COVID Loss Mitigation and Reg X: Condensed CFPB Interim Final Rule
By Greggory B. Oberg, Esq.
There’s a lot of information to read on the regulatory side in normal times. During COVID, it seems we’ve seen 3+ years of regulatory and compliance action—specifically state legislation—in the span of about 4 months.
With all the updates—often conflicting and ill formed—it’s tough to keep up with the material. In the past, I’ve created cheat sheets for my colleagues on some of these longer rules. The goal being to get the document down to ~20% or less of it’s full-text length by removing the unnecessary and duplication information.
For those who prefer to read the IFR themselves, see Federal Register.
What is the Issue?
Here, the CFPB is taking action to explicitly relieve servicers of the Regulation X “complete application” requirement, wherein servicers are prohibited to from offering certain loss mitigation options without first obtaining a complete loss mitigation application.
With many of the initial 90 day forbearances coming to an end, it’s to be expected that small adjustments like this Reg X requirement will need to be made in the name of administrative efficiency.
As you may have seen, the GSE guidance—which is engineered by the FHFA—uniformly specifies that a compete Borrower Response Package (BRP) is NOT requires to facilitate a loan modification for COVID-19 impacted borrowers.
What is the Bureau Proposing?
Quoting directly:
Bureau is amending Regulation X to temporarily permit mortgage servicers to offer certain loss mitigation options without obtaining a complete loss mitigation application.
….
[The] amendment conditions eligibility for the new exception on the loss mitigation option satisfying three criteria.
But don’t worry, the “three prong test” is not overly complex.
Prong One: Option-Specific Requirement
The loss mitigation options must, essentially defer all forborne amounts until the maturity or payoff of the mortgage. Given the FHFA direction of the GSE program(s), it’s not surprising to see the GSE preference for balloon-on-sale workouts codified here.
Prong Two: Non-Accrual of Interest
Another item that seems to codify (or further codify) what I’ve been reading from the start. We cannot make money off of this, essentially. I know that’s a raw statement, but putting yourself in that mindset will go a long way towards demonstrating and documenting good faith, reasonable, and prudent decision making for future review. We can be certain “what did you do with COVID” is a question the regulators will be asking.
Specifically:
any amounts that the borrower may delay paying through the loss mitigation option do not accrue interest; the servicer does not charge any fee in connection with the loss mitigation option; and the servicer waives all existing late charges, penalties, stop payment fees, or similar charges promptly upon the borrower's acceptance of the loss mitigation option.
Prong Three: Resolution of Prior Delinquency
Consistent again with the aims of “pausing the transaction”, the CFPB makes clear that whatever loss mitigation option is accepted by the borrower must result in the resolution of the delinquency.
Effective Date & Bottom Line
As an interim final rule, the rule became effective immediately, as of July 1,. 2020. The CFPB will now accept comment for a period, after which it will either reject, modify, or affirm this amendment.
More broadly, these changes seem to me to somewhat round off the edges around the loss mitigation expectations of regulator and investor stakeholders. We are pretending X months didn’t happen…or that they did and the borrower had in fact made payments. Probably most instructive to the causal follower of GSE trends is the clarification on the “extend v. balloon debate.”