CFPB Amends Regulation X to Account for COVID-19-Related Mortgage Relief

On June 23, 2020, one week before the July 1, 2020, deadline for mortgage servicers to begin offering mortgage relief for Fannie Mae and Freddie Mac loans exiting CARES Act forbearance, the Consumer Financial Protection Bureau (CFPB) issued an Interim Final Rule (IFR) amending Regulation X's Loss Mitigation Procedures to allow mortgage servicers to more efficiently provide that relief. The IFR partially departs from the CFPB's previous guidance regarding Regulation X's Loss Mitigation Procedures in the context of CARES Act forbearance, which we broke down here.

The IFR is effective July 1, 2020. The primary post-CARES Act forbearance option for Fannie, Freddie and FHA loans (detailed here), which many servicers and investors have mimicked for non-federally-backed loans as well, is designed to allow borrowers to defer forborne payments to a non-interest bearing balance that need not be repaid until the loan matures or is otherwise paid off.

Neither Fannie Mae, Freddie Mac, nor FHA require servicers to ask borrowers to complete full loss mitigation applications for COVID-19 payment deferrals; rather, the eligibility requirements are simple and streamlined. Recognizing that servicers may be whipsawed between Fannie, Freddie and FHA requirements on the one hand and Regulation X's requirement that servicers collect "complete loss mitigation applications" on the other, the CFPB, through the IFR, is amending Regulation X by:

• Creating a new, temporary exception to the "anti-evasion" requirement for complete loss mitigation applications for servicers offering COVID-19 payment deferrals, 12 CFR 1024.41(c)(2)(i); and
• Relieving servicers from two other requirements associated with collecting a "complete loss mitigation application:"
  
  • 1) The requirement to "exercise reasonable diligence in obtaining documents and information to complete a loss mitigation application," 12 CFR 1024.41(b)(1); and
  • 2) The requirement to review an application for completeness, and to provide an acknowledgment letter within five days of receiving an application notifying the borrower whether the application is complete and, if incomplete, what documents and information the borrower must submit to complete the application, 12 CFR 1024.41(b)(2).

New Anti-Evasion Exception, 12 CFR 1024.41(c)(2)(v)(A)

Currently, servicers may only "evade the requirement to evaluate a complete loss mitigation application for all loss mitigation options available to the borrower" in two circumstances:

• (1) Where the borrower delays completing a loss mitigation application for a significant period of time; and
• (2) For "short-term" loss mitigation options (more on that below).

The newly added section 1024.41(c)(2)(v)(A) provides a third exception. Servicers need not try to obtain a complete loss mitigation application and may offer a loss mitigation option based on an incomplete application, if three specific criteria are met. The criteria, which essentially describe the characteristics of a Fannie Mae/Freddie Mac COVID-19 payment deferral or FHA COVID-19 National Emergency Partial Claim (FHA's form of payment deferral), are:

• 1) The borrower is permitted to delay repaying forborne amounts until the loan is refinanced, the property is sold, the loan matures, or FHA insurance terminates;
• 2) Forborne and deferred amounts do not accrue interest, the borrower is not charged fees in connection with being granted a payment deferral, and the servicer waives late charges and other fees or penalties; and
• 3) Once a borrower accepts a payment deferral, the borrower is no longer considered delinquent.

Note that the amendments to Regulation X do not address the situation in which a borrower is offered and accepts a repayment plan to resolve CARES Act forborne amounts rather than a payment deferral. Presumably a repayment plan – that is, a plan that would require a borrower to repay forborne amounts over a specific time period in addition to the borrower's regular monthly mortgage payments – would still be covered by Regulation X's pre-existing "anti-evasion" exception for "short-term loss mitigation options," 12 CFR 1024.41(c)(2)(iii).

However, the official interpretation to section 1024.41(c)(3)(iii) narrowly defines a "short-term repayment plan" as lasting no more than six months and covering "no more than three months of past due payments."

Servicers Need Not Attempt to Collect "Complete" Loss Mitigation Applications and Need Not Send the 5-day Acknowledgment Letter, 12 CFR 1024.41(c)(2)(v)(B)

Currently, upon receiving an incomplete loss mitigation application, servicers are required to:

• (1) Provide the borrower with a letter within five days of receipt, notifying the borrower:
  
  • (a) Whether the application is complete or incomplete;
  • (b) If incomplete, what documents or information are needed to complete the application;
  • (c) Of a "reasonable date" by which the borrower must complete the application; and
  • (d) That if the borrower has other mortgage loans secured by the same property, the borrower should consider contacting the servicer(s) of those loans to discuss loss mitigation options for those loans too, 12 CFR 1024.41(b)(2); and then
• (2) "Exercise reasonable diligence" to collect any missing documents from a borrower so that the loss mitigation application becomes complete, 12 CFR 1024.41(b)(1); after which the servicer must
• (3) "Evaluate the borrower for all loss mitigation options available to the borrower," 12 CFR 1024.41(c)(1)(i).

