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Mortgage servicing in the time of COVID-19

Sep 06, 2021

The Consumer Financial Protection Bureau’s 2021 Mortgage Servicing COVID-19 Rule became effective August 31, 2021. Its purpose is to temporarily amend certain provisions of Regulation X to assist those mortgage borrowers affected by the COVID-19 emergency and to prevent avoidable foreclosures through five key amendments made to the regulation.

While the amendments are temporary, it’s important that your financial institution review the updated requirements in full and ensure compliance. Following the requirements of the 2021 rule will help ensure your financial institution avoids regulatory consequences and continues servicing your borrowers.

What does the rule apply to?

The 2021 rule applies to mortgage loans secured by the borrower’s principal residence and, as such, generally does not apply to investment properties or second homes. The 2021 rule does not apply to reverse mortgages, as defined by the mortgage servicing rules of Regulation X and Regulation Z. Similarly, small servicers, as defined in the mortgage servicing rules, are generally not subject to the new requirements.

For small servicers, the 2021 rule still provides an opportunity to revisit procedures and allow for a properly informed, risk-based decision on moving forward with mortgage servicing as the emergency federal and state provisions expire.

Why was the rule created?

The rule establishes temporary procedural safeguards to expand the opportunities for covered mortgages to be reviewed for loss mitigation before a servicer may make the first notice or filing required for foreclosure. Mortgage servicers may also temporarily offer certain loan modifications based on the evaluation of an incomplete application under certain conditions.

COVID-19 has had a devastating impact on the economy overall, and many borrowers remain seriously delinquent and will be at risk of foreclosure as CARES Act and other federal and state protections expire. Seven million borrowers have been placed into a forbearance program since the spring of 2020. The 2021 rule looks to provide a transition period for those borrowers, along with guidance for financial institutions on providing assistance to these borrowers while also outlining a path for those foreclosures that are inescapable.

What are the rule safeguards?

One of three following procedural safeguards must be met before a servicer may make the first notice or filing of foreclosure for loans covered by the 2021 rule. The safeguards are as follows:

  • The borrower has been considered for loss mitigation options after having submitted a completed loss mitigation application, has remained delinquent since the loss mitigation application was submitted, and is not eligible for a loss mitigation option or rejected options offered or has not performed under the options offered.
  • The property is considered abandoned property under state or municipal law.
  • The borrower has remained unresponsive for at least 90 days before the first notice or filing of foreclosure, and the servicer has complied with the early intervention live contact requirements, provided the early intervention 45-day written notice was sent at least 10 but no more than 45 days before the foreclosure referral.

The loans covered by the foreclosure requirements in the 2021 rule are those mortgage loan obligations that were more than 120 days delinquent on or after March 1, 2020. There is an exception to the rules when the statute of limitations applicable to the foreclosure will expire prior to January 1, 2022. The rules expire on January 1, 2022.

What happens when there is an incomplete loss mitigation application?

Regulation X requires certain actions by the servicer when an incomplete loss mitigation application is received to obtain the missing items. The 2021 rule, however, provides a second amendment that temporarily allows for streamlined loan modifications based on the evaluation of incomplete loss mitigation applications for borrowers with COVID-19-related hardships.

To meet this requirement, the loan modification may not cause the borrower’s monthly required principal and interest payment to increase and may not extend the term of the loan by more than 40 years. The loan modification must not allow interest to accrue on certain delayed payments and must end — or be designed to end — any preexisting delinquency, may not charge fees in connection with the loan modification, and must promptly waive certain existing fees the borrower owes that were incurred on or after March 1, 2020.

If a borrower accepts the loan modification and subsequently becomes delinquent, the servicer is required to resume reasonable efforts to obtain a complete loss mitigation application. In addition, a subsequent submission of a completed loss mitigation application following this streamlined modification does not count as a duplicative request under the 2021 rule.

What else do you need to know about the rule?

The rule’s third amendment modifies the early intervention obligations of servicers. Servicers are required to provide COVID-19-related information promptly after establishing live contact with borrowers. The information provided varies depending on whether the borrower is currently in a forbearance program or is not in a forbearance program made available to borrowers experiencing a COVID-19-related hardship. This third amendment ends on October 1, 2021.

For those borrowers in a short-term payment forbearance program made available to those experiencing a COVID-19-related hardship, based on the evaluation of an incomplete obligation, the rule’s fourth amendment outlines the reasonable diligence obligations servicers must take. Servicers are required to contact the borrower no later than 30 days before the end of the forbearance period if the borrower has remained delinquent to determine whether the borrower wishes to complete the loss mitigation evaluation. Prior to the end of the forbearance program period, the servicer needs to exercise reasonable diligence to complete the application if the borrower affirmatively states they request further assistance.

What is a COVID-19-related hardship?

A COVID-19-related hardship has been defined by the 2021 rule to mean a financial hardship due, directly or indirectly, to the national emergency for the COVID-19 pandemic declared in Proclamation 9994 on March 13, 2020 (beginning on March 1, 2020), and continued on February 24, 2021, in accordance with Section 202(d) of the National Emergencies Act (50 U.S.C.1622(d)).

Complying with the rule

The COVID-19 emergency has caused mortgage servicing rules to remain in a state of fluctuation due to a barrage of temporary rules for more than a year, with compliance departments being asked to interpret new rules and implement them in updated policies and procedures.

If you have not already, now is the time to review the 2021 rule and work toward full compliance. Take time to determine the volume of customers in forbearance with extensions expiring and ensure your mortgage servicing department is prepared. Confirm staff are trained on the updated rules. Lastly, reach out to Wipfli for assistance with your compliance challenges.

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Nick Bonnema, JD, CRCM
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