While paying attention to the CFPB’s guidance in its Supervisory Highlights reports is always important, in the midst of the COVID-19 pandemic it is now critical that mortgage servicers be mindful of the loss mitigation violations that were described in the Winter 2020 edition. In its Winter 2020 Supervisory Highlights report, the CFPB described several legal violations that it had uncovered during recent supervisory activities. With respect to mortgage servicing, the CFPB noted different ways in which entities failed to comply with Regulation X’s loss mitigation requirements. Two compliance issues – the failure to recognize verbal loss mitigation applications and the failure to comply with the CFPB’s rules related to short-term loss mitigation options – are particularly relevant in the context of what is now happening across the country with COVID-19.
Mortgage servicers are already reporting an uptick in requests for assistance from borrowers who are impacted by the pandemic. As servicers continue to field calls for help, they should be mindful of what the CFPB published related to compliance with loss mitigation obligations. We previously wrote about the issues surrounding verbal loss mitigation applications and encouraged servicers to be vigilant in recognizing when a borrower’s request for help meets the standard of a loss mitigation application under the law, regardless of whether it is in writing or over the phone.
The CFPB’s current guidance to consumers that may be impacted by COVID-19 and are not able to pay certain bills is to contact the servicer, inform the servicer about the situation, and be prepared to discuss income, expenses and assets.
The conversations that the CFPB is encouraging homeowners to have with their lenders and servicers may very likely rise to the level of a loss mitigation application. Again, servicers who don’t have a process in place to recognize or take in verbal applications should tread carefully.
The other issue the CFPB raised in the Winter 2020 report related to short-term loss mitigation options, which is also likely to be prevalent as borrowers impacted by COVID-19 need temporary assistance to help get through tough times that may lie ahead. The CFPB explained that at least one entity fell short when managing short-term forbearance offers made in connection with a disaster. In that case, the servicer would offer a forbearance to any borrower “in a disaster area [who] experienced home damage or incurred a loss of income from the disaster.” The CFPB notes in the report that “[b]orrowers did not submit any form of written application to receive the forbearance. Rather, borrowers spoke with the servicers over the phone about their financial concerns due to the disaster and received the forbearances based on these conversations.”
The CFPB explains in the report that the conversations the borrowers had with their servicers qualified as a loss mitigation application under Regulation X, and that servicers failed to send the notice that is required when a short-term forbearance (or repayment plan) is offered. Although short-term forbearance and repayment plans can be offered at any time, they are particularly common in response to disasters and are likely to be heavily relied upon as we navigate COVID-19. Fannie Mae and Freddie Mac, for example, are encouraging the use of forbearance plans to help borrowers in need. Therefore, servicers should make sure their processes align with the requirements of Regulation X to avoid compliance issues and being the subject of future Supervisory Highlights reports.
As a reminder, there are several requirements in Regulation X related to short-term forbearance and repayment plans:
- In order to offer a short-term forbearance or repayment plan based off of an incomplete application, the plan must meet certain criteria. This includes certain limitations on the number of payments that can be addressed and the length of time a borrower can be given to repay amounts owed.
- A servicer must provide a notice to the borrower promptly after offering a short-term forbearance or repayment plan. The notice must include certain content, including the specific payment terms and duration of the program or plan, and a statement that the servicer offered the program or plan based on an evaluation of an incomplete application.
- Short-term forbearance and repayment plans are considered loss mitigation options under the law, so dual tracking restrictions apply while a borrower is complying with the plan’s terms.
Although things continue to change and evolve on a daily basis, mortgage servicers should be mindful of their obligations, particularly since the volume of calls from borrowers seeking help is likely to continue to rise. As the volume increases, so will the risks servicers face if they do not handle loss mitigation obligations properly.