Alston & Bird Consumer Finance Blog

Attorney General Actions

38 Attorneys General Ask SCOTUS to Determine the CFPB’s Fate

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A&B Abstract:

In November, the Consumer Financial Protection Bureau (“CFPB”) filed a petition for a writ of certiorari in connection with the Fifth Circuit’s recent decision in Community Financial, which held that the CFPB’s funding structure violated the Constitution’s Appropriations Clause. (For a full discussion of the Community Financial decision, click here; for a full discussion of the CFPB’s petition, click here.).

One month later, thirty-eight state attorneys general have joined one of two separate amicus briefs asking the nation’s highest court to weigh in. While both amicus briefs support granting the CFPB’s petition, the similarities end there.

The Amicus Briefs

The first brief, filed by a coalition of twenty-two Democratic attorneys general, argues that the Fifth Circuit’s Community Financial decision created “confusion and regulatory chaos” by “stepp[ing] in to create a conflict between [Congress and the Executive branch] that did not otherwise exist.” Focusing principally on the Fifth Circuit’s decision to vacate the challenged CFPB rule it its entirety, these amici argue that Supreme Court precedent specifically rejects that challenged agency action must be completely undone just because the agency operated with a constitutional defect at the time of the action. Emphasizing the threat that Community Financial poses to many of the CFPB’s actions taken over the last decade, these amici suggest that a “‘judge made remedy’ that aligns with traditional remedial principles would address the specific constitutional defects in the CFPB’s funding” in a more tailored way. They ask that the Supreme Court “grant certiorari and confirm that the absence of valid appropriations does not make void a prior unfunded action.” These attorneys general represent the states of New York, California, Colorado, Connecticut, Delaware, Hawai’i, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New Mexico, North Carolina, Oregon, Pennsylvania, Rhode Island, Washington, Wisconsin, and the District of Columbia.

The second amicus brief, filed by sixteen Republican attorneys general, takes a very different approach. To start, these amici contend that the Court should grant the petition for review not because Community Financial was wrongly decided but because the Fifth Circuit’s ruling should apply nationwide. Referring to the CFPB as a “failed experiment,” these amici stress that the Appropriations Clause “serves a critically necessary purpose by giving States insight into agency action” that must be recognized. And because, in their view, the CFPB has “not convincingly explain[ed]” how the CFPB could act without appropriations, these amici conclude that the Fifth Circuit correctly elected to vacate the CFPB’s action altogether. Applauding the Fifth Circuit’s opinion as “right in every regard,” these amici request that the Court grant certiorari and confirm the Fifth Circuit’s reasoning. These attorneys general represent the states of West Virginia, Alabama, Arkansas, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Montana, Nebraska, Oklahoma, South Carolina, South Dakota, Texas, Utah, and Virginia.

Takeaways

The Fifth Circuit’s decision in Community Financial posed an existential threat to the CFPB. Now, leaders across the nation have asked the Supreme Court to take a side. If the Court accepts this invitation, its ultimate ruling will have important implications on the future of the CFPB.

 

Attorneys General Urge FHFA and HUD to Take Additional Measures to Protect Borrowers Affected by COVID-19

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A&B Abstract:

On April 23, 2020, the attorneys general of 33 states, the District of Columbia and Puerto Rico (the “Attorneys General”) sent two letters, one to the Federal Housing Finance Agency (“FHFA”) and the other to the U.S. Department of Housing and Urban Development (“HUD” and collectively with FHFA, the “Agencies”), respectively, noting that the “national response must recognize the unique challenges presented by the unprecedented number of homeowners who are affected by COVID-19, including the fact that all of these homeowners need relief at the same time..[and that] [m]eeting this challenge will require straightforward and consistent guidance that can be quickly operationalized.”  As a result, the Attorneys General urged the Agencies to make changes to their respective guidelines addressing COVID-19-related mortgage and foreclosure relief.

