On June 28, 2021, the CFPB issued its Mortgage Servicing COVID-19 Final Rule (the Final Rule). The Final Rule, which amends Regulation X, is effective August 31, 2021, and comes at the same time as certain related updates from other Federal agencies. We discuss those topics, along with an overview of the Final Rule, below.
Effective Date and Related Updates. The effective date of the Final Rule is August 31, 2021, and as further detailed below (and as anticipated), it includes enhanced foreclosure protections to address the COVID-19 pandemic. According to the preamble, an earlier effective date was not possible as the Congressional Review does not allow a “major rule” (which the Final Rule is deemed to be) to become effective sooner than 60 days after publication in the Federal Register (which occurred on June 30, 2021).
The preamble further notes concern regarding the gap of time between the expiration of federal foreclosure and/or eviction moratoria (which the CDC, FHFA, FHA, and VA extended to July 31, 2021, during the prior week), and the effective date of the Final Rule. On that issue, the CFPB clarifies in the preamble, and highlights in the associated Executive Summary, that early implementation is permitted, including for the new exceptions for streamlined loss mitigation offers under Regulation X. The preamble states, in relevant part:
While servicers will not have to comply with this rule until the effective date, servicers may voluntarily begin engaging in activity required by this final rule before the final rule’s effective date. . . . While the Bureau declines to adopt an earlier effective date, for the reasons discussed above, the Bureau does not intend to use its limited resources to pursue supervisory or enforcement action against any mortgage servicer for offering a borrower a streamlined loan modification that satisfies the criteria in § 1024.41(c)(2)(vi)(A) based on the evaluation of an incomplete loss mitigation application before the effective date of this final rule. 86 Fed. Reg. 34886-34887 (June 30, 2021).
To help clarify expectations regarding this time frame, the Federal Housing Finance Agency (FHFA) quickly announced that Fannie Mae and Freddie Mac servicers must comply with the foreclosure protections in the Final Rule, prior to the effective date, starting on August 1, 2021. Fannie Mae and Freddie Mac then issued, respectively, Lender Letter 2021-02 and Bulletin 2021-24, effectuating this policy.
Scope. We note that the scope of these new provisions, including the temporary foreclosure protections discussed below, can apply more broadly than the CARES Act and certain other borrower protections that were imposed in connection with the pandemic. While the CARES Act applied to “federally backed mortgage loans” (i.e., FHA, VA, USDA, Fannie or Freddie program loans), the provisions in the Final Rule apply to closed-end residential mortgage loans, that are “federally-related mortgage loans” subject to RESPA, and are secured by the borrower’s principal residence. Therefore, the temporary foreclosure hold in the Final Rule, and the other provisions discussed below, can apply to portfolio loans that were not expressly subject to the CARES Act or certain other protections.
We also note that “small servicers” under the Regulation X mortgage servicing rules are generally exempt from these new requirements in the Final Rule.
Temporary COVID-19 Foreclosure Safeguards. The Final Rule includes enhanced foreclosure protections that will be in place from the effective date through December 31, 2021. During that time frame, servicers may not make the first notice or filing required for foreclosure, due to missed payments (and the borrower being more than 120 days delinquent, in accordance with the existing rule), unless one of three safeguards has been met:
- Complete Loss Mitigation Evaluation – The borrower has submitted a complete loss mitigation application, the borrower has remained delinquent at all times since submitting the application, and that evaluation process has been exhausted pursuant to the existing criteria in § 1024.41(f)(2) (i.e., appeal rights have been exhausted, the borrower rejects all loss mitigation options offered, or the borrower fails to perform under a loss mitigation option);
- Abandoned Property – The property securing the loan is abandoned, pursuant to the laws of the state or municipality in which it is located; or
- Unresponsive Borrower – The servicer has not received any communications from the borrower for at least 90 days prior to making the first notice or filing for foreclosure, and all of the following conditions are met:
- The servicer made good faith efforts to establish live contact with the borrower after each payment due date, pursuant to § 1024.39(a), during that 90-day period;
- The servicer sent the written early intervention notice, required by § 1024.39(b), from 10 to 45 days before the servicer makes the first notice or filing for foreclosure;
- The servicer sent all loss mitigation notices required by § 1024.41, as applicable, during the 90-day period before the servicer makes the first notice or filing for foreclosure; and
- The borrower’s forbearance program, if applicable, ended at least 30 days before the servicer makes the first notice or filing for foreclosure.
