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Mortgage companies could face penalties if they don’t take steps to prevent a deluge of foreclosures that threatens to hit the housing market later this year, a U.S. regulator said Thursday.

The Consumer Financial Protection Bureau warning is tied to forbearance relief that’s allowed million of borrowers to delay their mortgage payments due to the pandemic. To avoid what the bureau called “avoidable foreclosures” when the relief lapses, mortgage servicers should start reaching out to affected homeowners now to advise them on ways they can modify their loans.

“There is a tidal wave of distressed homeowners who will need help,” Dave Uejio, the CFPB’s acting director, said in a statement. “Servicers who put struggling families first have nothing to fear from our oversight, but we will hold accountable those who cause harm to homeowners and families.”

In a separate compliance bulletin released Thursday, the CFPB said that companies “that are unable to adequately manage loss mitigation can expect the bureau to take enforcement or supervisory action.”

More than 2 million borrowers as of January had either postponed their payments or failed to make them for at least three months, the bureau said. Once government-authorized forbearance plans begin to end in September, hundreds of thousands of people may need assistance getting back on track.

CFPB issued a brief statement highlighting its position regarding “consumer harms in the small dollar lending market” and likely future action to reverse the previous CFPB administration’s policy regarding the industry.

The next day, the CFPB provided its Consumer Response Annual Report for 2020 to Congress, which stated the complaint volume for payday loans “decreased significantly in 2020” (down 24%) and personal loans (listing installment loans, personal lines of credit and pawn loan as “types” in this category) stayed relatively the same. Despite this overall decrease in small dollar lending consumer complaint volume, the CFPB indicated in its statement that it is focusing its attention on small dollar lending activity. The CFPB expressed “concern” for “any lender’s business model that is dependent on consumers’ inability to repay their loans,” citing prior research which, the bureau states, shows that small dollar loans frequently result in reborrowing chains that end in default and result in consumer harm.

Finally, the statement alludes to the prior administration’s revocation of the “ability to repay” requirement of the Payday, Vehicle Title and Certain High-Cost Installment Loans (“Small Dollar Rule”) final rule and the current administration’s dissatisfaction of that decision, and confirms the CFPB will vigorously pursue the ability to repay issue through other authority provided by Congress.

Interestingly, the CFPB refers to “years of research by the CFPB” in its statement as a justification for why ability to repay analysis should be required in the small dollar lending context, even though the prior administration found this historical research to be flawed and a primary reason for removing the ability to repay element from the Small Dollar Rule. The prior administration received numerous comments related to the Small Dollar Rule, including from industry participants, on why the research was flawed.

Furthermore, industry experts have long touted numerous studies that demonstrate the vast majority of small dollar borrowers can afford to repay their loans and are able to correctly predict their ability to repay a loan. For example, studies show that a consumer may take out a two-week payday loan, but understand that it would still take them six weeks to pay off the loan completely. Thus, because the consumer refinances the loan several times it is still a short-term loan and it does not mean that the consumer misjudged their ability to repay the loan or that the lender deceived the consumer.

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