The below article is the Special Focus section of the July 2020 Compliance Journal. The full issue may be viewed by clicking here.
The Bureau of Consumer Financial Protection (CFPB) issued an interim final rule in late June to amend Regulation X, which implements the Real Estate Settlement Procedures Act (RESPA), to temporarily permit mortgage servicers to offer a loss mitigation option based on the evaluation of an incomplete loss mitigation application. This article provides a summary of the interim rule.
Background and Rationale for New Rule
A general understanding of the current compliance requirements of loss mitigation and recent mortgage servicing activity which has resulted due to the pandemic is necessary to better understand the nuances for the newly created mitigation option under the interim final rule. As a requirement of the Dodd-Frank Act, Regulation X (Reg X) was revised in 2013 to create a uniform set of procedures that mortgage servicers must follow when offering loss mitigation options to borrowers who have failed to meet the contractual obligations of their mortgage loan. The loss mitigation procedures are found in Reg X section 1024.41.
Under current Reg X loss mitigation procedures, servicers are required to first obtain a complete loss mitigation application from the borrower before evaluating a borrower for a loss-mitigation option, such as a loan modification or short sale. Reg X defines a “complete loss mitigation application” to mean an application in connection with which a servicer has received all the information that the servicer requires from a borrower in evaluating applications for the loss mitigation options available to the borrower. A servicer is required to exercise reasonable diligence in obtaining documents and information to a complete loss mitigation application; failure to do so could result in compliance exam violations and potential civil money penalties.
Reg X compliance requirements aside, financial institutions have now had to deal with various responses to the national emergency due to the novel coronavirus disease (COVID-19) including actions taken by mortgage owners, investors, and insurers of mortgage loans under payment forbearance programs. In particular, the Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Company (Freddie Mac), Federal Housing Administration (FHA), Federal Home Loan Bank Chicago, and other owners or insurers of mortgage loans previously announced forbearance loan programs to assist borrowers with mortgage payments knowing many would not be able to work due to the steps taken under the COVID-19 national emergency. These parties also then created payment deferral programs for borrowers once they exit forbearance to help those borrowers who are unable to afford full reinstatement or a repayment plan at that time.
Additionally, section 4022 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allows borrowers who are experiencing financial hardship due, directly or indirectly, to the COVID-19 emergency and who have a federally-backed mortgage to have access to payment forbearance programs if the borrower submits a request to their mortgage servicer and affirms that they are experiencing a financial hardship during the COVID-19 emergency. Unfortunately, the CARES Act does not specify how borrowers who received a CARES Act forbearance must repay forborne payments.
Given the actions by Fannie Mae, Freddie Mac and other investors/insurers to utilize forbearance and deferral programs and the requirements under the CARES Act, mortgage servicers need to reconcile those actions and requirements with the Reg X loss mitigation compliance rules to ensure no compliance violations are cited.
As stated above, Reg X requires mortgage servicers to offer loss mitigation options only after the servicer has evaluated a complete loss mitigation application. To further ensure servicers comply with the requirement, Reg X section 1024.41(c)(2)(i) contains what is generally referred to as the “anti-evasion” rule whereby mortgage servicers cannot 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 upon the evaluation of any information provided by a borrower in connection with an incomplete loss mitigation application except for in only two instances:
- borrower delays completing a loss mitigation application for a significant period of time; and
- for a “short-term” mitigation plan.
The programs being offered by mortgage owners/insurers and under the CARES Act were typically programs that would not fall within the Reg X 1024.41(c)(2) exceptions to allow a mortgage servicer to offer a loss mitigation option after review of an incomplete loss mitigation application.
