Alston & Bird Consumer Finance Blog

COVID-19

CFPB Issues Warning to Mortgage Servicing Industry

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A&B ABstract: On April 1, 2021, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) issued a Compliance Bulletin and Policy Guidance (the “Bulletin”) on the Bureau’s supervision and enforcement priorities with regard to housing insecurity in light of heightened risks to consumers needing loss mitigation assistance once COVID-19 foreclosure moratoriums and forbearances end.  The Bulletin warns mortgage servicers to begin taking appropriate steps now to prevent “a wave of avoidable foreclosures” once borrowers begin exiting COVID-19 forbearance plans later this Fall, and also highlights the areas on which the CFPB will focus in assessing a mortgage servicer’s compliance with applicable consumer financial laws and regulations.

The Bulletin

The Bulletin warns mortgage servicers of the Bureau’s “commit[ment] to using its authorities, including its authority under Regulation X mortgage servicing requirements and under the Consumer Financial Protection Act” to ensure borrowers impacted by the COVID-19 pandemic “receive the benefits of critical legal protections and that avoidable foreclosures are avoided.”

Specifically, the Bureau highlighted two populations of borrowers as being at heightened risk of referral to foreclosure following the expiration of the foreclosure moratoriums if they do not resolve their delinquency or enter into a loss mitigation option, namely, borrowers in a COVID-19-related forbearance and delinquent borrowers who are not in forbearance programs.

As consumers near the end of their forbearance plans, the CFPB expects “an extraordinarily high volume of loans needing loss mitigation assistance at relatively the same time.” The Bureau specifically expressed its concern that some borrowers may not receive effective communication from their servicers and that some borrowers may be at an increased risk of not having their loss mitigation applications adequately processed. To that end, the Bureau plans to monitor servicer engagement with borrowers “at all stages in the process” and prioritize its oversight of mortgage servicers in deploying its enforcement and supervision resources over the next year.

Servicers are expected to plan for the anticipated increase in loans exiting forbearance programs and related loss mitigation applications, as well as applications from borrowers who are delinquent but not in forbearance. Specifically, the Bureau expects servicers to devote sufficient resources and staff to ensure they are able to clearly communicate with affected borrowers and effectively manage borrower requests for assistance in order to reduce foreclosures. To that end, the Bureau intends to assess servicers’ overall effectiveness in assisting consumers to manage loss mitigation, and other relevant factors, in using its discretion to address potential violations of Federal consumer financial law.

In light of the foregoing, the Bureau plans to focus its attention on how well servicers are:

  • Being proactive. Servicers should contact borrowers in forbearance before the end of the forbearance period, so they have time to apply for help.
  • Working with borrowers. Servicers should work to ensure borrowers have all necessary information and should help borrowers in obtaining documents and other information needed to evaluate the borrowers for assistance.
  • Addressing language access. The CFPB will look carefully at how servicers manage communications with borrowers with limited English proficiency (LEP) and maintain compliance with the Equal Credit Opportunity Act (ECOA) and other laws. It is worth noting that the Bureau issued a notice in January 2021 encouraging financial institutions to better serve LEP borrowers in a language other than English and providing key considerations and guidelines.
  • Evaluating income fairly. Where servicers use income in determining eligibility for loss mitigation options, servicers should evaluate borrowers’ income from public assistance, child-support, alimony or other sources in accordance with the ECOA’s anti-discrimination protections.
  • Handling inquiries promptly. The CFPB will closely examine servicer conduct where hold times are longer than industry averages.
  • Preventing avoidable foreclosures. The CFPB will expect servicers to comply with foreclosure restrictions in Regulation X and other federal and state restrictions in order to ensure that all homeowners have an opportunity to save their homes before foreclosure is initiated.

Takeaway

As more and more borrowers begin to near the end of their COVID-19-related forbearance plans, and as applicable foreclosure moratoriums near their anticipated expiration dates, mortgage servicers should consider evaluating their mortgage servicing operations, including applicable policies, procedures, controls, staffing and other resources, to ensure impacted loans are handled in accordance with applicable Federal and state servicing laws and regulations.

Consolidated Appropriations Act Includes Temporary Provisions That May Affect Servicers

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Among the myriad provisions of H.R. 133, the Consolidated Appropriations Act, 2021, is Division FF, Title X, Section 1001, of which mortgage holders and servicers should take note because it may affect activities with respect to borrowers in bankruptcy.  These temporary provisions expire December 27, 2021.

