On June 23, 2020, the Consumer Financial Protection Bureau (CFPB) posted on its website an interim final rule that creates a temporary exception to certain loss mitigation obligations of mortgage loan servicers under Regulation X when offering specific loss mitigation options to consumers facing a financial hardship based on COVID-19. The interim final rule is effective July 1, 2020, and the CFPB will accept comments on the rule no later than 45 days after publication in the Federal Register.
Regulation X sets forth requirements for a mortgage loan servicer to exercise reasonable efforts to obtain all documents and information to complete a loss mitigation application from a borrower, and assess the borrower for all loss mitigation options available to the borrower based on the complete application. Subject to two exceptions, Regulation X also provides that a servicer may not evade the requirement to evaluate a complete loss mitigation application for all loss mitigation options available to the borrower by offering a loss mitigation option based on an evaluation of any information provided by a borrower in connection with an incomplete loss mitigation application. The two exceptions are (1) when a servicer has exercised reasonable diligence in obtaining the documents and information to complete a loss mitigation application, but a loss mitigation application remains incomplete for a significant period of time under the circumstances without further progress by a borrower to make the loss mitigation application complete, and (2) when a servicer offers a short-term payment forbearance program or a short-term repayment plan to a borrower based upon an evaluation of an incomplete loss mitigation application. Servicers have relied on the second exception when offering COVID-19 forbearances to consumers, but that exception does not apply to the offering of the loss mitigation option to address the missed payments.
The interim final rule adds a third temporary exception that is designed allow servicers to offer a payment deferral option offered by Fannie Mae and Freddie Mac, at the direction of the Federal Housing Finance Agency (FHFA), and a loss mitigation option for FHA insured loans. The CFPB explains that the criteria in the temporary exception “are intended to align with the criteria outlined in FHFA’s COVID-19 payment deferral and other comparable programs, such as FHA’s COVID-19 partial claim.” As previously reported, on May 13, 2020, Fannie Mae and Freddie Mac announced the COVID-19 payment deferral Servicers may begin to evaluate borrowers for a COVID-19 payment deferral starting July 1, 2020. And as previously reported, in April 2020 the U.S. Department of Housing and Urban Development announced a COVID-19 National Emergency Standalone Partial Claim for FHA insured loans.
Pursuant to the temporary exception, a servicer may offer a borrower a loss mitigation option based upon the evaluation of an incomplete loss mitigation application if all of the following criteria are met:
1. The loss mitigation option permits the borrower 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 FHA insured mortgage loan, the mortgage insurance terminates. For purposes of the temporary exception the “covered amounts”:
- Include, without limitation, all principal and interest payments forborne under a payment forbearance program made available to borrowers experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency, including a payment forbearance program made pursuant to the CARES Act; and
- Include, without limitation, all other principal and interest payments that are due and unpaid by a borrower experiencing financial hardship due, directly or indirectly, to the COVID-19 emergency.
For purposes of the temporary exception, “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.
2. Any amounts that the borrower may delay paying as described in paragraph 1 do not accrue interest, 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.
3. The borrower’s acceptance of the loss mitigation offer ends any preexisting delinquency on the mortgage loan.
Pursuant to the temporary exception, once the borrower accepts the loss mitigation offer, the servicer is not required to comply with the Regulation X section 1024.41(b)(1) or (2) requirements regarding the completion of a loss mitigation application, and review of a loss mitigation application for completeness, in connection with any loss mitigation application the borrower submitted prior to the servicer’s offer of the loss mitigation option. However, in the event that a borrower who accepts a loss mitigation option offered pursuant to the temporary exception later submits a new loss mitigation application, the servicer must comply with the Regulation X section 1024.41(b)(1) and (2) requirements.
The CFPB notes that while under paragraph 1 the repayment of the deferred amounts is delayed until the specified events, the temporary exception “does not specify how a servicer must structure repayment of the deferred amounts, [and] that repayment either in a lump sum or over a specified period at the end of the loan term through additional periodic payments, among other possible approaches, would satisfy the [exception].” The CFPB also notes that the temporary exception is available for eligible loss mitigation options that would technically extend the term of the loan in accommodating repayment of forborne or delinquent amounts.
The CFPB explains the condition that the borrower’s acceptance of the offer end any preexisting delinquency ensures that borrowers who accept a loss mitigation option under the temporary exception do not face a risk of imminent foreclosure. Under Regulation X, servicers are generally prohibited from making the first notice or filing required under applicable law to initiate the foreclosure process until a mortgage loan obligation is more than 120 days delinquent.
While the CFPB designed the temporary exception to work with the Fannie Mae and Freddie Mac COVID-19 payment deferral and the FHA COVID-19 National Emergency Standalone Partial Claim, the exception is not limited to these programs.
The CFPB seeks comment on three specific issues with regard to the temporary exception:
- Whether the temporary exception appropriately balances providing flexibility to servicers to offer relief quickly during the COVID-19 emergency with providing important protections for borrowers engaged in the loss mitigation application process, such as protections from foreclosure.
- Whether the CFPB should require written disclosures for the temporary exception, or any similar exceptions that the CFPB may authorize in the future.
- Whether the CFPB should extend the temporary exception to other post-forbearance loss mitigation options made available to borrowers affected by other types of disasters and emergencies.
As noted above, comments on the interim final rule will be due no later than 45 days after publication in the Federal Register.
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