InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
FHFA announces CFPB final rule
On June 29, FHFA announced that Fannie Mae and Freddie Mac (GSEs) will not be permitted to make a first notice or filing for foreclosure that would be prohibited by the CFPB’s “Protections for Borrowers Affected by the COVID-19 Emergency Under the Real Estate Settlement Procedures Act (RESPA), Regulation X” final rule prior to the rule’s effective date. As previously covered by a Buckley Special Alert, the Bureau’s final rule, which takes effect August 31, obligates a servicer to continue specifying, with substantial detail, any loss mitigation options that may help borrowers resolve their delinquencies. GSEs are required to follow the CFPB’s new protections a month before the CFPB rule takes effect, which will protect borrowers from foreclosure and provide certainty for servicers regarding GSE expectations. According to FHFA, “[s]ervicers will still be able to make a notice or filing for foreclosure on abandoned properties and those that had a foreclosure referral prior to March 2020, along with certain other exceptions.” FHFA’s action eliminates the gap between the expiration of its current moratoriums for single family foreclosures and real estate owned (REO) evictions that will expire on July 31 (covered by InfoBytes here) and the effective date of the CFPB’s rule, which is a month later.
FHA extends Covid-19 foreclosure moratorium and other flexibilities
On June 25, FHA announced the extension of several Covid-19-related flexibilities in Mortgagee Letter 2021-15, which extends the foreclosure and eviction moratorium in connection with the Covid-19 pandemic, expands the Covid-19 forbearance and the home equity conversion mortgage (HECM) extension, and establishes the Covid-19 advance loan modification (Covid-19 ALM). As previously covered by InfoBytes, in December 2020, FHA first extended its foreclosure and eviction moratorium through February 28. In the most recent extension, FHA further extended its foreclosure and eviction moratorium for all FHA-insured single family mortgages, excluding vacant or abandoned properties, through July 31. For FHA’s Covid-19 forbearance policy, FHA expanded the date to request an initial Covid-19 forbearance from June 30 to September 30 and provided an additional three-month extension to the forbearance for borrowers who began their initial forbearance between July 1, 2020, and September 30, 2020. FHA also established the Covid-19 ALM, which, among other things, “offers borrowers who are currently 90 or more days delinquent, or at the end of their COVID-19 forbearance, the opportunity for a 30-year rate and term mortgage modification that will bring their mortgage current and reduce the principal and interest portion of their monthly mortgage payment by at least 25 percent” and establishes a Default Code. FHA also expanded the HECM Covid-19 extensions by “providing an additional three-month extension to HECM borrowers, where an initial HECM extension period began between July 1, 2020, and September 30, 2020.”
VA establishes VAPCP requirements
On May 28, the Department of Veterans Affairs (VA) published a final rule in the Federal Register, which establishes the “COVID–19 Veterans Assistance Partial Claim Payment” (VAPCP) program to help veterans resume making normal loan payments on VA-guaranteed loans after exiting forbearance due to the Covid-19 pandemic. The final rule incorporates several revisions in response to comments submitted by veterans, lenders, servicers, consumer groups, and trade associations on the VA’s proposed rule published last December (covered by InfoBytes here). Under the final rule, the partial claim maximum limit is increased from the proposed 15 percent to 30 percent of the unpaid principal balance of the guaranteed loan as of the date the veteran entered into a Covid-19 forbearance. The timeframe for servicers to submit partial claim payment requests to the VA also was increased from 90 to 120 days. Additionally, the final rule will allow servicers to use the Covid-VAPCP program “even if other home retention options are feasible, provided the partial claim payment option is in the veteran’s financial interest.” For a loan to qualify for a Covid-VAPCP, among other things, (i) the guaranteed loan must have been either current or less than 30 days past due on March 1, 2020, or made on or after March 1, 2020; (ii) the veteran must have received a Covid-19 forbearance and missed at least one scheduled monthly payment; (iii) at least one unpaid scheduled monthly payment must remain that the veteran did not make while under a Covid-19 forbearance; (iv) the veteran must indicate the ability to “resume making scheduled monthly payments, on time and in full, and that the veteran occupies, as the veteran’s residence, the property securing the guaranteed loan for which the partial claim is requested”; and (v) the veteran must timely execute all necessary loan documents in order to establish an obligation to repay the partial claim payment.
