Compliance Alert: Temporary Rule Under Regulation X to Help Mortgage Borrowers Affected by the COVID-19 Pandemic
On June 30, 2021, the Consumer Financial Protection Bureau (Bureau) issued a temporary final rule under Regulation X1 to help mortgage borrowers facing financial hardship from the COVID-19 pandemic.
The rule has two main provisions: 1) it requires servicers to follow procedural safeguards before initiating a foreclosure; and 2) it allows servicers to offer loss mitigation options based on an incomplete application. The rule also modifies existing early intervention live contact messages and reasonable diligence obligations. In the preamble, the Bureau noted that nearly 900,000 borrowers could be exiting forbearances by the end of 2021.2 The rule, which became effective on August 31, 2021, is designed to help ensure a smooth and orderly transition as other foreclosure protections end by providing borrowers with a meaningful opportunity to explore ways to resume making payments and avoid foreclosure.
The protections provided in the rule are temporary. The rule generally sunsets on January 1, 2022. A provision that specifies live contact requirements related to borrowers experiencing a COVID-19-related hardship expires on October 1, 2022.3
Procedural Safeguards
These provisions apply to a mortgage loan secured by a borrower’s principal residence, which was more than 120 days delinquent on or after March 1, 2020, and for which the statute of limitations under state law applicable to the foreclosure action being taken will not expire before January 1, 2022. Under §1024.41(f)(3)(ii), servicers (except small servicers) cannot make the first notice or filing to initiate a foreclosure on such mortgage loans unless one of the following circumstances applies:
- the borrower submitted a complete loss mitigation application, remained delinquent since submitting it, and the servicer determined the borrower is ineligible for loss mitigation; the borrower rejected options that were offered; or the borrower failed to perform under a loan modification agreement;
- the property securing the mortgage is considered abandoned under state or local law; or
- the servicer conducted specified outreach to the borrower, and the borrower is deemed unresponsive under the rule.
Loss Mitigation Options for Incomplete Applications
The final rule also permits servicers to offer loss mitigation options based on an incomplete application in certain circumstances. Servicers are generally required to receive a complete loss mitigation application before they can offer loss mitigation options (aka the anti-evasion requirement).4 To help borrowers whose forbearance agreements expire in 2021, the final rule permits servicers receiving an incomplete application to offer a loss mitigation option that meets the following requirements:
- the loan term is not extended by more than 40 years from the date of the loan modification;
- the loan principal and interest payments do not increase over the amount paid before the modification;
- interest does not accrue on any portion of the amount owed if the modification permits the borrower to delay payment on those amounts until the loan is refinanced, the property is sold, the mortgage term ends, or (for FHA loans) the mortgage insurance terminates;
- the modification is made available to borrowers experiencing a COVID-19-related hardship (as defined in §1024.31);
- Either the borrower’s acceptance of an offer ends any preexisting delinquency on the mortgage loan or the loan modification offered is designed to end any preexisting delinquency on the mortgage loan upon the borrower satisfying the servicer’s requirements for completing a trial loan modification plan and accepting a permanent loan modification; and
- the servicer does not charge fees regarding the loan modification and waives all existing late charges, fees, and penalties incurred on or after March 1, 2020.
The Bureau noted this approach will help mitigate a resource strain on servicers processing a large volume of loss mitigation applications, while still protecting consumers because streamlined options must conform to the previously-noted restrictions. The Bureau further noted that borrowers experiencing the effects of the COVID-19 emergency may be less likely to finish a complete loss mitigation application, which could put them at risk for foreclosure.5
ENDNOTES
1 See 86 Federal Register at 34848 (June 30, 2021).
2 See 86 Federal Register at 34852.
3 See 12 C.F.R. §1024.39(e).
4 See 12 C.F.R. §1024.41(c)(2)(i). An interim final rule issued in June 2020 temporarily permits mortgage servicers to offer certain loss mitigation options based on the evaluation of an incomplete loss mitigation application for borrowers experience a COVID-19 financial hardship. 85 Federal. Register 39055 (June 30, 2020). The new rule expands on the temporary exception.
5 See 86 Federal Register at 34868.