Introduction

The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) in 2011, on the heels of the Great Recession.¹ Now, the agency created in response to one crisis is poised to lead the regulatory charge in another crisis. The new agency—and its “regulation by enforcement” approach—has already established a penchant for taking initiative with respect to developing industries.² One such emerging area of regulation pertains to COVID-19 mortgage forbearance. The end of the current forbearance period is likely to cause a surge in foreclosures and related disputes.³ As foreclosures come to the regulatory forefront, lenders and servicers may witness an unprecedented expansion of CFPB authority.

The CFPB Continues to Expand Mortgage Regulation

The CFPB is the agency tasked with rulemaking and enforcement with respect to the CARES Act, which implemented the freeze on mortgage foreclosures.⁴ On April 3, 2020, the CFPB issued a joint statement with all other federal financial regulators.⁵ In the statement, the CFPB indicated that it did not intend to take action against mortgage servicers for delays in: (1) sending loss mitigation notices; (2) establishing or making good faith efforts to establish live contact with delinquent borrowers; or (3) sending written early intervention notice to delinquent borrowers.⁶ While this statement appears to offer mortgage servicers regulatory flexibility, the statement also warns that initial forbearance of up to 180 days must be granted without a request for initial documentation.⁷ The borrower can extend that period for an additional 180 days.⁸

In a COVID-19 forbearance guide, the CFPB stated that servicers are prohibited from requiring proof of borrowers’ financial hardship.⁹ In addition, servicers may be at risk of a legal violation by simply discouraging or steering borrowers away from a CARES Act forbearance.¹⁰ Determination of the latter violation would be subject to the discretion of CFPB examiners.¹¹

The CFPB has not yet started to bring COVID-19 forbearance actions, but it has remained active in other areas of enforcement. In fact, the CFPB brought a total of 19 public civil and administrative actions between July and September of this year.¹² Nearly half of these actions involve mortgage lenders and servicers.¹³ This increase represents the agency’s highest new case volume in five years.¹⁴ This number is likely to increase as forbearance ends.¹⁵

The CFPB continues to pursue enforcement actions against mortgage lenders and servicers.¹⁶ One such example is a federal case filed by the CFPB against one of the largest mortgage servicers in the United States, Ocwen Financial Corporation (“Ocwen”).¹⁷ Although this case pre-dates COVID-19, the CFPB has remained vigilant in pursuing claims against Ocwen in 2020.¹⁸ In its most recent complaint, the CFPB alleges that Ocwen: (1) serviced loans based on inaccurate borrower information: (2) relied on a deficient servicing platform; (3) relied excessively on manual data entry and reports to address servicing issues; and (4) harmed borrowers through its use of inaccurate and incomplete information.¹⁹

In its complaint, the CFPB cites six distinct areas of harm to consumers stemming from Ocwen’s mishandling of consumer loan information.²⁰ These actions are alleged to be in violation of Ocwen’s statutory obligations under the Real Estate Settlement Procedures Act of 1974,²¹ the Consumer Financial Protection Act of 2010,²² the Truth in Lending Act,²³ the Homeowners Protection Act,²⁴ and/or the Fair Debt Collection Practices Act.²⁵ The relief sought by the CFPB includes: (1) permanent injunctive relief to prevent future statutory violations; (2) relief to harmed consumers (rescission of contracts, restitution, monetary damages, etc.); (3) disgorgement of unlawful gains; and (4) civil monetary penalties.²⁶ 

Additional enforcement actions have been filed by the agency during the ongoing pandemic. For example, the CFPB initiated an action against Washington Federal Bank, N.A. on October 27, 2020, alleging mortgage servicing reporting errors.²⁷ The administrative action seeks implementation of a new compliance and reporting system, as well as payment of civil penalties.²⁸

As mortgage servicers continue to draw greater scrutiny from the CFPB during the pandemic, it is likely that similar enforcement actions will be filed in 2021.²⁹

The CFPB Continues Regulation by Enforcement

The CFPB has traditionally adopted an enforcement-based regulatory approach, as opposed to a rule-based approach. Accordingly, the CFPB often imposes penalties on consumer-facing entities without warning or rulemaking. The agency has drawn criticism for this approach.³⁰ This defining feature, however, allows the agency to nimbly respond to emerging consumer issues. Looking ahead to regulation in 2021, there is speculation that a Biden administration could result in an even more aggressive use of the agency’s authority.³¹ Until recently, the President could only remove the CFPB director for cause. The Supreme Court recently ruled, however, that this “for cause” requirement is unconstitutional.³² Accordingly, it is likely that the change in administration will result in a new director and increased enforcement actions across all sectors, including mortgage servicing.³³

The CFPB Looks to Further Define Its Arbitrary ‘Abusive’ Standard

The CFPB is a leader in regulation of developing industries because of its broad (perhaps ambiguous) regulatory authority. Pursuant to the Dodd-Frank Act, the agency has the authority to prevent and punish any unfair, deceptive, or abusive acts or practices. Although all three standards are broadly defined, the abusive standard represents a particularly powerful tool for the CFPB. Unlike “unfair” or “deceptive” acts or practices, the standard for “abusive” acts or practices is accompanied by almost no independent case law or regulatory history.³⁴ While this vague standard grants the CFPB broad regulatory discretion, it creates significant compliance difficulties for regulated entities.³⁵

Earlier this year, CFPB Director Kathleen L. Kraninger stated her desire to further define the abusive standard through the agency’s trademark regulation-by-enforcement approach.³⁶ In cases of “good-faith but unsuccessful effort[s] to comply” with the abusive standard, the CFPB will pursue damages and restitution.³⁷ Where bad-faith violations occur, the agency will seek civil penalties and/or disgorgement.³⁸

As COVID-19 forbearance ends, we are likely to see unprecedented numbers of foreclosures and mortgage servicing disputes. On the regulatory side, the CFPB will lead the charge in punishing lenders and servicers for what are deemed wrongful acts. Given Director Kraninger’s statements, a new administration and the possibility of a more aggressive agency, and an impending mortgage crisis, the CFPB may use the pandemic as an opportunity to define the abusive standard. Financial institutions should be wary, as this clarity may come in the form of enforcement actions against mortgage lenders and servicers.³⁹

Joshua L. Roquemore is an associate at Riley Safer Holmes & Cancila LLP in its Irvine/Los Angeles office; Rodney Perry is a partner at Riley Safer Holmes & Cancila LLP in its Chicago office.