On June 28, 2021, the CFPB issued a final rule governing loss mitigation procedures and referrals to foreclosure following the COVID-19 pandemic (“COVID Servicing Rule”). The final rule amends the servicing rules under Regulation X, which implements the Real Estate Settlement Procedures Act of 1974 (“RESPA”). The rule adds live contact requirements and procedural safeguards prior to foreclosure referrals for borrowers suffering COVID-19-related hardship. It also allows servicers to offer streamlined loan modification option for such borrowers based on incomplete loss mitigation application. The COVID Servicing Rule is effective on August 31, 2021. This note summarizes the provisions and provides key takeaways on the COVID Servicing Rule.
Coverage
The COVID Servicing Rule applies in the context of “COVID-19-related hardship”, which is defined as a financial hardship due, directly or indirectly, to the national emergency declared for the COVID-19 pandemic.
As the COVID Servicing Rule implicate processes in sections 1024.39 and 1024.41 of Regulation X, it applies only to a mortgage loan secured by the borrower’s principal residence. Also as such, it generally does not apply to: (i) investment properties or second homes, (ii) reverse mortgages, and (iii) small servicers.
Temporary COVID-19 Related Live Contact
Until October 1, 2022, the COVID Servicing Rule imposes the following additional requirements on servicers when establishing live contacts with borrowers experiencing a COVID-19-related hardship:
Borrowers Not in Forbearance
For a borrower not in forbearance, where forbearance is available, the servicer must provide the following information:
- List and brief description of any forbearance program available and the time and action that the borrower must take to be evaluate for such forbearance programs – unless the borrower states that s/he is not interested such information.
- At least one way that the borrower can find contact information for homeownership counseling services – for example – referencing the borrower’s periodic statement.
Borrowers in Forbearance
For borrower in a forbearance, due to COVID-19-related hardship, at least 10 days and no more than 45 days before the scheduled end of the forbearance – or if the scheduled end date of the forbearance program occurs between August 31, 2021 and September 10, 2021, then after August 31, 2021 – the servicer must provide the following information:
- The date the borrower’s current forbearance program is scheduled to end;
- A list and brief description of each of the types of forbearance extension, repayment options, and other loss mitigation options made available to the borrower and the actions the borrower must take to be evaluated for such loss mitigation options; and
- At least one way that the borrower can find contact information for homeownership counseling services – for example – referencing the borrower’s periodic statement.
Procedural Safeguards Prior to Foreclosure Referral
The COVID Servicing Rule adds temporary procedural safeguards as Section 1024.41(f)(3) that expires on January 1, 2022. The regulation states that these procedural safeguards are aimed to give a borrower a meaningful opportunity to pursue loss mitigation options.
The COVID Servicing Rule requires that a servicer ensure that one of the procedural safeguards are met before making the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process (“Foreclosure Referral”) because of a delinquency resulting from COVID-19-related hardship – unless an exception to this requirement apply (discussed below).
These three alternative procedural safeguards are as follows:
- Complete loss mitigation application evaluated. The borrower submitted a complete loss mitigation application, remained delinquent at all times since submitting the application, and the servicer either (i) notified the borrower that s/he was not eligible for loss mitigation option and borrower did not appeal this decision timely (ii) the borrower rejects the loss mitigation option offered or (iii) the borrower fails to perform under an agreement on the loss mitigation option (e.g. trial modification agreement);
- Abandoned property. The property securing the loan is abandoned according to the laws of the State or municipality where the property is located when the servicer makes the Foreclosure Referral; or
- Unresponsive borrower. The servicer did not receive any communications from the borrower for at least 90 days before the servicer makes the Foreclosure Referral and all of the following four conditions are met:
- The servicer made good faith efforts to establish live contact with the borrower after each payment due date during the 90 day period;
- The servicer sent the written early intervention notice (45-day notice) at least 10 days and no more than 45 days before the Foreclosure Referral;
- The servicer sent all loss mitigation notices required during the 90-day period before Foreclosure Referral; and
- The borrower’s forbearance program, if applicable, ended at least 30 days before the Foreclosure Referral.
Exceptions to the Procedural Safeguards
These temporary procedural safeguards are not required if:
- The borrower was more than 120 days delinquent prior to March 1, 2020;
- The statute of limitations applicable to the foreclosure action expires prior January 1, 2022; or
- The Foreclosure Referral occurs after on or after January 1, 2022.