Notably, the final rule strikes the following requirements that were included in the proposed rule: (i) veterans will not be required to repay the partial claim within 120 months; (ii) interest will not be charged on the Covid-VAPCP; and (iii) servicers will not have to complete financial evaluations of veterans in the program.
The rule is effective July 27.
FHA streamlines mortgage servicing operational requirements
On April 19, FHA issued an update to Section III of the Single Family Housing Policy Handbook 4000.1, which streamlines many standard mortgage servicing operational requirements. The updates also incorporate FHA actions taken to support borrowers experiencing Covid-19-related financial hardships. The changes/updates include:
- A revised loss mitigation home retention “waterfall” to help servicers quickly review borrowers in danger of foreclosure for a permanent FHA Home Affordable Modification Program option without a lengthy forbearance. FHA noted in its announcement that this process “has been proven to be highly effective at helping borrowers avoid redefault and foreclosure.”
- Streamlined documentation requirements designed “to avoid unnecessary delays” and be more closely aligned “with standard industry servicing practices.” One example includes removing signature requirements on trial payment plans.
- A revised structure for certain allowable costs and fees corresponding with other industry participants’ fee structures.
The changes take effect August 17.
Special Alert: CFPB proposes to halt foreclosure starts from August 31 until 2022 and create new loss mitigation requirements for servicers
The Consumer Financial Protection Bureau on Monday issued a proposal that would broadly halt foreclosure initiations on principal residences from August 31, 2021 until 2022, and change servicing rules to promote consumer awareness and processing of Covid-relief loss mitigation options. Although the proposal would give servicers some flexibility in streamlining the modification process, most already have been offering many of these types of modifications since the early days of the pandemic. The proposal also would create new and detailed obligations for communicating with borrowers to ensure they are aware of their loss mitigation options for pandemic-related hardships.
The CFPB indicated that a final rule implementing the proposal will take effect Aug. 31 — a tight timeline to address public comments, which are due May 10. The proposal comes as the housing market is strengthening, loans in Covid-related forbearance are dropping, the unemployment rate is ticking down, and the nation’s vaccination program is gathering momentum.
Restrictions on foreclosure initiation through Dec. 31 for principal residences
The CFPB proposes prohibiting servicers from making the first notice or filing for foreclosure from the effective date on Aug. 31, 2021 until after Dec. 31, 2021, on all principal residences, regardless of whether the loan default was related in any way to the Covid-19 pandemic. Regulation X currently requires a servicer to generally refrain from making the first notice or filing to initiate foreclosure until the borrower reaches the 120th day of delinquency. Although the CFPB has previously taken the position that a borrower generally is not obligated to make a lump sum payment upon expiration of the forbearance period (See for example: Slides - Housing Counseling Webinar Forbearance Options and Resources - March 22, 2021 (hudexchange.info)), the proposal acknowledges that borrowers who enter forbearance programs and do not make payments during the forbearance period become increasingly delinquent on their mortgage obligation. As a result, without additional action, servicers likely would have a right under Regulation X to initiate foreclosure in the event a borrower comes off of a forbearance plan and does not cure the delinquency through reinstatement, deferral, or some other loss mitigation alternative to foreclosure. The proposal said a temporary foreclosure prohibition would address this concern.
The CFPB indicated it is considering creating exemptions from this restriction that would allow for the commencement of foreclosure proceedings if the borrower is not eligible for any nonforeclosure loss mitigation options or has failed to respond to servicer outreach.
It is possible that loan investors who had expected to instruct servicers to foreclose on defaulted loans will raise a legal challenge to the broad proposed foreclosure restriction, which appears to be principally based upon the CFPB’s authority to issue regulations creating mortgage servicer obligations as “appropriate to carry out [the Real Estate Settlement Procedures Act’s] consumer protection purposes.” It is an open question whether a blanket prohibition on foreclosures — including those unrelated to the pandemic — and applicable to all mortgage servicers is within the CFPB’s statutory authority under RESPA or the Dodd-Frank Act
Modifications based on evaluation of an incomplete loss mitigation application
The proposal also would allow servicers to offer borrowers with a Covid-19 related hardship a loan modification based on an incomplete application, as long as the modification met the following criteria:
- Term and payment limitations: The modification may not cause the borrower’s principal and interest payment to increase and may not extend the term of the loan by more than 480 months from the date of the modification.
- Non-interest-bearing deferred amounts: Any amounts that the borrower may delay paying until the loan is refinanced, the property is sold, or the loan modification matures, must not accrue interest.
