In mid May 2020, we highlighted that the Fannie Mae and Freddie Mac (GSEs) COVID-19 payment deferral programs put mortgage servicers at risk of violating some of the Consumer Financial Protection Bureau's (CFPB) Mortgage Servicing Rules in Regulation X. When originally introduced, the GSEs' COVID-19 payment deferral programs seemed to require servicers to offer a loss mitigation solution based upon an incomplete loss mitigation application in violation of the CFPB's anti-evasion clause. On June 23, 2020, after pressure from the industry, the CFPB released an interim final rule amending Regulation X in a manner that removed many of the barriers that prevented mortgage servicers from being able to offer the GSEs' COVID-19 payment deferral in compliance with applicable law. Unfortunately, the interim final rule simply isn't broad enough to save mortgage servicers from legal risks associated with the GSEs' non-COVID-19-related payment deferral programs.
On March 25, 2020 - just prior to the GSEs' introduction of the COVID-19 deferral program - the GSEs rolled out their more general, non-COVID-19-related payment deferral programs (Standard Deferral). The program is very similar to the COVID-19-related program and "is designed to provide relief to eligible Borrowers who have the financial capacity to resume making their monthly payments, but who are unable to afford the additional monthly contributions required by a repayment plan." An eligible borrower under the Standard Deferral plan will be brought current by deferring up to two months of delinquent principal and interest, creating a non-interest-bearing forborne balance that will become due at the earlier of the mortgage maturity date, payoff date, or upon transfer or sale. To offer a Standard Deferral, a servicer generally must confirm, among other things, that the borrower has resolved his or her hardship, is able to continue making the full monthly contractual payment, and is unable to reinstate the mortgage loan or afford a repayment plan to cure the delinquency. Like the COVID-19 deferral program, the GSEs note that the Standard Deferral can be offered "without receiving a complete Borrower Response Package (BRP)."
On July 15, 2020, the GSEs announced a third type of payment deferral program - one specific to borrowers who may have become delinquent due to a disaster-related hardship (Disaster Deferral). The Disaster Deferral is functionally similar to the COVID-related deferral program and the Standard Deferral. All three programs are designed to bring an eligible borrower current by deferring certain missed payments to the end of the loan as a non-interest-bearing balance. Under the Disaster Deferral, a servicer may defer up to 12 months of missed payments. In order to offer a Disaster Deferral, a servicer generally must establish quality right party contact with the borrower and confirm, among other things, that the borrower has resolved his or her hardship, is able to continue making the full monthly contractual payment, and is unable to reinstate the mortgage loan or afford a repayment plan to cure the delinquency. The GSEs note that the "servicer must not require a complete Borrower Response Package (BRP) to evaluate the borrower for a disaster payment."
The Standard Deferral and Disaster Deferral programs raise a familiar question: Can servicers legally make these offers as contemplated by the GSEs without first collecting a complete loss mitigation application?
As another refresher, the anti-evasion clause in Regulation X generally prohibits mortgage servicers from offering a loss mitigation option based upon an evaluation of an incomplete loss mitigation application, unless the resulting offer qualifies as a short-term forbearance program or short-term repayment plan, or falls under the CFPB's June 23 interim final rule providing an exception to the anti-evasion clause for certain COVID-19-related deferrals. For purposes of the loss mitigation rules in Regulation X, a short-term forbearance is when a servicer allows a borrower to forgo making up to six months of payments, regardless of how long the borrower has to make up the missing payments, and a short-term repayment plan is when a borrower is allowed to repay up to three months of past due payments over a period lasting no more than six months. Given that the GSEs' Standard Deferral program contemplates deferring up to two months of past due payments to the end of the loan term and the Disaster Deferral contemplates deferring up to 12 months of payments, the GSEs' programs do not fall squarely within the CFPB's short-term forbearance or short-term repayment plan exceptions. And given that the CFPB's interim final rule is solely related to COVID-19-related hardships, the GSEs' Standard Deferral and Disaster Deferral programs do not fall within that exception either. In sum, the GSEs' non-COVID-19-related deferral programs suffer from all of the regulatory compliance issues that existed with the GSEs' COVID-19 deferral program when it was originally introduced and prior to the CFPB's interim final rule.
There are three possible solutions to this problem: (1) the CFPB could further eliminate some of the restrictions in the anti-evasion clause; (2) the GSEs could modify their non-COVID-19 deferral program guidelines; or (3) servicers could consider conversations with borrowers as constituting complete loss mitigation applications for Regulation X purposes. This last option was discussed in connection with the COVID-19 deferral programs earlier this year but is less than ideal for a number of reasons. Among other things, considering a conversation to be a complete application is likely to cause borrower confusion because an evaluation notice would have to be sent and would likely have to include modification denial reasons and information about appealing those denials. This also may result in certain borrowers losing protections under the law and, quite frankly, just isn't a path fully contemplated by the GSEs' guidelines or model forms. Therefore, the best path to resolving this issue appears to be either additional relief by the CFPB or modifications to the GSEs' guidelines.
Servicers of Fannie Mae and Freddie Mac loans will be required to evaluate borrowers for the Standard Deferral beginning on January 1, 2021. Meanwhile, the Disaster Deferral became effective on October 1, 2020. The question remains, though, how will servicers be able to offer these programs in compliance with federal law?
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