by Wendy Lee, Esq.
McCalla Raymer Leibert Pierce, LLP
USFN Member (AL, CA, CT, FL, GA, IL, MS, NV, NJ, NY, OR, TX, WA)

In the wake of the CARES Act and the realization that RESPA might create a conflict for servicers attempting to roll borrowers from a forbearance to a payment deferral opportunity, the CFPB took action quickly to modify the “anti-evasion rule,^[1] ” the rule that requires servicers to evaluate for loss mitigation only after a complete application is received for the longer term workout options (i.e. modifications).  The policy underlying this rule is to prohibit servicers from making an offer based on an incomplete loss mitigation application and potentially shortchanging a borrower from a full loss mitigation process merely because paperwork is missing in the original application.  

This same rule also requires servicers to send a notice within five days of any application identifying remaining documents to be collected^[2], and also requires the servicer to act with diligence and provide a reasonable date by which a borrower should submit all the required documents^[3].   These rules were promulgated to solve a different problem, in a different era, and formed too tight of a box for servicers who were not required to collect detailed loss mitigation applications in applying the CARES Act and similar COVID-19 workout options.  So, the Bureau took action and quickly released some restrictions by making an interim final rule, effective on July 1, 2020, which allowed the very short form requests to be an acceptable trigger to enable a servicer to do a review for loss mitigation and apply the CARES Act solution without having to comply with the prior era rule, including the five day letter and collect additional data that used to be required when a borrower was required to actually qualify financially for loss mitigation.^[4]  

With an unprecedented number of borrowers shifting from the short-term forbearance and needing a more long-term option to deal with the unpaid installments ^[5], the Bureau’s solution was to create another exception^[6] to the anti-evasion rule if:

• The offer must resolve any preexisting delinquency of the borrower, including all forborne payments and “all other principal and interest payments that are due and unpaid”
  
  
• The borrower is offered a payment deferral that doesn’t accrue interest
  
  
• There is no fee paid to the servicer for the option, and
  
  
• The servicer waives other fees on the loan in connection with the loss mitigation option

Servicers who are treating their non-CARES Act loans under similar policies pursuant to private investor request need to be careful when using this exception.  While a private investor might offer the same quick forbearance rights to defer payments for a specific period of time (three, six, nine, or up to 12 months), if a servicer takes advantage of the anti-evasion rule, it will be required to offer a payment deferral greater than those allowed under the CARES Act and these apply to all loans, both federal and non-federally backed.

Also, servicers need to be aware that the “one bite” per borrower rule might not apply when using this new exception.  In other words, if the quick CARES Act like treatment is used and a formal, complete application is not reviewed, and a few months later a borrower decides to reapply for loss mitigation to seek a different style of modification, the RESPA 1024.41 rules on anti-evasion will apply.  In this instance the borrower may get their right to a formal full loss mitigation process upon the tender of a complete loss mitigation application, even though, technically, the CARES Act does not require a complete loss mitigation package to push a borrower onto a permanent modification situation. 

Finally, if a servicer offers a payment deferral and it is not accepted by the borrower, the reasonable diligence rule and the five-day letter will be required as the exception falls away.  This might be a difficult situation to remedy in that a borrower might not decline the offer until long after the five-day letter would have been due.   And, with the private right of action available under RESPA, this is bound to result in litigation.^[7]  

Only 21 comment letters were received in reaction to this rule and from the industry side.[8]   Assuming no major changes to this interim final rule as a result of the comments, servicers might want to consider reviewing all policies pursuant to providing the five-day letter upon receipt of an incomplete application and still using diligence to track down additional paperwork to make sure the long term solution provided for the borrower is worthwhile and well thought out.  It is an undoubtedly daunting task and, with each borrower owning a private right of action under RESPA, compliance efforts should be careful and robust. 

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Fall 2020 USFN Report