Earlier this week the CFPB released an interim final rule that allows mortgage servicers flexibility to offer additional short-term loss mitigation options to borrowers impacted by the COVID-19 pandemic. The mortgage servicing rules include many requirements for the servicing of mortgage loans in default, including limitations on the types of loss mitigation that may be offered in certain instances. The unique challenges facing servicers and borrowers in the wake of the pandemic, as well as the unique loss mitigation options being announced by federal housing agencies designed to assist borrowers negatively impacted by COVID-19 that do not fit neatly into the CFPB’s existing servicing requirements, have prompted the CFPB to amend those rules to provide servicers with additional flexibility.
Existing Limitation on Loss Mitigation Offered Based on Evaluations of Incomplete Applications
The CFPB’s mortgage servicing rules in Regulation X provide that servicers generally may not evade the requirement to evaluate a complete loss mitigation application for all loss mitigation options available to the borrower by making an offer based on a review of an incomplete application. This is known as the “anti-evasion” requirement, and is designed to ensure that a borrower in default submits a complete loss mitigation application and then is evaluated for all loss mitigation options available to the borrower based on investor and/or regulatory requirements.
The CFPB broadly conceives of what qualifies as a loss mitigation application, and even a phone call with a borrower in which the borrower speaks about their financial concerns can qualify as a loss mitigation application, triggering the anti-evasion requirement. This is especially relevant in our current environment when many borrowers have reached out via phone or their servicer’s website to let the servicer know that they are impacted by the pandemic. This contact likely constitutes an incomplete loss mitigation application and the servicer is generally prohibited from offering the borrower loss mitigation based solely on this outreach.
However, exceptions in Regulation X have allowed servicers to offer short-term forbearance and short-term repayment plans to borrowers based on a review of an incomplete application. For purposes of these exceptions, a forbearance plan generally is defined broadly as a loss mitigation option pursuant to which a servicer allows a borrower to forgo making certain payments or portions of payments for a period of time, and a repayment plan generally is defined as a loss mitigation option with terms under which a borrower would repay all past due amounts over a specified period of time to bring the mortgage loan current.
Which Loss Mitigation Plans Qualify for the Exceptions?
In light of the increased delinquencies resulting from the pandemic, servicers and investors have struggled with questions of whether certain loss mitigation programs qualify as short-term forbearance or short-term repayment plans and can be offered based on the review of an incomplete application. For example, given that a short-term forbearance program is defined broadly to essentially mean any loss mitigation option that allows borrowers to skip certain payments, would a deferral qualify as a short-term forbearance plan?
The question of whether a deferral could be offered as a short-term loss mitigation option became particularly important in the last few months as the federal housing agencies that purchase, insure, or guaranty mortgage loans subject to the forbearance requirements of Section 4022 of the CARES Act began issuing guidance on how servicers must evaluate borrowers at the end of CARES Act forbearance plans for loss mitigation options. Importantly, the Federal Housing Finance Agency (“FHFA”) announced that Fannie Mae and Freddie Mac would offer a new deferral program, with unique qualifications for borrowers negatively impacted by COVID-19. Beginning on July 1, 2020, the program will be available to borrowers in a COVID-19 forbearance plan and to other borrowers who experienced a financial hardship resulting from COVID-19 that affects their ability to make their mortgage payments. In April of 2020, HUD announced that it would permit servicers of FHA-insured loans to offer borrowers on a COVID-19 forbearance plan a “COVID-19 National Emergency Standalone Partial Claim,” that effectively permits borrowers to defer mortgage payments covered by their forbearance plans, provided they meet certain limited criteria. Under both the GSEs’ deferral program and FHA’s COVID-19 stand-alone partial claim option, borrowers would not be required to submit a complete loss mitigation application to be eligible.
New Short-Term Loss Mitigation Option under the Interim Rule
The new interim rule offers some certainty for servicers and investors who seek to offer loss mitigation options like a deferral based on an evaluation of an incomplete application. In addition to the preexisting exceptions for short-term forbearance and short-term repayment plans, the interim rule creates a third exception for programs offered to borrowers impacted by the pandemic. To take advantage of this exception, the program that servicers offer must meet certain requirements. In its announcement of the new exception, the CFPB emphasized that the criteria in the rule are intended to align with the criteria outlined in FHFA’s COVID-19 payment deferral program and other comparable programs, such as FHA’s COVID-19 partial claim
- The program must permit borrowers to delay paying “covered amounts” until the mortgage loan is refinanced, the mortgaged property is sold, the term of the mortgage loan ends, or, for a mortgage loan insured by FHA, the mortgage insurance terminates. “Covered amounts” generally includes all principal and interest payments forborne under a payment forbearance program made available to borrowers impacted by the pandemic as well as all other principal and interest payments that are due and unpaid by a borrower impacted by the pandemic. “The term of the mortgage loan” means the term of the mortgage loan according to the obligation between the parties in effect when the borrower is offered the loss mitigation option.
- Any amounts that the borrower may delay paying as described above do not accrue interest. In addition, the servicer does not charge any fee in connection with the loss mitigation option, and the servicer waives all existing late charges, penalties, stop payment fees, or similar charges promptly upon the borrower’s acceptance of the loss mitigation option.
- The borrower’s acceptance of the loss mitigation offer ends any preexisting delinquency on the mortgage loan.
The Bureau notes that the FHFA’s COVID-19 payment deferral and the FHA’s COVID-19 partial claim satisfy these criteria, although the interim final rule is not limited to these programs. The Bureau also explained that the rule is flexible with respect to repayment requirements. A lump sum payment at the end of the loan term is permissible under the rule, and because the rule defines “the term of the mortgage loan” to mean the term in effect when the loss mitigation offer is made, repayment over a specified period at the end of the loan term through additional periodic payments is also permissible under the rule.
Other Requirements Waived
The interim rule provides that if a borrower accepts an offer pursuant to the new exception, the servicer is not required to comply with Regulation X’s requirement to send a letter acknowledging receipt of a loss mitigation application within five days and the requirement to attempt to get a complete application from the borrower. This provision is likely welcome relief to servicers who are facing sharply increased requests for assistance.
Interim Final Rule
The CFPB is issuing this rule as an interim final rule under the good cause exception of the Administrative Procedure Act. The good cause exception generally allows agencies to publish a final rule without going through the usual notice and comment process before the rule becomes effective where notice and comment are impractical, unnecessary, or contrary to the public interest. According to the CFPB, because many servicers offered borrowers 90-day forbearance programs that are coming to an end in the next few weeks, and because the FHFA COVID-19 deferral program becomes effective on July 1, it would be impractical and contrary to the public interest to require a notice and comment process. Unless the CFPB acts quickly, servicers may struggle to determine whether they could offer borrowers a deferral program, including the FHFA COVID-19 deferral program, upon the end of a forbearance without obtaining a complete loss mitigation application from borrowers, a step that the CFPB acknowledged would delay or obstruct relief to borrowers who have an immediate need for the program.
The rule becomes effective on July 1, and the Bureau is currently accepting comments on the rule. Comments are due 45 days after the rule is published in the Federal Register. A more detailed Legal Update discussing the new rule is forthcoming.