Revision of Forbearance Programs

The Attorneys General acknowledged that forbearance plans are a critical first response to borrowers affected by the COVID-19 pandemic.  However, the Attorneys General expressed concern that both the mortgage servicing industry and homeowners will become overwhelmed if changes are not made.   The Attorneys General recommended or encouraged that:

  • the Agencies “issue simple, self-executing guidance that servicers can easily implement to meet demand while providing an immediate, responsive resolution to borrowers.” The Attorneys General specifically expressed concern about HUD guidelines requiring an individualized evaluation for every borrower who receives a CARES Act forbearance, as well as guidelines issued by both of the Agencies requiring an individualized evaluation for borrowers coming out of forbearance, due to “grave doubts about servicers’ abilities to effectively manage the unprecedented number of borrowers who will be emerging from forbearance plans related to COVID-19 if individualized evaluations are required for each borrower.”
  • the Agencies amend their forbearance programs so that the obligation to repay forborne payments is automatically placed at the end of the loan term in the form of additional monthly payments that will follow the current term of the loan.  The Attorneys General noted that “there can be no reasonable expectation that a borrower who has experience a loss of employment or a reduction in income will be able to repay the forborne payments in a lump sum at the end of the forbearance period.” FHFA subsequently clarified its repayment requirements for its forbearance program on April 27, 2020.
  • the Agencies issue guidance allowing these post-forbearance agreements to occur without requiring borrowers to execute any additional documents, such as a loan modification agreement or a promissory note for the forborne payments, or at least waiving or easing those requirements until the pandemic abates.
  • FHFA to clarify that a borrower may receive a forbearance based on the borrower’s verbal attestation of a hardship related to COVID-19, and to encourage servicers to proactively notify borrowers of their right to verbally request a forbearance.

Expanded Eligibility for Disaster Relief-Related Modifications and Loss Mitigation Programs

The Attorneys General urged the Agencies to expand their eligibility standards for post-forbearance loss mitigation programs to enable a greater number of borrowers to qualify.  The Attorneys General urged HUD to reconsider its decision to remove the Disaster Loan Modification option for borrowers affected by COVID-19.  Further, the Attorneys General requested that the Agencies revise their respective loan modification eligibility criteria to ensure these programs have the same reach as the forbearance program mandated by the CARES Act, as the Agencies’ current guidelines impose several delinquency-related eligibility requirements.  For example:

  • Under current Fannie Mae and Freddie Mac guidelines, borrowers affected by COVID-19 are eligible for any one of three modification programs. Currently, however, a borrower is only eligible for such programs if the borrower was current or less than 31 days delinquent as of March 13, 2020. Additional delinquency-related eligibility criteria apply for the Cap and Extend Modification and Flex Modification programs.
  • Under current HUD guidelines, a borrower is only eligible for the COVID-19 Partial Claim if the borrower was current or less than 30 days delinquent as of March 1, 2020 and the partial claim amount does not exceed 30 percent of the unpaid balance. If a borrower is ineligible for the COVID-19 Partial Claim, then the borrower will be reviewed for HUD’s FHA-HAMP program. The Attorneys General noted that the FHA-HAMP program has additional seasoning requirements, such as requiring the borrower to have made at least 4 payments and the loan to have aged at least 12 months.

The Attorneys General urged the Agencies to waive the delinquency status requirements of these modification programs and noted that post-forbearance modification programs should be commensurate with the forbearance plans required by the CARES Act, as the CARES Act requires forbearance for any borrower experiencing a COVID-19 financial hardship regardless of delinquency status.  Moreover, the CARES Act authorizes forbearances of up to 360 days, so many borrowers receiving CARES Act forbearances will be more than 360 days delinquent by the end of the forbearance period.

Eviction and Foreclosure Moratoriums

Finally, the Attorneys General urged the Agencies to “instruct servicers that they also must suspend all foreclosures and evictions currently in process and cannot move forward to complete any step in the judicial or non-judicial foreclosure or eviction process while the moratorium is in place,” to address differences in various states’ foreclosure and eviction processes.

Currently, the CARES Act states that servicers of federally backed mortgages may not initiate any judicial or non-judicial foreclosures process, move for a foreclosure judgment or order of sale, or execute a foreclosure-related eviction or foreclosure sale until at least May 17, 2020. The Attorneys General asserted that advancing any step of the eviction or foreclosure process during a forbearance related to COVID-19 will only lead to borrower confusion and harm.

Takeaway

As the COVID-19 pandemic continues to affect homeowners and the mortgage servicing industry, there will likely be continued political pressure on the Agencies to further revise servicer loss mitigation guidelines. Servicers will need to be vigilant to stay on top of the rapidly evolving market conditions and regulatory environment.

 

Massachusetts Settlement Agreements Highlight AG’s Compliance Expectations

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A&B Abstract: In a series of 2019 settlement agreements, the Massachusetts Attorney General has publicly provided insights into her compliance expectations for residential mortgage servicers.  The settlements demonstrate a focus on compliance with the Commonwealth’s Act to Prevent Unlawful and Unnecessary Foreclosures, codified in part as M.G.L. Chapter 244, Section 35B (“Section 35B”) and its unfair and deceptive acts and practices law (the “UDAP law”), found in Chapter 93A of the Massachusetts General Laws.