We also note that the Final Rule adds language to the commentary detailing recordkeeping and other requirements in connection with these foreclosure safeguards. For example, the added commentary details what records must be maintained to adequately show the borrower was unresponsive, in accordance with that safeguard option.
These temporary safeguards are not required, in addition to the existing foreclosure protections, if:
- The foreclosure is commenced on or after Jan. 1, 2022;
- The borrower was more than 120 days delinquent prior to Mar. 1, 2020; or
- The applicable statute of limitations for the foreclosure action will expire before January 1, 2022.
Additional COVID-19 Streamlined Loan Modification Options. The Final Rule includes new exceptions to the general prohibition on offering a loss mitigation option, based on an incomplete loss mitigation application, without evaluating a complete loss mitigation application for all other available loss mitigation options. Now, in addition to short-term forbearances or repayment plans, or the COVID-related options provided for in the CFPB’s Interim Final Rule from June, 2020, servicers may offer certain additional COVID-19-related loan modification options, based on an incomplete application, if the following criteria are met:
- The modification may not extend the loan term more than 40 years from the date the modification is effective;
- The modification may not increase the borrower’s monthly principal and interest payment beyond what was required prior to the modification;
- If the modification provides for a deferral of amounts owed (i.e., until the property is sold, or the loan is refinanced, or if applicable, FHA mortgage insurance terminates), interest cannot accrue on those deferred amounts;
- The modification is available to borrowers experiencing COVID-19-related hardships;
- The modification must end any pre-existing delinquency upon acceptance, or upon final acceptance after completion of any applicable trial modification period; and
- The servicer may not charge fees in connection with the loan modification, and must promptly waive certain existing fees the borrower owes, that were incurred on or after March 1, 2020, such as late fees, penalties, or stop-payment fees.
The Final Rule also clarifies that if the borrower fails to perform under a trial modification plan per the new exception, or requests further loss mitigation assistance, the servicer must immediately resume reasonable diligence efforts to help complete the loss mitigation application, and provide the borrower with an updated notice, as needed, conveying the information required to complete the application.
COVID-Related Early Intervention Live Contact. The Final Rule includes temporary COVID-19-related live contact requirements under the early intervention rule. Until Oct. 1, 2022, when complying with the existing early intervention live contact requirement in § 1024.39(a), servicers must convey the following information during that live contact:
- For borrowers not in a forbearance plan at the time of live contact, the servicer must:
- Inform the borrower that forbearance programs are available for borrowers experiencing a COVID-19-related hardship;
- List and briefly describe to the borrower any such forbearance programs made available at that time and the actions the borrower must take to be evaluated for such forbearance programs, unless the borrower states that they are not interested in receiving information about such programs; and
- Inform the borrower of at least one way the borrower can find contact information for homeownership counseling services, such as referencing the borrower’s periodic statement.
- For borrowers in a forbearance plan at the time of live contact, the servicer must:
- Inform the borrower of the date the borrower’s current forbearance plan is scheduled to end;
- List and briefly describe each of the types of forbearance extension, repayment options, and other loss mitigation options available to the borrower by the owner or assignee of the borrower’s mortgage loan at the time of the live contact, and the actions the borrower must take to be evaluated for such loss mitigation options; and
- Inform the borrower of at least one way that the borrower can find contact information for homeownership counseling services, such as referencing the borrower’s periodic statement.
“Reasonable Diligence” for Borrowers in a COVID-19 Forbearance. The Final Rule adds language to the commentary of the regulation clarifying what “reasonable diligence” efforts are needed to help the borrower complete a loss mitigation application, if the borrower is in a COVID-19 forbearance program. In that scenario, the added commentary provides that the servicer has to contact the borrower, no later than 30 days prior to the scheduled end of the forbearance plan, to determine if the borrower wishes to complete the loss mitigation application and receive a full loss mitigation evaluation. If the borrower requests further assistance, the servicer has to exercise reasonable diligence to complete the application before the end of the forbearance period.