During the pandemic, many regulations and guidance came out to protect consumer interests and assist in avoiding foreclosures. A lot of these rules are set to expire during this Summer and the Consumer Financial Protection Bureau (CFPB) issued a final rule regarding protections for borrowers affected by the COVID-19 Emergency Under the Real Estate Settlement Procedures Act (RESPA) to ensure a smooth transition to go back to “normal.” Since the CARES Act was passed in Spring 2020, mortgage servicers placed over seven million borrowers into forbearance programs. This final rule which is effective on August 31, 2021 puts forth temporary procedural safeguards to ensure borrowers have an opportunity to be reviewed for loss mitigation before a servicer can make the first notice or filing for foreclosure. The temporary safeguards are set to expire on October 1, 2022.
The temporary safeguards were created to ease borrowers from their COVID foreclosures. Generally, a servicer must provide borrowers with an opportunity before making the first notice or filing required for foreclosure due to delinquency to pursue loss mitigation options. This requirement applies if:
- The borrower’s loan obligation is more than 120 days delinquent on or after March 1, 2020; and
- The statute of limitations for the foreclosure action in their given state or municipality expires on or after January 1, 2022.
A procedural safeguard has been met and the servicer could proceed with foreclosure under any one of these three circumstances:
- The borrower submitted a completed loss mitigation application and permits the servicer to make the first notice or filing;
- The property securing the mortgage is abandoned under state or local law; or
- The servicer has performed outreach and the borrower has been unresponsive.
These safeguards are set to expire on January 1, 2022.
As for loan modifications, the rule continues to allow banks to accept incomplete loss mitigation applications. The modification also cannot increase the borrower’s monthly principal and interest payment. If the modification allows the borrower to delay paying certain amounts until the loan is refinanced, the property is sold, the loan matures, the mortgage insurance terminates for a loan insured by the Federal Housing Administration, those amounts cannot accrue interest. The borrower’s acceptance of the modification ends any preexisting delinquency on the loan or it must at a minimum be designed to end such delinquency. Additionally, the servicer cannot charge any fee in connection with the modification and would have to waive all existing late charges, penalties, stop payment fees, or similar charges incurred on or after March 1, 2020, upon the borrower’s acceptance of the modification. Finally, the servicer isn’t required to exercise reasonable diligence to complete the loss mitigation application and send an acknowledgement notice.
Regarding the reasonable diligence, the servicer must contact the borrower no later than 30 days before the end of the forbearance period if the borrower remains delinquent to determine whether they wish to complete the loss mitigation application and proceed with a full evaluation. Then, if the borrower indicates the need for further assistance, the servicer must exercise diligence to complete the application before the end of the period.
As the forbearance moratoria comes to its expiration, banks should determine which borrowers are experiencing hardships related to the pandemic and implement the procedures to be compliant with this new rule.