On Wednesday, May 13, 2020, Fannie Mae and Freddie Mac unveiled new retention workout options that were jointly developed and “specifically designed to help borrowers impacted by a hardship related to COVID-19 return their mortgage to a current status.” The government-sponsored enterprises’ (GSEs) highly anticipated new COVID-19 payment deferral will allow servicers to defer up to 12 months of delinquent mortgage payments to the end of the loan term as a non-interest-bearing balance. Although the GSEs’ intentions behind the COVID-19 payment deferral are admirable, there are some questions about whether servicers can legally offer the deferral without violating the anti-evasion clause in Regulation X and, therefore, being exposed to risk.
As a 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. Instead, the CFPB’s mortgage servicing rules are designed to encourage servicers to collect complete loss mitigation applications and evaluate borrowers for all loss mitigation options that may be available. While servicers are always allowed to make blind offers of loss mitigation, they also are permitted to evaluate incomplete applications when the resulting offer constitutes either a short-term forbearance program or short-term repayment plan.
To make the new option simple and efficient for both servicers and borrowers, the GSEs both establish that servicers “must not require a complete Borrower Response Package (BRP) to evaluate the borrower for a COVID-19 payment deferral if the eligibility criteria are satisfied.” Instead, quality right party contact (QRPC) must be established with the borrower to gauge if (1) the borrower’s hardship has been resolved, (2) the borrower is able to make the contractual monthly payment going forward, and (3) the borrower is able to reinstate the mortgage loan or afford a repayment plan to cure the delinquency.
At the time of these interactions, servicers will likely already have an incomplete loss mitigation application open if the borrower previously requested a forbearance pursuant to the CARES Act or another COVID-19 related program. Even if, for whatever reason, that doesn’t apply in some circumstances and an application isn’t open, when the servicer makes contact with the borrower and begins discussing what is required to evaluate the borrower for the COVID-19 payment deferral, the conversation will inevitably constitute a loss mitigation application under Regulation X. The borrower will have to express an interest in loss mitigation and will have to provide information that the servicer will evaluate to make its decision. The servicer’s only option at that point under Regulation X will be to offer something that qualifies as a short-term forbearance or short-term repayment plan.
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. Given that borrowers will likely be coming off of forbearances when they are considered for a deferral and the deferral is designed to address already past due payments, it seems highly unlikely that a deferral would be considered a form of forbearance, which is traditionally considered to be a prospective option. Furthermore, the GSEs contemplate that servicers should be able to address up to 12 months of delinquent payments, which clearly does not fit within the short-term forbearance parameters in Regulation X that only permit servicers to forbear up to six months of payments. Therefore, the GSEs’ COVID-19 payment deferral will likely not meet the definition of a short-term forbearance program.
A short-term repayment plan, on the other hand, 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. While a deferral could be considered a repayment plan because borrowers are agreeing to repay the arrearage over a significant period of time, the GSEs are allowing the COVID-19 deferral program to address up to 12 months of missed payments, which precludes the arrangement from being considered “short-term.” Additionally, under Regulation X, to be considered short-term, a repayment plan must address the arrearage within six months. Under a deferral, borrowers will repay the arrearage at maturity or loan payoff, which will almost always take place more than six months in the future. Either way you look at it, a COVID-19 payment deferral will also not meet the definition of a short-term repayment plan.
Given that the QRPC conversations will constitute loss mitigation applications and the COVID-19 payment deferral option will not fit into the parameters of a short-term forbearance or repayment plan, servicers may actually be required to collect a complete loss mitigation application before being able to evaluate the borrower for the new option – a reality contrary to the GSEs’ expectations and burdensome for servicers and borrowers. With that said, a servicer may be able to argue that, upon QRPC and once it determines the borrower is eligible for the COVID-19 deferral program, it actually has a complete loss mitigation application at that point. The argument would be that, following the conversation, the servicer has everything it needs to evaluate the borrower for all available loss mitigation options pursuant to the GSEs’ COVID-19 evaluation hierarchy. The strength of this argument is a bit unclear at this point and, nevertheless, it does not seem consistent with the GSEs’ expectations, as the GSEs make it very clear that the servicer must not collect a complete application and their form COVID-19 deferral offer notice does not contemplate that the offer is based upon a complete application (i.e., does not include any loan modification denial reasons, an appeal period, etc.).
While the CFPB previously announced that it will be lenient in its expectations when it comes to technical compliance with certain aspects of the mortgage servicing rules during the pandemic, its commitment has centered around future supervisory and enforcement activity. However, the CFPB has not indicated that it would provide any flexibility in terms of the anti-evasion clause in Regulation X. Furthermore, the loss mitigation rules in Regulation X are subject to private enforcement by individual borrowers, and the CFPB has not yet taken any steps to alleviate that risk. Therefore, servicers who follow the process laid out by the GSEs for the evaluation , and offering of, a COVID-19 payment deferral may be exposed to risk of potential future supervisory, enforcement, and litigation activity. These same risks apply – perhaps even more so – to servicers that elect to apply the GSE approach to their portfolio and private investor loans. In such cases, the servicer is even less likely to be able to point to the GSE guidance for potential cover.
It is also worth noting that proposed follow-up legislation to the CARES Act, which is titled the Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES Act), contains provisions that may pave a path for the GSEs’ COVID-19 payment deferral program to work and, at least theoretically, not violate the existing restrictions in Regulation X. However, that proposed legislation is not final and there appears to be substantial disagreement in the Senate over the existing proposal. Meanwhile, servicers of GSE loans will be required by Fannie Mae and Freddie Mac to follow their guidance in the coming weeks.
Servicers of Fannie Mae and Freddie Mac loans currently will be required to evaluate borrowers for the COVID-19 payment deferral beginning on July 1, 2020. We are hopeful that additional guidance will be released before that time.