Home Mortgage Consumer Protection

§1. Reaching out quickly with “live contact”

During the mortgage crisis, many mortgage servicers did not have good procedures for offering help quickly to borrowers who couldn’t keep up with their payments. Contacting borrowers in trouble right away is essential because the more missed or partial payments a borrower has, the harder it is to avoid foreclosure. To solve this problem for the future, CFPB is proposing that servicers must take “early intervention” steps to give borrowers important information and encourage them to get help.

What this means for consumers. If a borrower misses a payment or makes only a partial payment, the servicer must try to make a “live contact,” in person or by phone, with the borrower. This contact is supposed to make sure the borrower knows that a payment is overdue, and tell him/her whether the servicer offers any alternatives that could help avoid foreclosure (called “loss mitigation options”) such as a change in the loan term, forbearance, or refinancing. A recorded message would not be enough: the servicer must make “good faith efforts” to actually talk with the borrower.

CFPB is proposing that this means trying on at least 3 separate days to reach the borrower by phone. Is this a good definition of “good faith efforts”? CFPB also wonders if email or text messaging should be allowed as well. Would these be as good for getting the borrower and the servicer to start talking about loss mitigation options? If so, what would “good faith efforts” mean in this context?

This first contact must happen within 30 days of when the payment was due. CFPB thought about giving servicers 45 days, but is afraid that by then the borrower might have missed another payment. Some loan programs (e.g., FHA, VA) want servicers to start trying to contact borrowers within 16-20 days, but CFPB fears that contact too soon could upset borrowers who think their payment is on time so long as it’s within their servicer’s grace period. Is 30 days too much time, too little, or about right?

What this means for servicers. The time period for giving notice starts to run one day after the due date, even if there is a grace period. Servicers will want to look at CFPB’s examples of how timing is calculated. Note that a servicer must begin contact efforts no later than the 28^th day to be able to meet the good faith requirement of attempted contact on 3 discrete days. Should CFPB consider other ways of demonstrating good faith effort to establish interactive communication with a delinquent borrower? The 30-day period was chosen to harmonize with (1) the timing of the periodic statement (which must disclose late fees; see the Periodic Statement post) and (2) current early intervention standards of FHA, VA, and GSE loans.

Small servicers have told CFPB they often contact delinquent borrowers within several days of a missed payment. CFPB specifically asks whether the 30-day requirement conflicts with existing servicer practices – particularly, small servicers. Does it appropriately balance borrowers’ need for prompt notice with servicers’ need for flexibility in managing borrowers with who are considered more, or less, likely to default on a loan?

Notice requirements don’t apply if the borrower is making timely payments under a loss mitigation option. If the borrower telephones the servicer on his/ her own, the servicer can use this call to tell the borrower in a “live contact” that LMOs may be available, but written notice still must be given. If a borrower makes the missed payment before the 30 days passes, the servicer has no further notice responsibilities.

As part of a general expansion of the scope of Regulation X, the early intervention requirements would apply to subordinate-lien (as well as primary) closed-end mortgages.

Read what CFPB says in the NPRM about oral notice.

Read CFPB’s analysis of early intervention costs and benefits: general; small business.

See the text of the proposed rule and CFPB commentary: §1024.39(a); §1024.31 (“mortgage loan”)

§2. Following up with a written notice.

Although the live contact is an important start, CFPB is afraid that borrowers in trouble may not be ready to handle a lot of information or recall details provided in a conversation with the servicer. So it wants to require a second, written contact as well.

What this means for consumers. Within 40 days of when the payment was due, the servicer must send a written notice containing a lot more information. (CFPB has provided sample language, which you can comment on):

1. a statement encouraging the borrower to contact the servicer to get help, with mailing address and phone number.

Sample MS-4(A)

2. brief examples of any loss mitigation options the borrower might qualify for, and how he/she can get more details.

Sample MS-4(B)

3. what foreclosure means, and an estimated time (number of days from date of missed payment) for when the process would start.

Sample MS-4(D)

4. information on how to contact organizations (housing counselors, state housing finance agencies, etc.) that might be able to help the borrower better understand his/her options.

Sample MS-4(E)

Are the samples clear enough?

CFPB’s idea is to give borrowers enough information that they can start working with the servicer (or some other organization) before they get into too much trouble — but not so much information that they feel overloaded. Also, CFPB doesn’t want to add costs to the servicing process that don’t really benefit borrowers, since those costs may be passed along to mortgage consumers. Has CFPB come up with the right balance? Is there more, or different, information that would help borrowers? E.g., should the notice list all loss mitigation options the servicer offers, even though all borrowers may not qualify for all options? Does it help the borrower in trouble to be told how many days after a missed payment the foreclosure process could start? Small servicers are especially worried about cost. Should CFPB allow them to develop a more streamlined notice?

Is 40 days the right time period? Would borrowers in trouble still have enough time to begin working to avoid foreclosure if the notice wasn’t sent until, for example, 65 days?

Although servicers would get a longer time to send the written notice, CFPB is not planning to require that the “live contact” come first. Does it matter if the written notice comes before or after the live contact? The “live contact” requirement would apply every time there is a missed or partial payment, but servicers would have to send the written notice only every 180 days (6 months). CFPB’s theory is that borrowers in trouble aren’t helped by getting the same written notice over and over, but that servicers should continue to reach out to people who haven’t found a solution. Right approach?

The early intervention requirements would not apply if the borrower only misses a payment on late fees. Servicers aren’t allowed to “pyramid” late fees by applying a payment that would cover principal, interest and escrow to outstanding late fees, and then charging new late fees for an “insufficient” payment. So, CFPB assumes that a borrower whose only problem is failure to pay late fees isn’t really in danger of foreclosure. Make sense?

What this means for servicers. Servicers will want to read the specific requirements for content of the written notice (§ 1024.39 (b)(2)). Is it feasible at this point to provide information about loss mitigation options and an estimate of when foreclosure may start? Could small servicers deliver the same benefits to borrowers at a lower cost through more streamlined written disclosure requirements?

The 40-day period was chosen (1) to give borrowers at least 10 days after the live contact to make up the payment (if this happens, no further notice is required); and (2) to harmonize with current written notice requirements of FHA and GSE loans. Servicers will want to look at CFPB’s examples of how timing is calculated. The proposal that written notice need be provided only once in any 6-month period harmonizes with requirements for FHA loans. CFPB wants comments on whether the written disclosure proposals conflict with current requirements of other federal agencies, GSEs or others — and if so how it should handle such conflict.

CFPB recognizes that complying with the proposed notice requirements might, in some circumstances, conflict with servicers’ obligations under other federal or state laws (e.g., Fair Debt Collection Practices Act; Bankruptcy Code) and requests comments on these possible conflicts.

For more details:

Read what CFPB says in the NPRM about early intervention written notice.

Read CFPB’s analysis of early intervention costs and benefits: general; small business.

See the text of the proposed rule and CFPB commentary: §1024.39(b)