COVID-19 Post-Forbearance Options
On June 30, the Consumer Financial Protection Bureau (CFPB) published an interim final rule, which became effective on July 1, 2020, related to permanent loss mitigation options offered to borrowers completing COVID-19 mortgage forbearances. The interim rule addressed concerns from industry stakeholders about whether offering certain types of permanent loss mitigation options to borrowers completing a COVID-19-related mortgage forbearance complied with the loss mitigation rules set forth in section 1024.41 of Regulation X.
CARES Act Mortgage Forbearance and GSE Post-Forbearance Options
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) mandated offering forbearance on federally backed mortgage loans—loans that are guaranteed or made by a federal agency, like the Federal Housing Administration or the Department of Veterans Affairs, or owned or securitized by Fannie Mae or Freddie Mac—for as long as 360 days upon the borrower’s election without obtaining additional documentation or information aside from the affirmation that the borrower is experiencing financial hardship during the COVID-19 national emergency. The interim final rule, however, noted that many of these initial forbearance periods were offered for 90 days and set to expire in June and July 2020.
To deal with the expiration of these initial forbearance periods, Fannie Mae and Freddie Mac developed streamlined loss mitigation applications for their COVID-19 payment deferral programs. Under these programs, payments subject to forbearance are deferred until maturity of the loan, sale of the home, or refinancing of the loan. These payment deferral programs are available to borrowers who can resume their normal monthly payments but cannot fully reinstate the loan or complete a repayment plan after the expiration of the initial forbearance period. These deferral programs do not permit servicers to charge administrative fees. They also require servicers to waive “late charges, penalties, stop payment fees, or similar charges” after completion of a COVID-19 payment deferral. But questions were raised about whether these options complied with the general prohibition against offering a loss mitigation option without evaluating a complete loss mitigation application.
General Prohibition Against Evaluating Borrowers for Loss Mitigation Options Based on Incomplete Loss Mitigation Applications
Under section 1024.41(c)(2)(i), servicers generally need to obtain a complete loss mitigation application before evaluating a borrower for a loss mitigation option. The rule requires servicers to use reasonable diligence in completing a loss mitigation application for evaluation. See, 12 CFR § 1024.41(b)(1). Before the interim final rule, sections 1024.41(c)(2)(ii) and (iii) provided limited exceptions from the general prohibition against offering a loss mitigation option based on the evaluation of an incomplete loss mitigation application if (1) servicers exercised reasonable diligence but could not complete a loss mitigation application or (2) servicers offered short-term loss mitigation options such as a forbearance plan or repayment plan lasting six months or less. NAFCU has previously blogged on short-term loss mitigation options and CFPB guidance issued at the beginning of the pandemic.
The CFPB’s earlier guidance “explained that, when a borrower requests a CARES Act forbearance and affirms that the borrower is experiencing a financial hardship during the COVID-emergency, it constitutes an incomplete loss mitigation application for purposes of Regulation X.” As described in this NAFCU compliance blog, “Regulation X allows a credit union to comply with the reasonable diligence requirement – at least in the context of a short-term forbearance plan – by contacting the member before the end of the forbearance period to see if the member wants to complete a loss mitigation application and be evaluated for all available loss mitigation options.” The potential issue with the streamlined deferral programs is then whether they violate the general prohibition against offering a loss mitigation option based on the evaluation of an incomplete loss mitigation application.
New COVID-19 Exception
The interim final rule resolved this issue by creating another exception to the general rule. To qualify for the exception, a loss mitigation option must satisfy all of the following conditions:
- The loss mitigation option must permit the borrower to delay paying all principal and interest payments that were placed into forbearance as a direct or indirect result of a financial hardship related to the COVID-19 emergency—including a CARES Act forbearance—and all principal and interest payments due and unpaid because of a financial hardship related, directly or indirectly, to COVID-19 “until the mortgage loan is refinanced, the mortgaged property is sold, the term of the mortgage loan ends, or, for a mortgage loan insured by the Federal Housing Administration, the mortgage insurance terminates.”
- The amounts deferred under the loss mitigation option must not accrue interest.
- Servicers are not permitted to charge any fees for the loss mitigation option.
- The rule requires servicers to waive “all existing late charges, penalties, stop payment fees, or similar charges promptly upon the borrower's acceptance of the loss mitigation option.”
- The borrower becomes current upon acceptance of the loss mitigation option.
The CFPB felt that creating this exception balanced the needs of borrowers and servicers during this challenging time because the exception benefits both borrowers and servicers. Borrowers who can afford to resume making normal periodic payments can “eliminate the immediate potential risk of losing their homes to foreclosure, resume repaying the mortgage loan with no delinquency and no additional fees or interest, and better plan how eventually to repay the forborne or delinquent amount that has been deferred.” The new exception will place servicers in the best position to respond to the high number of borrowers who may be seeking modifications in the wake of COVID-19-related forbearances. Simply put, the exception provides a pathway to offer members a loss mitigation option without necessarily having to collect a complete loss mitigation application as long as the option conforms to the requirements of the new exception.
That said, there is still some uncertainty with respect to escrow. The new exception does not expressly address how escrow amounts that are delinquent or in forbearance are to be treated, but it offers an example of what may be permissible: “A loss mitigation option would qualify for the new exception if it defers repayment of escrow amounts, in addition to principal and interest payments, as long as it otherwise satisfies new § 1024.41(c)(2)(v)(A).”
- Whether the new COVID-19 exception appropriately balances the competing interests of borrowers and servicers;
- Whether written disclosures should be required for the new exception and any future exceptions identified by the CFPB; and
- Whether the new exception should be applicable to post-forbearance loss mitigation options made in the context of other disasters and emergencies.
Comments are due August 14, 2020.