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Law360 (June 3, 2021, 4:58 PM EDT )
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| Richard Gottlieb |
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| Brett Natarelli |
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| Joseph Reilly |
As summer begins, while things may look relatively quiet on the CFPB mortgage servicing enforcement front, those of us who remember the CFPB's early days following the 2008 foreclosure crisis have a different view: What we are seeing now has all the hallmarks of the calm before a huge storm.
President Joe Biden's nomination of progressive firebrand Rohit Chopra to lead the bureau was the first hint, but the surprise move has been the very meaningful tenure of Dave Uejio as acting director. Despite his centrist credentials, Biden has skewed dramatically to the left with several key appointments and initiatives, and both he and Uejio have made racial equity an administration, and bureau, mantra. Uejio, further, is a wild card who has moved quickly to establish himself in his brief but substantive tenure as acting director.
In a video released June 2,[1] Uejio again committed the bureau to racial justice, speaking in personal terms as a Japanese-American being the "target of hatred and violence on the basis of my race."
"Rest assured," he concluded, the CFPB will take action against institutions and individuals whose policies and practices prevent fair and equitable access to credit, or take advantage of poor, underserved and disadvantaged communities."
On the mortgage front, the CFPB enforcement actions we see today are primarily the product of investigations commenced before the new administration. And while the CFPB has proposed rules[2] to clarify technical aspects of COVID-19 relief implementation in loss mitigation, along with a temporary pause on foreclosures, we have yet to see the regulatory avalanche some anticipated.
But the dynamic has plainly changed, and the bureau has launched several warning volleys. On March 31, the CFPB issued Bulletin No. 2021-02,[3] aptly named "Supervision and Enforcement Priorities Regarding Housing Insecurity," warning servicers to:
[D]edicate sufficient resources and staff to ensure they can communicate clearly with borrowers, effectively manage borrower requests for assistance, promote loss mitigation, and ultimately reduce avoidable foreclosures and foreclosure-related costs.
Further, at a recent mortgage bankers conference, Uejio warned that servicers may be entitled merely to equitable foreclosure recoveries.
Housing security is likewise a focus of CFPB research. At the bureau's fifth research conference in early May,[4] researchers presented reports focused both on mortgage credit and housing security, "given that mortgage balances make up the largest component of household debt and housing equity accounts for the majority of wealth for the median homeowner."
Likewise, on May 27, the bureau issued a report on manufactured house financing,[5] decrying the high interest rates and credit barriers that the bureau claims afflict that industry.
Finally, the CFPB has joined other regulators in expressing interest and seeking information about artificial intelligence.[6] Such scrutiny might adversely affect not just automated underwriting, but also the way mortgage servicers systemically deal with borrowers in distress.
This is a critical time for the CFPB, and we expect its regulatory and enforcement actions in the mortgage space to effect a sea change by 2022.
These early signals are just the beginning of what is likely to be a rocky ride for mortgage servicers. As disruptive as the past foreclosure moratoria and new loss mitigation requirements were, the result was to dramatically slow and, for long periods of time, outright stop the volume of foreclosures needing to be processed.
This period will likely be far more chaotic as servicers continue to implement the new programs and restrictions while at the same time returning to foreclosure and eviction volumes rivaling 2010. This will occur as the CFPB gears up for an intense few years of activity by ramping up staff with new hires.[7]
Consider as well that, to date, the above has been occurring against the backdrop of rapid recovery of the job market and historically low mortgage interest rates. What will happen without a full recovery, and in an environment of rising interest rates associated with inflationary pressures?
Will this become an existential moment for the CFPB? We doubt it. But, if the public, and the politicians who answer to it, come to view the CFPB as having failed in this critical moment, structural reform — toward or away from either end of the ideological spectrum — would not be a surprising future outcome after the next presidential elections.
This likely will lead to splash headlines and major enforcement efforts from the CFPB directed at mortgage servicers, and a natural political target in times of stress. Resolving a now yearslong foreclosure backlog will likely give regulators a target-rich environment in which to work.