The federal banking supervisory agencies attempted to bring clarity to the issue in a joint statement issued on April 3, 2020. In that statement, the agencies, in recognizing the impact the COVID-19 emergency was having on borrowers and on the operations of mortgage servicers, explained that, when a borrower requests a CARES Act forbearance and reaffirms that the borrower has experienced financial hardship during the COVID-emergency, it constitutes an incomplete loss mitigation application under Reg X. The agencies further stated that although receipt of an incomplete loss mitigation application generally triggers a mortgage servicer’s good faith obligations under Reg X sec. 1024.41, the joint statement provided that a CARES Act forbearance qualifies as a short-term payment forbearance program under Reg X, so certain loss mitigation requirements under Reg X do not apply. This position, however, was only in a jointly issued statement, not in Regulation.
In recognizing the unique environment created as a result of COVID-19 and all that has been outlined above, CFPB has amended the Reg X loss mitigation rules to create a third exception. New Reg X section 1024.41(c)(2)(v) allows a mortgage servicer to offer a loss mitigation option that meets certain criteria based on the evaluation of an incomplete application, and that servicers need not comply with certain Reg X requirements once a borrower accepts that option. To participate, the interim final rule requires certain criteria be met as is outlined next; CFPB structured its criteria to align with Fannie Mae/Freddie Mac COVID-19 payment deferral and other comparable programs, including FHA’s COVID-19 partial claim.
Eligibility Requirements of New Exception
The interim final rule conditions eligibility for the new exception on the loss mitigation option satisfying three criteria:
- First, the loss mitigation option must permit a 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 the payment forbearance program made available to borrowers experiencing a financial hardship due directly or indirectly to COVID-19 emergency, including one made pursuant to the CARES Act.
These amounts also include, without limitation, all other principal and interest payments that are due and unpaid by the borrower experiencing financial hardship due, directly or indirectly, to the COVID-19 emergency.
For this criterion, the term of 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; 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 interim final rule provides no definition or clarity by what is meant by “or similar charges” under this criterion.
- Third, the borrower’s acceptance of the loss mitigation offer must resolve any prior delinquency.
Reg X Mitigation Steps Servicer is Exempt From Under New Rule
If a borrower accepts an option offered pursuant to the new exception, the servicer is not required to continue the reasonable diligence efforts under Reg X section 1024.41(b)(1) or send the acknowledgment notice Reg X section 1024.41(b)(2) would otherwise require for those who are not considered a small servicer under Reg X loss mitigation rules.
Items Mortgage Servicers Should Consider
There are a number of items compliance officers of mortgage servicers may want to consider in connection with CFPB’s interim final rule. First being that the rule was effective July 1st. Is the bank ready to implement the interim final rule should it determine the interim rule is a desired process? If bank decides the option is something it will implement, for which mortgage loans will the option be made available? The interim rule allows the new mitigation option for Fannie Mae or Freddie Mac loans as well as other loans, including bank’s own portfolio loans.
Also, note that it is not a requirement that the bank offer this option to its borrowers. The bank can certainly follow its normal loss mitigation process established under Reg X section 1024.41 and proceed to collect a complete loss mitigation application and follow its normal protocol established to meet its reasonable diligence in obtaining documents and information to a complete loss mitigation application from borrowers.
If implementing the new mitigation option, how will bank record or validate that the borrower’s financial hardship is COVID-19 related? A criterion is that the deferred amounts are not to accrue interest, how will bank code or program its loan operating system to ensure that treatment is applied? What steps will be implemented to ensure those fees that are required to be waived under the rule are waived?
While the rule is effective now, will bank wait until a final rule is issued before it implements this option? If implementing now, bank will need to reevaluate when the rule is finalized to ensure any change made in the promulgation process are implemented into bank’s own procedures.
CFPB has created a new exemption under Reg X loss mitigation rules to allow mortgage servicers to offer a particular loss mitigation option to borrowers so long as the criterion in the interim final rule are met, including waiving fees and bringing the loan current. The rule allows servicers to offer the loss mitigation option without having to first receive a complete loss mitigation application. The interim final rule is effective July 1, 2020 and may be viewed at this link. Comments regarding the new option are due August 14th.