The Consumer Financial Protection Bureau (CFPB or Bureau) issued an interim final rule (IFR) on June 23, 2020 that temporarily permits mortgage servicers to offer to borrowers impacted by the coronavirus (COVID-19) pandemic certain loss mitigation options based on the evaluation of an incomplete loss mitigation application.
Regulation X (the Real Estate Settlement Procedures Act’s implementing regulation), generally requires servicers to obtain a complete loss mitigation application before evaluating a mortgage borrower for a loss mitigation option, such as a loan modification or short sale. Regulation X provides an exception from this requirement for certain short-term loss mitigation options.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides forbearance relief for consumers with federally backed mortgage loans, but the statute does not specify how borrowers receiving CARES Act forbearances must repay the forborne payments. This omission creates uncertainty for stakeholders as to how borrowers must repay these amounts when CARES Act forbearances expire. As many initial forbearance periods were set at 90 days earlier this spring, many of the forbearances will expire in June or July 2020.
The mortgage industry has developed different options for borrowers to repay the payments that were forborne under the CARES Act. For example, the Federal Housing Finance Agency (FHFA), Fannie Mae, and Freddie Mac may permit some borrowers to defer repayment of the forborne amounts until the end of the mortgage loan. The Federal Housing Administration (FHA) has a similar program. These programs require the servicer to collect only minimal information from the borrower before offering the option.
Summary of the Interim Final Rule
The IFR makes it clear that servicers do not violate Regulation X by offering certain COVID-19-related loss mitigation options based on an evaluation of limited application information collected from the borrower. Normally, with certain exceptions, Regulation X would require servicers to collect a complete loss mitigation application before making an offer. Due to the particular needs of mortgage servicers and borrowers during the COVID-19 pandemic, the Bureau is amending Regulation X to temporarily permit mortgage servicers to offer certain loss mitigation options without obtaining a complete loss mitigation application. Servicers may offer eligible loss mitigation options to a borrower experiencing a financial hardship due, directly or indirectly, to COVID-19 and who has received a payment forbearance program, including one offered pursuant to Section 4022 of the CARES Act, or who has had other principal and interest payments that are due and unpaid as a result of a financial hardship due, directly or indirectly, to COVID-19.
The CFPB’s amendment conditions eligibility for the new exception on the loss mitigation option satisfying three criteria.
First, the loss mitigation option must permit the borrower to delay paying certain amounts until the mortgage loan is refinanced, the mortgaged property is sold, the term of the mortgage loan ends, or, for a mortgage insured by FHA, the mortgage insurance terminates. These amounts include, without limitation, all principal and interest payments forborne under a qualifying COVID-19-related payment forbearance program. These amounts also 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 COVID-19. For purposes of this criterion, 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.
Second, any amounts that the borrower may delay paying through the loss mitigation option 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.
Third, the borrower’s acceptance of the loss mitigation offer must resolve any prior delinquency. The Bureau states that these criteria provide important protections for borrowers and are intended to align with the COVID-19 payment deferral option announced by FHFA and other similar programs, including FHA’s COVID-19 standalone partial claim.
The IFR also provides servicers relief from certain requirements under Regulation X that normally would apply after a borrower submits an incomplete loss mitigation application. Once the borrower accepts an offer for an eligible program under the IFR, the servicer need not exercise reasonable diligence to obtain a complete application and need not provide the acknowledgment notice that is generally required under Regulation X when a borrower submits a loss mitigation application.
The IFR is effective on July 1, 2020, and comments must be received within 45 days after publication in the Federal Register.
- Servicers still must comply with Regulation X’s other requirements after a borrower accepts a loss mitigation offer. For example, if the borrower becomes delinquent again after accepting the offer, the servicer would have to satisfy Regulation X’s early intervention requirements. Similarly, if the servicer receives a new loss mitigation application from the borrower, the servicer would have to comply with Regulation X’s loss mitigation procedures.
- In particular, the IFR helps resolve uncertainty surrounding whether servicers could offer an FHFA COVID-19 payment deferral (which uses streamlined application procedures) and certain other similar programs without violating Regulation X’s general prohibition of offering a loss mitigation option based on an evaluation of an incomplete application. Such streamlined procedures may help ensure that servicers have sufficient resources to address the unusually large number of borrowers who will be exiting CARES Act or similar forbearances and may be seeking assistance in the coming months.
- The IFR also is flexible with respect to repayment requirements—it does not specify how a servicer must structure repayment of the deferred amounts. Requiring 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 be satisfactory.