As the pandemic ends, new challenges for mortgage lenders and servicers arise.
COVID-19 will continue to plague the industry, but in new and different ways.
Given the bureau's strong focus on loss mitigation, it is not surprising to see the bureau warn servicers against treating foreclosures like they would during pre-pandemic times. The impending foreclosure environment is obvious, but just resolving defaults and delinquencies will also stress servicers for the rest of this year, and beyond.
Two CFPB-commissioned reports issued in May, and an earlier report from March, outline the scope of the pandemic-end challenge on the doorstep. The CFPB's March report titled "Housing Insecurity and the COVID-19 Pandemic"[8] confirms:
- Mortgage delinquency was up 250% in 2020, and remains at a height not seen since 2010.
- Employment in the leisure and hospitality category was down almost 50% in April 2020 and even now has recovered only to about 80% of February 2020 levels.
- While 90-plus day delinquencies made up only about one-third of all delinquencies in December 2019, they accounted for more than two-thirds of all delinquencies in December 2020.
- Yet foreclosures in 2020 remained down from 2019 and even from 2005 levels — there is still a gigantic backlog of pipeline and new-start foreclosures coming in 2022.
- In June 2020, about half of borrowers exiting forbearance were able to do so without further loss mitigation being afforded, but the number needing additional loss mitigation roughly doubled by January 2021. The percentage of borrowers needing further loss mitigation would have been dramatically higher but for the large proportion who were able to refinance their loans during a period of historically low interest rates — a market environment unlikely to be sustained in 2022 and 2023 as mortgage interest rates creep upward.
Loss mitigation compliance is fair servicing.
In May, the CFPB's Office of Research issued the paper "Characteristics of Mortgage Borrowers During the COVID-19 Pandemic,"[9] which reported, among other things, that Blacks and Hispanics account for about 18% of the mortgage market as a whole, but 33% of loans in forbearance and 27% of loans in 60-plus day delinquency.
These statistics mean that, for all practical purposes, compliance with loss mitigation requirements and fair lending compliance should not be thought of as separate issues. Proper compliance with all loss-mitigation requirements, whether related to COVID-19 or not, simply is the fair lending issue of the day.
The bureau will accordingly be watching closely to ensure that mortgage servicers are treating protected classes fairly. As the CFPB wrote in Bulletin No. 2021-02:
[T]he Bureau expects an extraordinarily high volume of loans needing loss mitigation assistance at relatively the same time. During this period in which there may be large increases in requests for loss mitigation assistance, the Bureau is specifically concerned that some borrowers may not be receiving effective communication from servicers and that some borrowers may be at risk of not having their loss mitigation applications adequately processed.
As part of that process, the bureau warns that it will be examining:
Whether servicers are complying with the Equal Credit Opportunity Act's (ECOA's) prohibition against discriminating against any applicant, with respect to any aspect of a credit transaction, including … when determining eligibility for loss mitigation options.
How are servicers doing, and what can they do now to prepare for the coming storm?
So how are servicers doing in this regard? The CFPB gave some indication in a May complaint bulletin[10] focused on loss mitigation in mortgage servicing:
- The CFPB received 3,400 mortgage-related complaints in March, the highest in three years.
- The number of complaints has been trending upward since November 2020.
- Borrowers reported confusing and contradictory statements about how to end or resolve forbearance, that they were incorrectly reported as delinquent during forbearance — allowed only if delinquency predated the COVID-19 forbearance — and delays in the loan modification process.
- Borrowers continue to report difficulty in reaching a live voice, improper accounting for forbearance and deferrals on periodic statements, being charged improper fees, and supposed failure to apply forbearance payments, i.e., borrower misunderstanding of how suspense accounts work, but the CFPB believes communications to borrowers in this regard could be clearer.
