The Consumer Financial Protection Bureau (CFPB) released the Winter 2020 edition of its Supervisory Highlights report on February 21, 2020. Among other legal violations, the CFPB noted that certain mortgage servicers have recently struggled with the concept of a verbal loss mitigation application. Although the issues described in the report center around assistance offered in connection with a natural disaster, the verbal loss mitigation application concept and the CFPB’s expectations regarding verbal loss mitigation applications have broad application and impact most loss mitigation and collections units. Therefore, the insight provided by the CFPB in the Winter 2020 report is critical for any mortgage servicer who (1) believes that a loss mitigation application can only be submitted in writing, or (2) offers short-term assistance — repayment or forbearance plans — to borrowers but does not consider those arrangements to be loss mitigation options or part of the standard loss mitigation process.
This post will discuss the verbal loss mitigation issues that the CFPB raised in the Winter 2020 report. A subsequent post will address short-term loss mitigation options and the applicable compliance issues raised by the CFPB.
Verbal Loss Mitigation Applications
The CFPB intentionally drafted the loss mitigation rules in Regulation X so that servicers would have to consider many conversations with delinquent borrowers as the start of a loss mitigation application. The result is that a discussion with a mortgage servicer’s collections department, SPOC group, or other phone representative can trigger all of the obligations that stem from receipt of an application, including the sending of an acknowledgment letter and assisting the borrower to complete the application. Although the CFPB continues to apply that interpretation of the law when examining servicing entities under its purview, the concept of a verbal loss mitigation application is something that many mortgage servicers seem to have not contemplated. The Winter 2020 report confirms that servicers must consider the concept of a verbal loss mitigation application and be ready to act when one is received.
The basis for the CFPB’s position on verbal loss mitigation applications primarily comes from the definition of a “loss mitigation application” in Regulation X, which is defined to mean “an oral or written request for a loss mitigation option that is accompanied by any information required by a servicer for evaluation for a loss mitigation option.” Note that the CFPB implemented this definition and intentionally made it applicable to oral requests for assistance. The purpose of such a broad definition was to cast a wide net and bring people into the fold early so that they can benefit from the protections afforded under the law. As a result, if a borrower expresses an interest in a loss mitigation option, such as a repayment plan, forbearance, or loan modification, and provides information that the servicer will use to evaluate the borrower for a loss mitigation option, then that interaction constitutes a loss mitigation application, regardless of whether it is communicated verbally or in writing.
The CFPB highlighted this concept in the Winter 2020 report:
In one or more examinations, servicers automatically granted short-term payment forbearances if a borrower in a disaster area experienced home damage or incurred a loss of income from the disaster. Borrowers did not submit any form of written application to receive the forbearance. Rather, borrowers spoke with the servicers over the phone about their financial concerns due to the disaster and received the forbearances based on these conversations. The borrowers’ conversations with the servicers constituted loss mitigation applications under Regulation X.
The Winter 2020 report makes clear that submitting information in writing is not a requisite to meeting the definition of a loss mitigation application. In the examples cited in the report, the borrowers “did not submit any form of written application” but the examiners and the CFPB concluded that the conversations nevertheless constituted loss mitigation applications under the law. This shows that borrowers who convey information over the phone can, and often do, start the loss mitigation process verbally.
Servicers who don’t categorize certain conversations with delinquent borrowers as the initial submission of a loss mitigation application can end up facing compliance issues. Upon receipt of a loss mitigation application — regardless of whether it is an oral or written request — Regulation X imposes various duties on the mortgage servicer. This includes the sending of an acknowledgment letter and exercising reasonable diligence to assist the borrower in completing the application. Failing to recognize that a conversation has risen to the level of a loss mitigation application will inevitably result in servicers failing to comply with those subsequent obligations.
Although the impact of this rule is far-reaching, it is particularly relevant to servicers who acquire information from a borrower during a conversation in order to determine whether to offer short-term relief, such as forbearances and repayment plans. Servicers frequently acquire information related to financials and hardship circumstances in order to gauge whether short-term relief is appropriate and to set the terms of an offer. As the CFPB explained in the Winter 2020 report, those interactions may be considered loss mitigation applications. To the extent a servicer has, up to this point, believed that loss mitigation applications must be submitted in writing, the CFPB’s Winter 2020 report casts serious doubt on that position.