Agencies Promise Flexibility, but the Rules Still Apply: Key Takeaways from Joint Agency and CFPB Guidance Regarding Mortgage Servicing Rules and COVID-19-Related Relief

Even before the CARES Act was signed into law on March 27, 2020, mortgage servicers have been inundated with requests for COVID-19-related relief. Recognizing that these requests are straining servicers’ capacity to assist consumers, regulators have attempted to assuage concerns that servicers’ efforts to provide quick relief may later be subject to examiner criticism or enforcement activity.

Our prior advisories on federal and state agency guidance to mortgage servicers can be found here and here.  

At first, regulator assurances were short on detail. But last Friday, April 3, 2020, the Consumer Financial Protection Bureau (CFPB), Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, and the Conference of State Bank Supervisors issued a “Joint Statement on Supervisory and Enforcement Practices Regarding the Mortgage Servicing Rules in Response to the COVID-19 Emergency and the CARES Act” (Joint Statement), and the CFPB published corresponding “Mortgage Servicing Rules FAQs related to the COVID-19 Emergency” (CFPB FAQs).

In their communications, the agencies acknowledged the operational and staffing challenges that servicers face in assisting customers right now. The agencies further recognized the potential for consumer confusion as borrowers struggle to understand what kind of mortgage relief may be available to them. Together, the Joint Statement and CFPB FAQs provide substantially more detailed guidance regarding the agencies’ proclaimed “flexible supervisory and enforcement approach” to comply with the Regulation X Part C mortgage servicing rules (Mortgage Servicing Rules, 12 CFR sections 1024.30-41).

The statement and FAQs also provide specific guidance regarding the interaction between COVID-19-related “short term” relief options like CARES Act forbearance on the one hand, and the mortgage servicing rules regarding the timing and substance of required early intervention and loss mitigation communications with borrowers; more in-depth loss mitigation activity; continuity of contact during loss mitigation; annual escrow notices; and payoff statements on the other.

Please reach out to us if we can help with interpreting and implementing this guidance, as well as any state-specific guidance, such as New York’s. For example, when New York adopted new Part 119 of 3 NYCRR on March 24, 2020, requiring emergency relief for New Yorkers suffering financial hardship because of COVID-19, the state gave servicers 10 business days, or until April 7, 2020, to communicate with customers regarding applying for relief, among other requirements. New York’s regulations specifically apply to mortgage loans not covered by CARES Act-required mortgage relief.

Eight Key Takeaways From the Joint Statement and CFPB FAQs:

1. CARES Act forbearance is a “short-term payment forbearance program” under Regulation X’s rules governing loss mitigation procedures (Loss Mitigation Rules), even if a second six-month forbearance period is offered at the conclusion of a first six-month period. (The CARES Act provides for up to two consecutive 180-day forbearance periods.) Associated repayment programs, depending on duration, may also qualify as “short-term repayment plans.” (Short Term Loss Mitigation Options FAQ 1.) As such, some procedural loss mitigation requirements do not apply, or do not immediately apply.

These include:

• Servicers need not collect a “complete” loss mitigation application in order to extend CARES Act forbearance relief. 12 CFR 1024.41(c)(2)(iii). Servicers may also extend forbearance relief, or any loss mitigation option, to borrowers who have not submitted an application at all. Comment 12 CFR 1024.41(c)(2)(i). (Short Term Loss Mitigation Options FAQ 2.)
• Servicers need not “exercise reasonable diligence” to obtain documents and information to complete a borrower’s loss mitigation application until “near the end” of a CARES Act forbearance period so long as the borrower is performing under the terms of the forbearance plan unless the borrower affirmatively requests additional, longer term loss mitigation (for example, a loan modification). Comment 1024.41(b)(1)-4.iii. (Short Term Loss Mitigation Options FAQ 4.)
• Caution: “Near the end” is not defined in the comments to Regulation X or in the CFPB FAQs, and servicers struggling to keep up with loss mitigation requests would be well-advised to schedule additional outreach regarding completing loss mitigation applications as soon as practicable during CARES Act forbearance periods.

2. A request for CARES Act forbearance, even if requested in a simple phone call during which a borrower affirms a COVID-19-related hardship, is an “incomplete loss mitigation application” under the Loss Mitigation Rules. (Joint Statement.) This means that all regulatory requirements associated with an “incomplete loss mitigation application” under Regulation X still apply.