Based on lessons of the painful period of 2008-2014, we suggest the following points for consideration:
- Exams this year may proceed under the watchful eye of CFPB enforcement. In at least one recent example, enforcement attorneys attended an examination, a situation rarely seen during the years under former CFPB Director Kathleen Kraninger.
- Expect to see less in the way of explanation for civil investigative demands. While the CFPB promised more transparency in the Kraninger years, the current CFPB has shown less interest in that ideal.
- While enforcement actions may not begin in earnest until 2022 or later, such actions will be based on servicing practices in place in 2021. Ramp-up takes time, so enforcement actions always lag the underlying activity. Consider, for example, that CFPB enforcement actions went from a single digit number in 2012 up to almost 60 per year by 2015,[11] with virtually none of that increase due to more noncompliance in 2014-2015.
- Even if staffing levels are appropriate now, or there is some cushion to absorb a big inflow, consider that foreclosure starts remain below the level they were at in 2005. Is the foreclosure unit ready for 2010-level foreclosures? Will the compliance unit be able to address the volume of requests for legal and compliance advice? Does the information technology unit have the manpower to address all the needed software changes as a result of regulatory changes? The CFPB has promised to scrutinize hold times and the substance of borrower communications, including periodic statements. Is the call center, for example, ready to absorb thousands of new calls from borrowers in resumed or newly started foreclosures and evictions?
- Self testing may be critical here. Does the fair lending team have visibility and input into the entire servicing operation? If not, now may be a good time to start that type of integration given the overlap between fair lending compliance and servicing practices discussed above. Consider, for example, that the CFPB spent about as many pages in May highlighting its concern for racial disparities as it did commenting on the market as a whole.
- When the CFPB first announced special fair lending scrutiny over servicing operations toward the end of the last crisis, smart compliance officers revamped their programs to place special emphasis on the servicing area, which had not traditionally been thought of as subject to fair lending scrutiny. Is that revamped program now mature? Is it fully staffed?
At this time next year, the list of enforcement actions related to mortgage servicing may be quite long. That will almost certainly be true two years from now. So batten down the hatches. Close the gates. Board up the windows. Better to do so now than trying to do so in the middle of the coming regulatory storm, and better still before trying to clean the regulatory house amid flooded call centers with borrowers exiting forbearance and entering foreclosure, eviction and bankruptcy by the millions.
Richard Gottlieb and Brett Natarelli are partners, and Joseph Reilly is counsel, at Manatt Phelps & Phillips LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] https://www.consumerfinance.gov/about-us/blog/addressing-racial-inequities-consumer-finance-markets/.
[2] https://www.consumerfinance.gov/rules-policy/rules-under-development/protections-for-borrowers-affected-by-the-covid-19-emergency-under-the-real-estate-settlement-procedures-act-regulation-x/.
[3] https://files.consumerfinance.gov/f/documents/cfpb_bulletin-2021-02_supervision-and-enforcement-priorities-regarding-housing_WHcae8E.pdf.
[4] https://www.consumerfinance.gov/data-research/cfpb-research-conference/2021-cfpb-research-conference/.
[5] https://www.consumerfinance.gov/about-us/newsroom/manufactured-housing-loan-borrowers-face-higher-interest-rates-risks-and-barriers-to-credit/.
[6] https://files.consumerfinance.gov/f/documents/cfpb_ai-rfi_frn_2021-03.pdf.
[7] https://www.consumerfinance.gov/about-us/blog/calling-attorneys-interested-in-joining-the-cfpb/.
[8] https://files.consumerfinance.gov/f/documents/cfpb_Housing_insecurity_and_the_COVID-19_pandemic.pdf.
[9] https://files.consumerfinance.gov/f/documents/cfpb_characteristics-mortgage-borrowers-during-covid-19-pandemic_report_2021-05.pdf.
[10] https://files.consumerfinance.gov/f/documents/cfpb_mortgage-forbearance-issues_complaint-bulletin_2021-05.pdf.
[11] https://www.consumerfinance.gov/enforcement/enforcement-by-the-numbers/.
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