- Fee restrictions: No fees may be charged for the loan modification and all existing late charges, penalties, stop-payment fees, and similar charges must be waived upon acceptance (the CFPB said it was aware that certain agencies, including the Federal Housing Administration, only require waiver of fees incurred after the beginning of the pandemic, and that such modifications would not fall within this safe harbor).
- Covid-related hardship: The loan modification is made available to borrowers experiencing a Covid-19-related hardship, which is very broadly defined in the regulation as “a financial hardship due, directly or indirectly, to the Covid-19 emergency.”
- Delinquency cure: The modification must be designed to end any preexisting delinquency.
Interestingly, investors and agencies have largely eliminated documentation requirements in response to the pandemic, and servicers have been successfully offering streamlined loan modifications under Regulation X’s current requirements. The lack of documentation requirements has seemingly blurred the lines of what constitutes a complete loss mitigation application.
Additional borrower outreach required
The proposed rule would require servicers, for one year after the effective date, to give borrowers Covid-forbearance-related information regarding the current Regulation X early intervention requirements, as follows:
- For borrowers not currently in forbearance, when live contact is made with the borrower, and the investor makes available to that borrower a Covid--related forbearance program, the servicer must inquire whether the borrower has a Covid-related hardship, then list and briefly describe available programs and actions the borrower must take to be evaluated for them. The CFPB noted that this could include listing federal, state, and/or investor-specific options.
- If the borrower is on forbearance, during the last live contact made pursuant to the early intervention rules prior to the program’s expiration, the servicer must inform the borrower of the date on which the current forbearance period ends and each type of post-forbearance option that is available to the borrower to resolve the post-forbearance delinquency, along with the actions that must be taken to be evaluated for such options. Importantly, this list would include all available loss mitigation options—not simply Covid-specific options.
The proposed rule would also require a servicer to contact the borrower no later than 30 days before the end of the forbearance period to determine if the borrower wishes to complete the loss mitigation application and proceed with a full loss mitigation evaluation. If the borrower requests further assistance, the servicer must exercise reasonable diligence to complete the application before the end of the forbearance program period.
The compliance requirements the proposal contemplates seems likely to present additional complexity and liability for mortgage servicers as they gear up to address the upcoming wave of delinquent borrowers who will be coming out of Covid-related forbearances.
If you have any questions regarding the CFPB’s proposal, please visit our Mortgages practice page or our Covid-19 Legal Resources & Capabilities page or contact a Buckley attorney with whom you have worked in the past.
Court rules incomplete loss mitigation application does not carry foreclosure protections
On March 19, the U.S. District Court for the Northern District of Ohio granted a mortgage lender’s motion for summary judgment, rejecting allegations that it had violated RESPA and Regulation X in handling plaintiffs’ loss mitigation application. The plaintiffs executed a promissory note and mortgage with the lender in 2017 and then initiated a loss mitigation application the following year. To complete the loss mitigation application process, the lender requested documents and information from the plaintiffs. The lender filed a foreclosure action after informing the plaintiffs that “required documents ‘remain outstanding.’” The plaintiffs filed suit, alleging the lender mishandled their loss mitigation application by, among other things, (i) failing to exercise reasonable diligence in obtaining documents and information to complete the loss mitigation application; (ii) failing to provide “the correct notices regarding the receipt of documents or with notice of a reasonable date by which Plaintiffs were required to submit additional documents to complete the loss mitigation application”; (iii) failing to evaluate the complete loss mitigation application for all available loss mitigation options within 30 days; (iv) requesting documents already received or impossible to obtain; and (v) filing a foreclosure action against the plaintiffs even though the loss mitigation application was either complete or facially complete.
The court disagreed, ruling that the lender “did not violate RESPA or Regulation X in either the handling of Plaintiffs’ loss mitigation application or in filing foreclosure litigation against Plaintiffs” because, among other things, “[t]here is no genuine issue of material fact that Plaintiffs did not comply with [the lender’s] request for additional information” and that “a complete, or even facially complete, loss mitigation application was not pending in this matter at the time of the filing of the foreclosure action.” As such, because an incomplete loss mitigation application does not carry foreclosure protections, the filed foreclosure action was not improper, the court wrote.