3. Borrower loss mitigation and early intervention correspondence and outreach requirements still apply, but timing provisions will not be strictly enforced. Servicers must still send all borrower correspondence required by the Loss Mitigation Rules, including:

• The five-day written acknowledgment notice required by 12 CFR 1024.41(b) after receiving an “incomplete loss mitigation application” (as noted above, a request for CARES Act forbearance is considered an “incomplete loss mitigation application” under the Loss Mitigation Rules);
• The written early intervention notice required by 12 CFR 1024.39(b) to be sent within 45 days of a borrower’s delinquency (45-day early intervention letter);
• The written notice of receipt of a complete loss mitigation application required by 12 CFR 1024.41(c) to be sent within five days after receiving the complete application;
• The written notice of determination (loss mitigation offer or denial) required by 12 CFR 1024.41(c) and (d) to be sent within 30 days of receipt of a complete loss mitigation application; and
• The written notice of determination required by 12 CFR 1024.41(h) to be sent within 30 days of receipt of a borrower’s appeal of a loss mitigation determination.

Servicers must also make good faith efforts to establish live contact with delinquent borrowers, as required by 12 CFR 1024.39(a), and to take all actions required by the Loss Mitigation Rules, including:

• Actions required to review loss mitigation applications (12 CFR 1024.41(b))
• Actions required to evaluate loss mitigation applications (12 CFR 1024.41(c))
• Actions required to deny loss mitigation applications (12 CFR 1024.41(d))
• Actions required to process appeals of loss mitigation application denials (12 CFR 1024.41(h))
• Actions related to loans that are service-transferred during review of a loss mitigation application (12 CFR 1024.41(k))

However, “until further notice” from the agencies, so long as servicers send the five-day acknowledgment notice before the end of a CARES Act forbearance period, and otherwise “mak[e] good faith efforts to provide the notices and take the related actions within a reasonable time,” the agencies will not take supervisory or enforcement action against servicers for delays in meeting timing requirements. (Joint Statement; Short Term Loss Mitigation Options FAQ 3; Early Intervention Requirements FAQ 1.)

Interestingly, neither the Joint Statement nor the CFPB FAQs provide that servicers must extend the 14-day minimum borrower response time provided in 12 CFR 1024.41(e) for borrowers who have received loss mitigation offers.

4. A borrower performing under a CARES Act forbearance program who requests forbearance before becoming delinquent in payment is likely not considered “delinquent” under the Mortgage Servicing and Loss Mitigation Rules. See Comment 12 CFR 1024.39(a)-1.ii. Thus, many of the Early Intervention requirements under the Mortgage Servicing Rules may not apply in a CARES Act forbearance scenario. (Joint Statement; Early Intervention Requirements FAQs 1-4.)

• Caution regarding template communications: Given the high volume of borrower assistance requests that servicers are and have been receiving, many borrowers as a practical matter may not be successful in making contact to request CARES Act forbearance until they have technically become delinquent. It may be operationally less complicated for servicers to uniformly implement delinquency-related communications required by the Mortgage Servicing Rules for all borrowers receiving CARES Act-related relief, whether they should technically be defined as “delinquent” or not.

Moreover, both Fannie Mae and Freddie Mac consider borrowers in forbearance plans to be “delinquent,” and if servicers of GSE loans already combine the 45-day letter with the GSEs’ borrower solicitation package requirements, it will likely be simplest for a servicer to continue that practice for all borrowers receiving CARES Act forbearance. The CFPB FAQs appear to recognize that “being able to use similar content in these circumstances may help servicers conserve resources,” and suggest that “[f]or example, servicers could develop a form letter that they send to all borrowers enrolled in the same short-term forbearance programs as a result of hardships related to COVID-19.” (Short Term Loss Mitigation Options FAQ 3.)

5. Servicers have flexibility with regard to content included in required borrower communications, particularly in aid of preventing borrower confusion and minimizing operational challenge. (Joint Statement; Short Term Loss Mitigation Options FAQ 3; Early Intervention Requirements FAQs 2 and 4.) Recognizing that some of the notices required by the Mortgage Servicing and Loss Mitigation Rules “without additional explanation, might otherwise be confusing to borrowers who were offered or placed in short-term options,” the Joint Statement and FAQs emphasize that “there is existing flexibility in the rules around how servicers can adjust the content of these notices to try to avoid consumer confusion.”

