The Loss Mitigation Angle
July 24, 2024
By Donna Schmidt, CEO DLS Servicing & WaterfallCalc
INTRODUCTION
Earlier this month, the Consumers Financial Protection Bureau (CFPB) issued hotly anticipated new proposed servicing rules. The new proposed loss mitigation rule addresses the industry shift from borrower-provided full document reviews to a more streamlined approach. However, there are some glaring issues that servicers simply cannot manage effectively.
At the heart of the issue are the new “foreclosure process procedural safeguards,” introduced on page 39 in redline copy: “Once a loss mitigation review cycle begins, the servicer must ensure that one of the following procedural safeguards are met before making the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process, or if applicable, before advancing the foreclosure process:
- There are no remaining loss mitigation options.
- The borrower is unresponsive after the servicer has “regularly taken steps” to identify and obtain any information and documents necessary from the borrower to determine which loss mitigation options, if any, it will offer to the borrower and, if the servicer has made a loss mitigation determination, has regularly taken steps to reach the borrower regarding that determination, but the borrower has not communicated with the servicer for at least 90 days.”
THE ISSUES
- It is an inappropriate assumption that all loan-type waterfalls have a denial option.
The CFPB is assuming that waterfalls for all loan types have a potential for denial. Under the new FHA and VA waterfall options, however, the borrower is always offered a modification. The terms of the modification may be completely unaffordable, but the borrower is given a chance to make changes in their household income and expenses in order to make one last attempt to save their property.
If a home retention option is not practical, the borrower has an option to consider a property liquidation option – either a short sale or deed in lieu of foreclosure. However, these options can only be approved, in part, with additional third-party information, such as a clear title report and appraisal. To move forward with these options, it is critical to have borrower engagement. Additionally, the servicer must expense the cost of title and appraisal. Unless the short sale is completed, the servicer may not be able to recapture these costs, which could add up quickly. It is unfair to ask servicers to incur these expenses unless the borrower is fully committed and engaged in the process.
- 90-day wait period for an unresponsive borrower.
The 90-day wait period is completely unworkable and could lead to a repetitive cycle that never advances the loan to either workout resolution OR foreclosure.
Not only does this open a black hole, but the servicer is put in the tenuous position of failing to meet certain insurer and investor foreclosure timelines. For example, the FHA requires that a servicer institute the first legal action to foreclose once a loan is six months from the date of default (eight months from the last paid installment). Failure to meet this timeline could result in curtailed interest on an eventual foreclosure conveyance claim.
A very real-world example is as follows:
Last Paid Installment (LPI) is 5/1/2024
Date of Default (DOD) is 6/1/2024
FHA’s First Legal Deadline is 1/1/2025
Borrower requests assistance on 7/24/2024
Servicer offers Loss Mitigation Recovery Modification on 8/20/2024
Modification effective date of 10/1/2024
This to comply with FHA rules that do not allow more than one buffer month from the offer, and effective date and time to also comply with the FHA rule to issue modification documents at least 30 days prior to effective date.
Per CFPB, the borrower has 14 days to accept, reject or appeal the option – which is 9/7/2024
Note: If the borrower does not accept the option before 9/1/2024, the servicer may not be able to comply with the 30-day modification document advance notice rule. As a result, some servicers may opt to recalculate the terms with a 11/1/2024 effective date – thus opening up another 14-day acceptance period, since the terms would now change.
Borrower does not respond – 90-day wait period commences – terminates on 10/22/2024
This termination date was calculated for the last contact with the borrower, which was the original date requesting assistance.
Borrower re-engages and requests assistance on 10/21/2024
Servicer offers Loss Mitigation Recovery Modification on 11/2/2024
Modification Effective Date of 1/1/2025
Note: This was the FHA’s first legal deadline date. Under current FHA rules, the servicer would not be entitled to an automatic extension since this is the second offer of loss mitigation for the same default episode. The servicer would need to either request an extension for the first legal deadline via EVARS and complete the loss mitigation option by that date or commence foreclosure. The latter would not be possible under the proposed safeguard rules.
Per CFPB the borrower has 14 days to accept, reject or appeal the option – which is 11/16/2024
The borrower accepts offer on 11/10/2024, but then does not return executed documents.
90-day wait period commences – terminates on 2/8/2025
Servicer most likely misses the first legal deadline and may face interest curtailments on a future claim. Borrower could re-engage at some point prior to the termination date and start the process over again.
There is nothing in the proposed rule that would end this cycle, given that there is no option to deny assistance in the FHA waterfall.
- “Regularly taken steps” needs to be defined.
The CFPB needs to be specific about its expectations. Is this once a month? Once a week? Do they send a letter? Etc.
PROPOSAL
- Remove the Unresponsive Borrower safeguard.
This is an unnecessarily prolonged safeguard that eliminates borrower accountability for the resolution of their default. In addition, it opens up the servicer to repeatedly update loss mitigation calculations, increasing the odds of errors and miscalculations. The borrower seeking assistance should respond within the 14-day window after loss mitigation offer, and if they do not, the servicer should be free to pursue steps to either initiate or continue foreclosure.
The proposed rule (page 43 of the redline version) requires the servicer to accept duplicative requests for assistance. At any time prior to foreclosure (less the 37-day rule), the borrower may request assistance, at which point a safeguard should be established from the date of request to the date the borrower has to respond to the offer – unless all loss mitigation options have been exhausted.
- Servicer responsibility to timely response.
Servicers should still be required to respond to a request for assistance within 30 days, unless they can document the need for additional information to complete the loss mitigation offer.
- Servicer should have the right to reject repeated requests.
Servicers should have the ability to summarily reject repeated requests for assistance should the home retention loss mitigation option fail to provide the borrower with an option with better terms than the previous one offered and rejected or ignored by the borrower.
Servicers should similarly not be required to provide foreclosure safeguards, once a foreclosure has been initiated for a property liquidation option unless, in the instance of a short sale, the borrower has presented a viable contract of sale that meets the insurer and investor requirements. Or the deed in lieu can be completed prior to the foreclosure sale date – and the servicer should be able to have discretion based on the borrower’s previous cooperation with loss mitigation efforts.
If your servicing operations are facing challenges due to these proposed rules, contact DLS Servicing to learn how our expert solutions can help you navigate these complexities and maintain compliance. Let’s work together to ensure your operations run smoothly and efficiently.