Streamlined Loan Modification Option
The COVID Servicing Rule adds an exception to the general rule that prohibits a servicer from offering a loss mitigation option prior to receiving complete loss mitigation application. The new exception allows a servicer to offer a borrower a loan modification based upon evaluation of an incomplete application if all of the following conditions are met:
- COVID-19 related hardship. The loan modification is made available to borrowers experiencing a COVID-19- related hardship.
- Loan Term Limit. The loan modification must not extend the term of the loan by no more than 480 months from the date the loan modification is effective.
- Payment Limit. For the entire modified term, does not cause the borrower’s monthly required principal and interest payment to increase beyond the monthly principal and interest payment required prior to the loan modification.
- No Interest Accrual on Deferred Amounts. If the loan modification permits the borrower to delay paying certain amounts until the mortgage loan is refinanced, the mortgaged property is sold, the loan modification matures, or, for a mortgage loan insured by the FHA, the mortgage insurance terminates, those amounts do not accrue interest.
- Resolution of Delinquency. The loan modification offered is designed to end any preexisting delinquency on the loan when the borrower satisfying the servicer’s requirements for completing a trial loan modification plan and accepting a permanent loan modification.
- No Fees and Certain Charges. The servicer does not charge any fee in connection with the loan modification, and the servicer waives all existing late charges, penalties, stop payment fees, or similar charges that were incurred on or after March 1, 2020, promptly upon the borrower’s acceptance of the loan modification.
If the borrower fails to perform under such streamlined trial loan modification offered or requests additional assistance, the servicer must immediately resume reasonable diligence efforts with regard to any loss mitigation application the borrower submitted prior to the offer of the streamlined trial loan modification. The servicer must also provide the borrower with the notice of missing documents required to complete the most recent loss mitigation application the borrower submitted prior to the servicer’s offer – unless the servicer has already provided such notice to the borrower.
Key Takeaways
Revision to Loss Mitigation Policy. The COVID Servicing Rule requires servicers to add additional procedures to their loss mitigation policy to ensure compliance with the rule’s live contact, procedural safeguard for Foreclosure Referrals and streamlined offers.
Elevated Liability Risk for Foreclosure Referral Prior to January 1, 2022. Although the rule allows Foreclosure Referral prior to January 1, 2022, the additional procedural safeguards represent elevated risk of civil liability for servicers with respect to such referrals, as violation of loss mitigation procedures are actionable and could serve the basis for a RESPA civil action by borrowers. Accordingly, servicers should ensure that Foreclosure Referrals made prior to January 1, 2022, are made based on solid written records that clearly demonstrate compliance with applicable procedural safeguard requirement prior to such referral.
Practical Effect of Procedural Safeguards on Foreclosure Referrals. Given the June 29, 2021 announcement made by the FHFA, extending the moratorium on Foreclosure Referrals with respect to Fannie Mae and Freddie Mac loans until the effective date of the COVID Servicing Rule, i.e. August 31, 2021 (FHFA Protects Borrowers After COVID-19 Foreclosure and REO Eviction Moratoriums End | Federal Housing Finance Agency), and possible similar action by other government agencies such as the FHA, VA and USDA, the practical effect of complying with the procedural safeguards following the effective date would likely mean that for many Foreclosure Referrals may not be possible until sometime in the fourth quarter of 2021. At that time servicers should weigh the benefit of Foreclosure Referral prior to January 1, 2022 against the risk of potential litigation risk that may result from such referral. Such balancing may weigh in favor of delaying Foreclosure Referrals, particularly when procedural safeguards are complete close to the end of 2021 or have less than solid documentations demonstrating compliance with rule’s requirements.
Streamlined Loan Modification Option as “Easy Path” to Compliance. The COVID Servicing Rule sets the streamlined option as potential easy path to compliance. The streamlined option terms are already widely used by investors and servicers as part of existing loss mitigation options. Servicers may find it as an efficient solution to deal with the majority of borrowers experiencing COVID-19 related hardship. Servicers and investors, however, must ensure that implementation of streamlined loan modification options is consistent to avoid fair lending risk.
If you have any questions regarding the COVID Servicing Rule, please contact Solomon Maman.
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