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CFPB Issues Rules to Create Smooth Forbearance Transition

The consumer bureau’s acting director, Dave Uejio, says the foreclosure-ban end will “drain billions of dollars in wealth from the Black and Hispanic communities.” The rules require lenders to assertively help homeowners stay in their homes and understand their options.

WASHINGTON, D.C. – The Consumer Financial Protection Bureau (CFPB) finalized amendments to the federal mortgage servicing regulations to reinforce the ongoing economic recovery as the federal foreclosure moratoria are phased out. It also published an Executive Summary of those rules.

Overall, CFPB says it created the rules to help protect mortgage borrowers from unwelcome surprises as they exit forbearance.

According to CFPB, the amendments will support the housing market’s “smooth and orderly transition to post-pandemic operation” by creating temporary safeguards to help ensure that borrowers have time before a foreclosure to explore their options, such as loan modifications and selling homes.

The rules cover loans on principal residences, generally exclude small servicers, and take effect on Aug. 31, 2021.

“As the nation shifts from the COVID-19 emergency to the economic recovery, we cannot be complacent about the dangers we still face,” says CFPB Acting Director Dave Uejio. “An unchecked wave of foreclosures would drain billions of dollars in wealth from the Black and Hispanic communities hardest hit by the pandemic and still recovering from the impact of the Great Recession just over a decade ago. An unchecked wave of foreclosures would also risk destabilizing the housing market for all consumers.”

Uejio says CFPB is “giving homeowners the time and opportunity to make informed decisions.” And it’s giving mortgage servicing firms “the flexibility they need to serve homeowners with dignity,” even while they’re servicing an “unprecedented volume of borrowers.”

Over seven million American homeowners temporarily stopped making monthly mortgage payments through COVID-19 hardship forbearance, about two million are still participating. However, most of the latter are expected to be in forbearance for over a year. CFPB expects about 900,000 homeowners to exit forbearance between now and the end of the year.

The number of homeowners currently in forbearance is greater than the number of at-risk homeowners during the Great Recession. Over 3% of U.S. homeowners with a mortgage are at least four months behind on mortgage payments.

New rules: A smooth and orderly transition

The new rules require servicers to redouble efforts to prevent avoidable foreclosures. The rules will:

  • Give borrowers a “meaningful opportunity” to pursue loss mitigation options. To ensure borrowers can do this, servicers must meet temporary “special procedural safeguards” before initiating foreclosures for certain mortgages through the end of the year.
  • Allow mortgage servicers to help borrowers faster. Servicers can offer streamlined loan modifications to borrowers with COVID-19-related hardships without making borrowers submit all paperwork for every possible option. These streamlined loan modifications cannot increase borrowers’ payments and have other protections built into them.
  • Tell borrowers their options. Servicers must increase outreach to borrowers before initiating foreclosure and tell borrowers key information about their repayment or other options.

Generally, borrowers will have at least three options to bring their mortgages current and avoid foreclosure. Borrowers may:

  • Resume regular mortgage payments. Servicers can move a borrower’s missed payments to the end of the mortgage, commonly called “deferral.”
  • Lower their monthly mortgage payments. Modifications can change the interest rate, principal balance or length of the mortgage.
  • Sell their homes. For homeowners with sufficient equity, a sale may be possible. However, long-term forbearance may have eroded borrowers’ equity.

In some cases, foreclosures can’t be avoided. Under the CFPB’s rule, foreclosures will be able to start if the borrower:

  • Abandoned the property
  • Was more than 120 days behind on their mortgage before March 1, 2020
  • Is more than 120 days behind on their mortgage payments and has not responded to specific required outreach from the mortgage servicer for 90 days
  • Has been evaluated for all options other than foreclosure and there are none

The CFPB offers extensive consumer resources, including information on how to contact HUD-approved housing counselors, online at consumerfinance.gov/housing.

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