CFPB announces $5.5 million loss mitigation settlement
On December 18, the CFPB announced a settlement with a mortgage servicer for allegedly violating the CFPA and RESPA’s implementing regulation, Regulation X, due to widespread failures in the handling and processing of homeowners’ applications for loss mitigation options. According to the consent order, which was entered with the mortgage servicer’s successor in interest, the mortgage servicer violated Regulation X by, among other things, failing to (i) state in the acknowledgement notices the additional documents and information borrowers needed to submit to complete loss mitigation applications; (ii) provide a reasonable due date for submission of borrower documents; (iii) properly evaluate borrowers for all loss mitigation options available to them; and (iv) treat certain applications as “facially complete” in accordance with Regulation X. Additionally, the consent order states that the servicer’s alleged failure to “accurately review, process, track, and communicate to borrowers information regarding their applications for loss mitigation options” is an unfair act or practice and the alleged failure to send accurate acknowledgement notices is a deceptive act or practice. The Bureau asserts that the servicer’s failures delayed or deprived some borrowers of a reasonable opportunity to obtain the benefits of a loss mitigation option, resulting in additional harm such as negative credit reporting, additional late fees, and additional interest.
The consent order requires the successor in interest to pay nearly $5 million in total redress to over 11,000 consumers. The consent order also imposes a $500,000 civil money penalty and includes requirements for operational changes should the successor in interest resume mortgage servicing operations.
FHA extends Covid-19 foreclosure moratorium and other flexibilities
On December 21, FHA announced the extension of several Covid-19-related flexibilities, which were set to expire on December 31. Specifically, FHA further extended its foreclosure and eviction moratorium through February 28. The moratorium applies to homeowners with FHA-insured Title II Single Family forward and Home Equity Conversion (reverse) mortgages, excluding legally vacant or abandoned properties. Additionally, FHA extended the date by which borrowers must engage with their servicer to obtain an initial Covid-19 forbearance to February 28 (details on the Covid-19 forbearance covered by InfoBytes here), and requires that mortgage servicers provide up to 6 months of forbearance or an additional 6 month extension of the initial Covid-19 forbearance. The FHA also extended (i) the timeframe for providing an insurance endorsement on single family mortgages in forbearance through March 31; (ii) the temporary re-verification of employment guidance and exterior-only appraisal inspection option through February 28; and (iii) temporary provisions for verification of self-employment, rental income, and 203(k) Rehabilitation Mortgage escrow accounts through February 28.
VA issues circular on loss mitigation options for CARES Act forbearance cases
On September 14, the Department of Veterans Affairs issued Circular 26-20-33, which clarifies whether, due to the impact of Covid-19, servicers may offer deferment as a Covid-19 loss mitigation option. Deferment may be used if the veteran is able to resume making monthly payment as scheduled under the loan contract after the conclusion of the forbearance period. However, for the VA’s purposes, servicers do not need to, and should not, enter into a modification agreement that modifies the terms of the existing loan for the purpose of applying a deferment. To accommodate the deferment option, the VA has temporarily waived the usual requirement that the final installment on any loan not be in excess of two times the average of the preceding installments. This waiver applies only where the servicer offers a deferment as a Covid-19 loss mitigation option to a borrower who requested CARES Act forbearance, among other conditions in the circular. The circular is rescinded October 1, 2021.
Fannie and Freddie announce new disaster payment deferral
On July 15, Fannie Mae and Freddie Mac introduced a new home-retention workout option, the “disaster payment deferral,” for borrowers experiencing financial hardship. According to Fannie Mae’s Lender Letter LL-2020-11 and Freddie Mac’s Guide Bulletin 2020-28, the disaster payment deferral would bring the borrower current on their mortgage by deferring the delinquency amount (which includes up to 12 months of past-due principal and interest payments; out-of-pocket escrow advances paid to third parties; and servicing advances paid to third parties in the ordinary course of business) as a non-interest bearing balance, due and payable at liquidation, refinance, or maturity. To qualify for the program, an eligible disaster event is defined as (i) a financial hardship that impacts the borrower's ability to pay their contractual monthly payment; and (ii) either: the property securing the mortgage loan experienced an insured loss, the property securing the mortgage loan is located in an eligible FEMA-Declared Disaster Area, or the borrower's place of employment is located in an eligible FEMA-Declared Disaster Area. Among other requirements detailed by the Lender Letter and Bulletin, servicers must confirm that the borrower has resolved the financial hardship and have the ability to continue paying the contractual monthly payments. Servicers must begin evaluating borrowers for the disaster payment deferral beginning July 1.