The FAQs provide three examples of required written notices and other communications that servicers may wish to augment with language referencing the COVID-19 emergency in order to avoid borrower confusion as to why the borrower is receiving these notices and communications:

• i. The written informational notice a servicer must provide after a servicer has offered a short-term loss mitigation option, such as a CARES Act forbearance plan. (Short Term Loss Mitigation Options FAQ 3; 12 CFR 1024.41(c)(2)(iii).)
• ii. Borrower contact servicers must initiate near the end of a short-term loss mitigation option, such as a CARES Act forbearance plan, in order to determine if the borrower wishes to complete a loss mitigation application and be evaluated for longer term relief. (Short Term Loss Mitigation Options FAQ 3; Comment 12 CFR 1024.41(b)(1)-4.iii.) This required contact need not be written.
• iii. The 45-day early intervention letter required by 12 CFR 1024.39(b), as provided in Comment 12 CFR 1024.39(b)(2)-1. (Early Intervention Requirements FAQ 2.)

6. Recognizing that servicers “may have difficulties staffing customer service call centers due to the COVID-19 emergency, the CFPB FAQs emphasize that the Mortgage Servicing Rules still do not require that a “single point of contact” (SPOC) be assigned to each borrower; rather the continuity of contact requirements of 12 CFR 1024.40 must be followed, as always. (Continuity of Contact Requirements FAQ 1.) However, as a practical matter, many loan servicers provide SPOCs to delinquent borrowers because of state requirements, or the National Mortgage Settlement.

7. Servicers may delay sending the annual escrow statement required by 12 CFR 1024.17(i), given that escrow statements “typically generate a high volume of calls” which “may cause challenges for servicers’ call center operations.” (Joint Statement.) So long as servicers are making “good faith efforts to provide these statements within a reasonable time,” the agencies “do not intend to cite in an examination or bring an enforcement action against mortgage servicers for delays in sending the annual escrow statement.” (Annual Escrow Statement FAQ1.)

• Caution: While providing this flexibility to servicers, the CFPB FAQs seemingly acknowledge the customer confusion and potential harm that could be created by not timely informing borrowers if they will have to pay any escrow shortage or deficiency. The CFPB FAQs suggest two potential solutions, the first not terribly comforting, or specific, and the second potentially inconsistent with other guidance:
  
  • i. Even though Regulation X requires servicers to explain how a consumer will be required to repay an escrow shortage, the regulation “does not require servicers to collect it,” and thus “[s]ervicers could, for example, inform borrowers that they are forgoing collection for several months,” or “[t]hey could also send an explanatory letter”;
  • ii. 12 CFR 1024.17(i)(2) exempts servicers from providing an annual escrow statement to borrowers who are “more than 30 days overdue.” Yet, the Annual Escrow Statement FAQ does not attempt to reconcile this guidance regarding the annual escrow statement with Early Intervention Requirements FAQs 1 through 4 and the Joint Statement, which appear to suggest that a borrower receiving CARES Act forbearance is not considered “delinquent” under the Mortgage Servicing Rules.

However, given a borrower receiving CARES Act forbearance will not be making any escrow payments at all, escrow shortage reconciliation will likely not take place until the forbearance plan is complete, thus hopefully mitigating any potential harm or consumer confusion that could result from a delay in communicating shortage information to borrowers.

8. Servicers have flexibility to take more than seven days to respond to a borrower’s request for a payoff statement as required by Regulation Z, 12 CFR 1026.36(c)(3). Regulation Z already provides flexibility in the case of “natural disasters or other similar circumstances.”

Despite regulator assurances that they do not “intend” to take supervisory or enforcement action, and the Joint Statement and CFPB FAQs’ focus on flexibility, the guidance also focuses on preventing consumer confusion. Neither the Joint Statement nor the CFPB FAQs provide any assurances regarding supervisory or enforcement actions for unfair, deceptive and abusive acts and practices (UDAAPs) that might result from servicers’ efforts to quickly implement COVID-19-related relief.

Servicers should therefore, even in the midst of current unprecedented operational and liquidity challenges, take good care to document their good faith efforts to comply with all applicable regulations and guidance, and to prevent consumer confusion – lest today’s attempt to provide comprehensive relief becomes the subject of tomorrow’s enforcement action.

The facts, laws, and regulations regarding COVID-19 are developing rapidly. Since the date of publication, there may be new or additional information not referenced in this advisory. Please consult with your legal counsel for guidance.

DWT will continue to provide up-to-date insights and virtual events regarding COVID-19 concerns. Our most recent insights, as well as information about recorded and upcoming virtual events, are available at www.dwt.com/COVID-19.