Section 35B and Chapter 93A Expectations

Section 35B prohibits a creditor (defined to include a servicer) from causing publication of notice of a foreclosure sale upon “certain mortgage loans” unless it has first taken reasonable steps and made a good faith effort to avoid foreclosure.  To be considered to have taken reasonable steps and made a good faith effort to avoid foreclosure, a creditor must have provided a statutorily defined notice (“35B Notice”) at the time a borrower is in default.  Additionally, if certain criteria are met, a creditor must conduct a review to determine whether the borrowers are eligible for a loan modification prior to publishing a notice of foreclosure sale pursuant to M.G.L. ch. 244, Section 14. While the requirements may sound simple, they are complex and difficult to operationalize.

To avoid violations of Section 35B and the UDAP law, the Massachusetts Attorney General expects servicers to:

  • Accurately record, capture or note in the servicing system when borrowers exercise their right to pursue a loan modification under Section 35B by returning the mortgage modification options form (“MMO”), as required by 209 CMR 56.09;
  • Complete a timely review of borrowers’ loan modification applications, as required by Section 35B(c), and avoid causing undue delay in the loan modification review process;
  • Disclose to borrowers the servicer’s determination of the income, debts and obligations and the net present value assessment performed by the servicer in the review of the loan modification, as required by Section 35B(c);
  • Offer modifications, including short-term and interest-only modifications that reflect the borrower’s future ability to repay the modified mortgage loan according to its scheduled payments, as required by Section 35B(b);
  • Not deny loan modification applications on the basis that the borrower did not return sufficient documents to be reviewed, if the servicer did not adequately or timely communicate the requirements to the borrowers or identify when all such documents have in fact been submitted;
  • Provide borrowers with notice of their right to present a counter-offer after being offered a loan modification as part of a Section 35B review, as required by Section 35B(c);
  • Take reasonable steps and make a good faith effort to avoid foreclosure when a borrower requested a loan modification;
  • Not record affidavits pursuant to Section 35B(f) attesting compliance with the requirements of Section 35B where deficiencies exist  in the servicers’ Section 35B loan modification review process, including the failure to identify MMO forms returned by the borrower; and
  • Accurately and timely report accurate borrower response rates under Section 35B to the Massachusetts Division of Banks (“DOB”) as required by 35B(g).

Additional Chapter 93A Expectations

To avoid UDAP concerns, servicers should also:

  • Provide borrowers in default meaningful access to a single point of contact (“SPOC”), such that borrowers can (i) reach a person who can provide information about the modification application, foreclosure status or other account information, and (ii) adequately ensure accessibility to company representatives to ensure borrowers do not encounter connectivity issues, including busy signals, long hold times, and multiple transfers without reaching a live representative;
  • Provide successors-in-interest (“SIIs”) information about what documentation is required to access the account, provide SIIs accurate information as to the availability and requirements related to loss mitigation programs, and adequately note in borrower account files a confirmed SII, such that surviving spouses or other types of SIIs are not required to resubmit death certificates or other documentation, when a servicer already has  such documentation;
  • Proactively  communicate with limited English proficiency (“LEP”) borrowers in their native language to provide information related to the mortgage account, adequately notate in the borrower account files a borrowers LEP status such that LEP borrowers do not have to reestablish their language-access needs with each contact with a servicer, and do not make outgoing calls to previously confirmed LEP borrowers without first engaging reasonably available translation services, such that LEP borrowers (i) encounter an English-speaking representative, (ii) face unexplained holds while translation services are engaged, and (iii) become confused about the nature of the call and disconnect;
  • Allow borrowers to complete short sales by (i) approving, explicitly or implicitly, a listing price in connection with a short sale application only after confirming the loan’s investor would accept an offer received at that price, (ii) not countering or rejecting short sale offers that meet the approved listing price due to a failure to obtain investor proceeds requirements prior to explicitly or implicitly approving the listing price, (iii) having adequate processes to resolve disputes in valuation of a property, and (iv) having a standardized or consistent review process such that borrowers attempting to complete a short sale do not have to relist the property to meet the servicer’s requirements; and
  • For in-flight modifications, ensure that loss mitigation applications initiated by a prior servicer are continued and  identify and honor loan modifications offered by previous servicer.

Takeaway:  

These settlement agreements serve as a reminder that Massachusetts continues to be active in mortgage servicing issues and will use its broad and sometimes nebulous UDAP authority to enforce activities that aren’t specifically regulated under existing law.