120 days delinquent. The current proposal provides additional guardrails to fully suspend any first notice or filings against a primary residence until after December 31, 2021.  

The agency’s statement highlighted its concern for a high volume of expiring forbearance plans this September and the risk that operational strains on servicers may expose homeowners to invalid foreclosure due to internal processing delays and errors.  

Regulatory pressure is not the only driving factor behind the need for increased protections for consumers. Housing insecurity continues to threaten Americans during this K-shaped recovery period that further divides the haves and have nots. As millions of homeowners adjust to making a mortgage payment for the first time in over a year, the problem will likely worsen. There is no time (or patience) for operational inefficiencies that compound the problem. 

Preparing for What’s Ahead 

Absent technology to automate the ingestion and processing of prescriptive offerings for borrowers exiting forbearance plans, servicers’ communication channels will need to be staffed for the influx of customers that will have questions, confusion, and anxiety about the process. If servicers progress foreclosure actions based on systemic delinquency triggers while customers wait on hold to unwind such confusion, foreclosures will spike at the detriment of homeowners who relied on representations of their servicers that their forbearance would let them keep their homes.   

Taking a step back from the proposed rule and thinking conceptually about the expiration of a forbearance plan, the customer's expectation is for payment obligations to “reset” through either a modification, deferment, or other method to cure the delinquency. Servicers should be prepared to properly recast the past due obligations to cure the default and return to current payment schedules with minimum intervention. This renders forbearance plans expiring in September with regular payment obligations resuming in October as ineligible for notice of filing and foreclosure as they will be less than120 days delinquent under the existing rule until at least a month after the December 31, 2021 moratorium period. Complying with the intent of the moratorium should not be troubling for most servicers that have prepared for the exit—and experienced the Great Recession.  

The industry should also prepare for the indirect consequences of such a moratorium, including the fact the strength of the housing market today may suffer due to reduced property values and increasing deficiencies post-sale if distressed properties flood the market over the next 24-plus months. It may also introduce an increase of strategic defaults where the proposed regulations weaken the ability to enforce delinquency consequences. This population and credit risk is separate and apart from those exposed by unfair actions of servicers.  

Beyond the immediate priority to return existing notes to original terms, mortgage servicers should also prepare for an influx of other challenges surrounding borrowers in forbearance:   

  • Communication channels: The world went online due to COVID-19. Respond to borrower preferences for instant access and online tools to automate the ingestion of borrower information related to requests for assistance.  
  • Tracking and reporting: Review the pipeline to ensure completeness of population. Examiners will be asking who asked for help, who received help, and for reporting around those that subsequently defaulted or experienced consequences of default.  
  • Taxes and insurance: Negative escrow shortages and spreads will require scalable solutions as will the increase of force placed insurance and required advances for non-escrowed accounts.  

There is still time to expand digital footprints and increase self-service features soundly and at scale. Reducing manual processes and increasing consumer transparency will curb compliance risks and improve customer satisfaction scores.  

About Author: Carissa Robb

Carissa Robb serves as President & COO of Constant AI, a digital loan servicing and loss mitigation provider. She most recently served as SVP and Head of U.S. Loan Servicing for TD Bank, responsible for servicing a $150 billion dollar portfolio of auto, consumer, residential, and commercial accounts. She joined TD Bank in 2009, overseeing collections channels and loss mitigation programs for distressed real estate, as well as servicing in executive roles responsible for audit remediation and governance and control frameworks for TD Bank’s loan servicing and collections divisions. She can be reached at crobb@constant.ai or found on LinkedIn at linkedin.com/in/carissa-robb-a5a26615. 
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