The new section 1024.41(c)(2)(v)(B) explicitly relieves the servicer from complying with the five-day acknowledgment letter requirement and the obligation to exercise diligence to complete a loss-mitigation application if the servicer has offered and the borrower has accepted a payment deferral as the means of resolving payments that were forborne pursuant to the CARES Act.

This is a significant change from the CFPB's April 3, 2020, guidance, "The Bureau's Mortgage Servicing Rules FAQs related to the COVID-19 Emergency" (the FAQs). Answers to questions 3 and 4 of the FAQs (related to Short-Term Loss Mitigation Options), had provided that:

• (1) The five-day acknowledgment letter still needed to be sent, though the CFPB relaxed the deadline for sending it; and
• (2) Servicers still had to "exercise reasonable diligence" to complete a loss mitigation application, also with relaxed timing requirements.

However, when the April 3 FAQs were issued, Fannie Mae and Freddie Mac had not yet introduced the COVID-19 Payment Deferral with its streamlined eligibility requirements.

Servicers Not Relieved of Loss-Mitigation Notice Requirements Earlier in the CARES Act Forbearance Period: Potentially Conflicting Guidance

In its supplementary information providing rationale for the amendments to Regulation X, the CFPB explains that enforcing the requirement that servicers must pursue complete loss-mitigation applications will likely result in significant delays in servicers' ability to offer the simple and streamlined COVID-19 payment deferral.

The loss-mitigation application review process can be lengthy and frustrating, and the CFPB anticipated that servicers overburdened with loss-mitigation applications to review, as they were during the foreclosure crisis of the last decade, would be unable to quickly offer relief and return borrowers to "current" payment status. Borrowers could also be harmed by having to submit full loss mitigation applications, the CFPB reasoned, because if borrowers are not able to timely complete their applications, they could unnecessarily be put at risk of foreclosure— when a simple COVID-19 payment deferral plan could have easily been implemented with no borrower-supplied documentation.

Servicers should note, however, that the CFPB's rationale— explaining how borrowers will still receive information regarding all other potential loss mitigation options that would be available to them should they choose to submit a full application— indicates that the Bureau assumes that borrowers in CARES Act forbearance will have "received at least two written notifications earlier in the loss mitigation process, as required under Regulation X."

In what appears to be direct conflict with the actual language of the amendments to section 1024.41 and even with the earlier FAQs, the CFPB's supplementary information provides that the CFPB expects that servicers will have provided a five-day acknowledgment letter, including all of the required information, "when the borrower submits the initial application requesting forbearance."

The CFPB also assumes that servicers will have provided the short-term loss mitigation option notice required by section 1024.41(c)(2)(iii), which will have informed the borrower of both the terms and conditions of the forbearance program, and that other loss mitigation options may be available if the borrower submits a complete application.

Finally, and also in potential conflict with the April 3, 2020, FAQs regarding Regulation X's early intervention requirements for delinquent borrowers (section 1024.39), the CFPB's supplementary information assumes that borrowers are "likely to have received early intervention efforts by their servicers, including the written notice required under Regulation X stating, among other things, a brief description of examples of loss mitigation options that may be available." Yet the FAQs (Answer to Questions 1 and 2 in Early Intervention Requirements) suggest that Regulation X's early intervention notice and live contact requirements might not apply to borrowers in CARES Act forbearance, who would not be considered "delinquent" borrowers covered by section 1024.39.

CFPB's Request for Comments

The CFPB is issuing the IFR without the usual notice and comment period, given the need to have the rule in place by July 1, 2020, when servicers must begin offering the FHFA-mandated COVID-19 payment deferral programs. However, the CFPB has invited comments specifically in the following areas, indicating that the Bureau anticipates potentially further amending Regulation X:

• Whether the amendments to Regulation X appropriately balance providing flexibility to overburdened servicers during the pandemic, with the borrower protections intended by the Loss Mitigation Procedures;
• Whether the CFPB should require written disclosures for this or other exceptions to the loss mitigation rules that may be authorized in the future;
• Whether the new anti-evasion exception should be extended to cover loss mitigation options provided in the wake of other types of disaster or emergency-related forbearances.

As always, if you need information or assistance with the fast-changing regulatory requirements and guidance in the mortgage space, DWT's mortgage and home lending practice is here to help.

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.

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