Mortgage Loan Forbearance Agreements and COVID-19
COVID-19, also known as the coronavirus, has already affected millions of American consumers leaving them unemployed and out of work. Amid the chaos and uncertainty in these difficult times, the United States Department of Housing and Urban Development (HUD) and the Federal Housing Finance Agency (FHFA) have ordered a 60-day moratorium on foreclosures and evictions for loans insured by the Federal Housing Administration or owned by Fannie Mae or Freddie Mac.
FHFA has also issued a statement to servicers of loans owned by Fannie Mae or Freddie Mac reminding them "that hardship forbearance is an option for borrowers who are unable to make their monthly mortgage payment." Fannie Mae and Freddie Mac loans may be eligible for a forbearance period up to 12 months.
States have addressed providing affected consumers with forbearance options. Both New York State and Washington State have asked mortgage servicers to forbear mortgage payments for 90 days for mortgagors adversely impacted by the coronavirus.
The federal government is also weighing in. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) recently passed by the United States Senate includes provisions on forbearance for federally backed mortgage loans. Under the CARES Act, federally backed mortgage loans include 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. The CARES Act, in its present form, permits borrowers with federally backed mortgage loans to obtain a 180-day forbearance by submitting a request to their mortgage servicer and affirming that they are experiencing a financial hardship during the coronavirus national emergency. The forbearance can be extended by an additional 180 days upon borrower request. During the forbearance period, servicers are prohibited from assessing fees, penalties, or interest above what would have been due under the contract had payments been timely made.
Because of the emphasis being placed on forbearance agreements, it may be useful to review how forbearance agreements are addressed in the Consumer Financial Protection Bureau's (CFPB) loss mitigation rules in Regulation X. There is nothing in the loss mitigation rules that suggests a credit union cannot consider a member for loss mitigation options unless the member has defaulted on the loan. In fact, Fannie Mae's servicing guide requires that its servicers consider available loss mitigation options when they are notified of circumstances that may cause a payment default within the next 90 days - what Fannie Mae refers to as imminent default.
One side note here. Most of the CFPB's loss mitigation rules do not apply to small servicers. Small servicers service 5,000 or fewer mortgage loans for which they are the creditor or assignee. Mortgage loans here generally means closed-end consumer credit secured by a dwelling. Small servicers are exempt from several of the mortgage servicing requirements in Regulations X and Z. This includes most of the loss mitigation rules. Small servicers, however, are subject to the prohibition on foreclosure referral activity and shall not move for judgment or conduct a sale if a borrower is performing pursuant to the terms of a loss mitigation agreement.
Regulation X's commentary indicates that a forbearance program in which a credit union permits a member to forgo making mortgage loan payments for a period of time is a short-term loss mitigation option under section 1024.41(c)(2)(iii) of Regulation X.
The commentary explains that the loss mitigation rules in section 1024.41 of Regulation X might not even come into play if a credit union provides a forbearance plan to a member without evaluating information submitted by a member. The commentary provides the example of a servicer that (1) does not require any type of loss mitigation application or consider any information submitted by a borrower and (2) offers trial loan modifications to all borrowers who become more than 150 days past due on their repayment obligations. Under these circumstances, Regulation X does not require compliance with its loss mitigation rules. In other words, a credit union can offer a loss mitigation option without triggering the other requirements in section 1024.41 as long as the offer is not based on the credit union's evaluation of a loss mitigation application or information submitted by a member.
To the extent the credit union considers information submitted by a member to determine whether a member has been adversely impacted by the coronavirus and needs a forbearance of mortgage payments, the commentary suggests that the loss mitigation rules in Regulation X would apply.
In general, Regulation X requires that servicers "exercise reasonable diligence" in completing loss mitigation applications they receive. Under the rule, a complete loss mitigation application includes all of the information a servicer would need to evaluate which loss mitigation options might be available under specific circumstances.
Regulation X contains a general prohibition against offering a loss mitigation option upon review of an incomplete loss mitigation application to evade the requirement to review a complete loss mitigation application. Section 1024.41(c)(2)(iii), however, permits offering a short-term forbearance to a borrower based on the evaluation of an incomplete loss mitigation application as long as the servicer provides the borrower with a written notice including the following information:
- the terms of the forbearance and the length of the forbearance;
- that the forbearance plan was offered based on the evaluation of an incomplete loss mitigation application; and
- that other loss mitigation options might be available to the borrower, and the borrower can submit a complete loss mitigation application to be evaluated for those available options.
Section 1024.41(c)(2)(iii) requires that the written notice be provided promptly after the offer of the forbearance plan. In addition to the notice, section 1024.41(c)(2)(iii) prohibits making the first notice or filing for foreclosure, moving for a foreclosure judgment or order of sale, or going forward with a foreclosure sale if a borrower is performing under the terms of a short-term forbearance plan.
What this may mean for credit unions depends on how a credit union provides its members with forbearance relief. If there is no loss mitigation application and a credit union does not evaluate information submitted by members to determine when to provide mortgage forbearance relief, the loss mitigation rules in section 1024.41 do not appear to be relevant. If a credit union evaluates what amounts to incomplete loss mitigation applications or limited information submitted by a member to see whether to offer forbearance relief, section 1024.41(c)(2)(iii) provides a credit union with a path for providing timely relief to members while notifying members of their ability to be considered for other loss mitigation options.
NAFCU has asked the CFPB to consider waiving certain disclosure requirements so that credit unions can quickly provide prudent relief such as mortgage forbearance plans to the members most in need of assistance. In the alternative, NAFCU asked the CFPB to assure credit unions that failures to comply with every technical requirement in rules under the CFPB's jurisdiction resulting from efforts to assist members would not lead to supervisory action or administrative penalties. Earlier this week, the CFPB issued a statement on its supervisory and enforcement responses to the coronavirus. The statement provides an indication of how CFPB may address supervisory activities, including whether to take enforcement action as a result of an institution's efforts to meet the needs of its borrowers:
"The Bureau encourages prudent efforts undertaken in good faith that are designed to meet the exigent needs of financial institutions’ borrowers and other customers. To that end, when conducting examinations and other supervisory activities and in determining whether to take enforcement action, the Bureau will consider the circumstances that entities may face as a result of the COVID-19 pandemic and will be sensitive to good-faith efforts demonstrably designed to assist consumers."
We will have to wait and see whether there is any future guidance on this particular issue.