CFPB Adopts Preliminary Definitive Mortgage Loss Limitation Rule Based On COVID-19 | Ballard Spahr LLP
On June 23, 2020, the Consumer Financial Protection Bureau (CFPB) posted a provisional final rule which creates a temporary exemption from certain loss mitigation obligations of mortgage loan service providers under Regulation X when offering specific loss mitigation options to consumers in financial distress due to COVID-19. The provisional final regulation will come into force on July 1, 2020 and the CFPB will accept comments on the regulation no later than 45 days after publication in the federal register.
Rule X sets out requirements for a mortgage loan service provider to use reasonable efforts to obtain all of the documents and information in order to complete a loss mitigation application from a borrower and to assess the borrower on all loss mitigation options available to the borrower based on the completed application. With two exceptions, Regulation X also provides that a servicer must not evade the requirement to evaluate a full loss mitigation application for all loss mitigation options available to the borrower by offering a loss mitigation option based on an assessment of all information provided by a borrower in connection with an incomplete claim for mitigation. The two exceptions are (1) where a servicer has taken reasonable care in obtaining the documents and information to fill out an application for loss mitigation, but an application for loss mitigation remains incomplete under the circumstances for a significant period of time without a borrower has taken additional steps to complete the loss mitigation application; and (2) if a servicer offers a borrower a short term deferral program or a short term repayment schedule based on an assessment of an incomplete loss mitigation application. Service providers have relied on the second exception when offering COVID-19 forbearance to consumers, but that exception does not apply to offering the loss mitigation option to resolve the missed payments.
The tentative definitive rule adds a third temporary exception that allows service providers to offer a deferred payment option offered by Fannie Mae and Freddie Mac on the direction of the Federal Housing Finance Agency (FHFA) and a loss-limiting option on FHA-insured loans. The CFPB declares that the criteria in the temporary exception “should match the criteria set out in the FHFA’s COVID-19 deferred payment and other comparable programs such as the FHA’s partial COVID-19 application”. As previously reported, on May 13, 2020, Fannie Mae and Freddie Mac announced that COVID-19 suspension will be able to screen borrowers for COVID-19 suspension as of July 1, 2020 previously reported, In April 2020, the US Department of Housing and Urban Development announced a COVID-19 National Emergency Standalone Partial Claim for FHA-insured loans.
Under the Temporary Exemption, a servicer may offer a borrower a loss mitigation option based on the assessment of an incomplete loss mitigation application if all of the following criteria are met:
1. The Loss Mitigation Option allows the borrower to defer paying the amounts covered until the mortgage loan is refinanced, the mortgage property is sold, the mortgage loan term expires, or, in the case of an FHA-insured mortgage loan, the mortgage insurance ends. For the purposes of the temporary exemption, the “amounts covered” apply:
- Include, without limitation, all principal and interest payments under a deferred payment program made available to borrowers in direct or indirect financial distress as a result of the COVID-19 emergency, including a deferred payment program under the CARES Act; and
- Includes, without limitation, all other principal and interest payments due and unpaid by a borrower who, directly or indirectly, has been in financial distress as a result of the COVID-19 emergency.
For the purposes of the Temporary Exemption, “Mortgage Loan Term” means the term of the Mortgage Loan under the obligation between the parties if the Borrower is offered the option of loss mitigation.
2. Amounts that the borrower can delay payment in accordance with paragraph 1 will not accrue interest, the servicer will not charge any fee in connection with the loss mitigation option, and the servicer will waive all existing late fees, penalties, payment stop fees, or similar fees immediately upon acceptance of the Loss mitigation option by the borrower.
3. Acceptance of the loss mitigation offer by the borrower ends any pre-existing arrears on the mortgage loan.
Under the Temporary Exemption, once the Borrower accepts the Loss Mitigation Offer, the Borrower is not required to meet the requirements of Regulation X Section 1024.41 (b) (1) or (2) for completing a Loss Mitigation Request and checking a loss mitigation request for completeness with a loss mitigation application submitted by the borrower prior to the servicer’s offering of the loss mitigation option. However, if a borrower who accepts a loss mitigation option offered under the Temporary Exemption later submits a new loss mitigation application, the servicer must comply with Regulation X Section 1024.41 (b) (1) and (2).
The CFPB notes that the repayment of the deferred amounts according to paragraph 1 is delayed until the specified events, the temporary exception “does not specify how a servicer must structure the repayment of the deferred amounts, [and] that a repayment either in a lump sum or over a certain period at the end of the credit period, including through additional periodic payments [exception]. ”The CFPB also notes that the Temporary Exemption is available for Eligible Loss Mitigation Options, which would technically extend the life of the loan to allow for repayment of any amounts deferred or overdue.
The CFPB clarifies the condition that the acceptance of the offer by the borrower ceases any pre-existing arrears to ensure that borrowers who accept a loss mitigation option under the temporary exemption are not at risk of imminent foreclosure. Regulation X generally prohibits servicers from making the initial notice or filing required by applicable law to initiate foreclosure proceedings until a mortgage loan obligation is more than 120 days past due.
Although the CFPB designed the temporary exemption to work with the Fannie Mae and Freddie Mac COVID-19 Deferred Payment and the FHA COVID-19 National Emergency Standalone Partial Claim, the exemption is not limited to these programs.
The CFPB asked for comments on three specific questions related to the temporary exemption:
- Whether the temporary exception is providing flexibility for service providers to provide quick relief during the COVID-19 emergency, with providing key protections for borrowers involved in the loss limitation application process, such as:
- Whether the CFPB should require written disclosures for the temporary exception or similar exceptions that the CFPB may approve in the future.
- Whether the CFPB should extend the temporary exemption to other post-deferral loss mitigation options made available to borrowers affected by other types of disasters and emergencies.
As mentioned above, comments on the provisional final regulation are due no later than 45 days after publication in the federal register.