On June 23, 2020, the CFPB issued an interim final rule (IFR) that provides that mortgage servicers will not violate Regulation X by offering certain COVID-19 related loss mitigation options to borrowers with federally-backed mortgage loans based only on the evaluation of an incomplete loss mitigation application. This amendment to Section 1024.41 of Regulation X will temporarily allow servicers to more efficiently offer loss mitigation options that will permit borrowers to delay repayment of forborne or delinquent amounts accrued due to COVID-19, including ones offered pursuant to the CARES Act by the FHFA, Fannie Mae, and Freddie Mac.
Currently, Regulation X generally requires servicers to obtain a complete loss mitigation application before offering a borrower any specific loss mitigation option. Servicers may not offer a loss mitigation option based upon an evaluation of any information provided in connection with an incomplete application except for certain exceptions such as short-term payment forbearance programs and short-term repayment plans. This obligation is referred to as the “anti-evasion requirement” in the servicing rules.
The IFR is effective on July 1, 2020. Interested parties must submit comments within 45 days after the IFR is published in the Federal Register. The IFR has not yet been published in the Federal Register, but should be so published therein shortly.
To qualify for the new exception from the anti-evasion requirement, the COVID-19 related loss mitigation option must meet all of the following criteria:
- The loss mitigation option permits the borrower to delay paying certain amounts until the mortgage loan is refinanced, the mortgage property is sold, the term of the mortgage loan ends, or, for a mortgage loan insured by the FHA, the mortgage loan terminates. These 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. These amounts also include principal and interest payments that are due and unpaid by a borrower experiencing financial hardship due, directly, or indirectly, to the COVID-19 emergency.
- Any amounts that the borrower may delay paying through the loss mitigation option does not accrue interest.
- The servicer does not charge any fee in connection with the loss mitigation option.
- The servicer waives all existing late charges, penalties, stop payment fees, or similar charges upon the borrower’s acceptance of the loss mitigation option.
- The borrower’s acceptance of the loss mitigation option resolves any prior delinquency.
If the borrower accepts an eligible loss mitigation option, the IFR also provides servicers relief from certain requirements under Regulation X that normally would apply after a borrower submits an incomplete application. Specifically, the IFR provides that the servicer does not need to exercise reasonable diligence to complete the incomplete application or send the five-day acknowledgement notice otherwise required under Regulation X.
Notwithstanding the above, servicers must still comply with Regulation X’s other requirements after a borrower accepts an eligible loss mitigation offer. For instance, if the borrower becomes delinquent again after accepting a loss mitigation option offered under the new exception, the servicer would have to comply with the regulation’s early intervention obligations. These include the requirement to inform borrowers through live contact and written notices of the availability of additional loss mitigation options and how the borrowers may apply for them. In addition, servicers are required to comply with the loss mitigation procedures set forth under Regulation X, if the borrower submits a new application after accepting a loss mitigation option offered pursuant to the new exception (e.g., the first time the borrower submits a later loss mitigation application).