Under the March 2020 CARES Act, borrowers with federally-backed mortgage loans were able to request a 180-day forbearance on their loan payments if the borrower attested to a COVID-related hardship. That 180-day period could be extended for an additional 180-days upon the borrower’s request. In February 2021, the FHA, FHFA, USDA and VA announced that they were extending their forbearance programs for an additional 180 days for a maximum of 18 months of forbearance.
Now, more than 16 months after the CARES Act was signed into law, several hundreds of thousands of borrowers have already completed their forbearance plans, and the CFPB anticipates an additional 900,000 will complete their forbearances by the end of 2021. With this in mind, on June 28, 2021, the CFPB issued its final rule amending certain provisions in Regulation X to allow additional assistance for borrowers experiencing a COVID-19 hardship (the “Final Rule”). The Final Rule, which is effective August 31, 2021, creates five key amendments to Regulation X. Each of these amendments is discussed below.
The Five Key Amendments
- Defining COVID-19-Related Hardship: The Final Rule defines “COVID-19-relatedhardship” as a financial hardship due, directly or indirectly, to the national emergency for theCOVID-19 pandemic. This definition is very broad, as was the definition under the CARESAct, from which this definition is modeled after.
- Temporary Special COVID-19 Procedural Safeguards: Currently, 12 C.F.R.§1024.41(f)(1)-(2) states that a servicer cannot make the first notice or filing for any foreclosure unless the mortgage loan is more than 120 days delinquent. Also, if a borrower submits a complete loss mitigation application within that 120-day period, the servicer cannot move forward with foreclosure until (1) it gives notice to the borrower that they are not eligible for any loss mitigation options and the appeal process is completed; (2) the borrower rejects the offer; or (3) the borrower fails to perform under the offered loss mitigation option. The Final Rule (12 C.F.R. §1024.41(f)(3)) adds three procedural safeguards that must be undertaken before referring the 120-day delinquent loan to foreclosure. Only one of the three safeguards must be satisfied.Specifically, between August 31, 2021 and December 31, 2021, the servicer must confirm that the borrower was evaluated for loss mitigation options based on a complete loss mitigation application and existing foreclosure protection conditions are met. Alternatively, the servicer must confirm that the property is considered abandoned under applicable state or local law. Or, the servicer must confirm that the borrower is unresponsive to the servicer’s out reach. To meet this unresponsive safeguard, the servicer must confirm, among other things, that it has not received any communications from the borrower in the 90 days prior to the foreclosure referral.
However, there are three important exceptions. These safeguards do not apply if (1) the foreclosure referral occurs on or after January 1, 2022; (2) the borrower was more than 120days delinquent prior to March 1, 2020; and (3) the applicable statute of limitations to any foreclosure proceedings expires before January 1, 2022.
- COVID-19 Streamlined Modification: The Final Rule amends §1024.41(c) by
authorizing servicers to offer “streamlined loan modification options” to borrowers with COVID-related hardships based on an incomplete loss mitigation application (“ Streamlined Modification”). These Streamlined Modifications must satisfy certain criteria.First, the Streamlined Modification cannot increase the borrower’s principal and interest payment and the loan term may not extend more than 480 months from the Streamlined Modification’s effective date. Second, if the Streamlined Modification includes a deferred balance due at the end of the term or when the loan is paid off, that deferred balance cannot accrue interest. Third, the Streamlined Modification must include any pre-existing delinquency. Finally, upon the borrower’s acceptance of the Streamlined Modification, the servicer cannot charge any fee in connection with the loan modification, and must waive all existing late charges, penalties, or similar charges that were incurred after March 1, 2020.
If borrower accepts a Streamlined Modification, the servicer is excluded from certain requirements, including exercising reasonable diligence to complete the loss litigation application and sending the acknowledgment notice required by §1024.41(b)(2). However, as the Streamlined Modification is based on an incomplete loss mitigation application, it does not constitute offering a loan modification based on a completed application. Therefore, if a borrower becomes delinquent after accepting a Streamlined Modification, the servicer still must ensure that efforts are made to obtain a complete loss mitigation application per the Mortgage Servicing Rules.
- Early Intervention Obligations: §1024.39(a) already obligates a servicer to make a good faith effort to establish live contact with delinquent borrowers to discuss loss mitigation options no later than the borrower’s 36th day of delinquency. The Final Rule expands on that requirement and now obligates servicers to discuss specific additional COVID-19-relatedinformation during the live contact. What is discussed depends on whether the borrower is already in a forbearance program.For borrowers that are not in a forbearance program at the time of the live contact, and if the owner of the loan allows forbearance programs, the servicer must inform the borrower that forbearance programs are available for borrowers experiencing a COVID-19-related hardship. Unless the borrower states that he or she is not interested, the servicer must provide a list and description of the applicable programs that are currently available. The servicer must also provide at least one way that the borrower can find contact information for home ownership counseling services.
For borrowers that are in a COVID-19 forbearance program, the servicer must make a good faith effort to establish live contact 10 to 45 days before the scheduled end of the borrower’s program and (1) inform the borrower of the scheduled end date of the program; (2) provide a list and brief description of any loss mitigation programs available, and how the borrower can apply for those programs; and (3) provide at least one way that the borrower can find contact information for homeownership counseling services.
Unlike the procedural safeguards discussed above, which have an end date of December 31,2021, these additional early intervention obligations are in effect until October 1, 2022. Also, given the Final Rule’s expedited nature, these obligations do not include any new written disclosure requirements.
- COVID-19-Related Reasonable Diligence Obligations: The Final Rule also clarifies the servicer’s reasonable diligence obligations when the borrower is in a forbearance program made available to borrower’s experiencing a COVID-19-related hardship. Specifically, the servicer must contact the borrower no later than 30 days before the end of the forbearance period if the borrower remains delinquent to determine if the borrower wishes to complete a loss mitigation application. If the borrower chooses to do so, the servicer must exercise reasonable diligence efforts to complete the loss mitigation application before the end of the forbearance period.
In its April 1, 2021 news release, the CFPB advised servicers to take all necessary steps to avoid an influx of avoidable foreclosures as borrowers completed their forbearances. There is nothing preventing servicers from implementing these amendments now as opposed to waiting for August 31, 2021 – and servicers should do so.
Also, these new requirements will very likely open servicers up to new claims. For example, claims that the servicer failed to assist a borrower that was “ indirectly” impacted by COVID-19, or failed to exercise reasonable diligence and adequately discuss the additional early intervention options. To address these claims as best as possible, servicers should take a conservative and possibly over inclusive approach as to what constitutes “indirectly” impacted by COVID-19 to avoid claims that it did not assist borrowers that arguably fall under that broad category. Moreover, servicers must make every effort to notate their discussions with borrowers and exactly what was discussed. Recordings of these conversations are also very helpful in defending such claims. Further, although there is no written disclosure requirements in the amendments, servicers should send letters to borrowers that identify and describe all loss mitigation options as well as any prior attempts to contact the borrowers. This will provide an extra layer of defense to a potential claim that the servicer did not satisfy its obligations under the Final Rule.