First, Section 1001 provides that a debtor under a Chapter 13 plan may seek (and a court may grant) a discharge if (1) the debtor has missed three or fewer mortgage payments on or after March 13, 2020 because of a “material financial hardship due, directly or indirectly, by the coronavirus disease 2019 COVID-19) pandemic”; or (2) the debtor’s plan provides for the curing of a default and maintenance of payments, and the debtor has entered into a loan forbearance or modification agreement, and. Importantly, unpaid mortgage payments are not discharged if the debtor is granted a discharge, and thus remain owed to the mortgage holder or servicer.

Second, Section 1001 provides that a consumer cannot be denied a CARES Act forbearance or other applicable CARES Act relief if they are a debtor in a pending bankruptcy case.

Third, Section 1001 permits servicers of federally backed mortgage loans to file supplemental proofs of claim for the amounts forborne under a CARES Act forbearance, provided that they are filed no later than 120 days after the expiration of the forbearance. Mortgage holders or servicers may also move to modify the debtor’s bankruptcy plan to provide for the supplemental CARES forbearance claim within thirty days after filing the supplemental claim.

Takeaway

Servicers may wish to consult counsel to determine whether these provisions will affect 2021 operations.

Alston & Bird Analyzes New Guidance on Remote Work in Client Alert

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State Capital

As the COVID-19 pandemic continues to persist across the nation, some state regulators have begun to consider, or have adopted, measures to allow employees of licensed entities to work from home, both during the pandemic and permanently thereafter.

Alston & Bird has issued a client alert unpacking a pair of state rules that extend or make permanent regulations authorizing financial institutions to allow employees to work from home.

Update: The Federal Moratorium On Residential Evictions Faces A New Class Action

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A&B ABstract: The National Apartment Association, along with several landlords, has challenged the order of the Centers for Disease Control and Prevention (“CDC”) that imposed a nationwide moratorium on certain residential evictions. This lawsuit follows one we previously covered, and could have a major impact on the scope of federal power during the pandemic.

Refresher on the Moratorium and CDC Emergency Order

As we previously discussed, the CARES Act imposed a temporary moratorium on certain residential evictions.  On August 8, President Trump directed executive agencies to “take all lawful measures to prevent residential evictions and foreclosures resulting from financial hardships caused by COVID-19,” and he ordered the CDC and the Department of Health and Human Services (“HHS”) to consider whether “temporarily halting residential evictions” was “reasonably necessary to prevent further spread of COVID-19” between states.

In response, on September 4, the CDC issued an emergency order imposing a nationwide moratorium on certain residential evictions through December 31, 2020 (“CDC Order”).  The CDC Order prevents the eviction of any tenant who certifies that he or she satisfies several financial hardship criteria.  However, the Order does not provide any compensation for landlords or property owners who are prevented from evicting non-paying tenants.

The New Class Action

Following on the Tiger Lily case (discussed in our September 23 post), on September 18, a group of landlords and the National Apartment Association filed Richard Lee Brown et al v. Alex Azar et al., No. 1:20-cv-03702 (N.D. Ga.), a purported class action lawsuit challenging the constitutionality of the CDC Order.  Plaintiffs also seek a preliminary injunction against enforcement of the CDC Order.

The Claims

Plaintiffs’ key claims are very similar to those asserted in Tiger Lily.  The Amended Complaint asserts that the CDC Order was promulgated in violation of the Administrative Procedure Act, violates landlords’ right to due process and access to courts, is unauthorized by the statute upon which it relies, and improperly seeks both to displace state eviction laws and to “commandeer” state resources to enforce its mandate.  Unlike Tiger Lily, Plaintiffs do not assert a Takings claim.

Our prior analysis is largely applicable to this new class action, and it seems probable that the outcome will turn on the general question of whether the scope of the CDC Order is consistent with past practice and the intent underlying the federal statute on which it purports to be based.  The CDC’s broad interpretation of its power would arguably give the Executive the power to restrict almost any type of activity, as applied to any “communicable” disease.  And the eviction moratorium is very different than exemplary public health measures listed in the statute, perhaps exceeding its intended scope.

Takeaways

Brown v. Azar has the potential to be quite significant regardless of its outcome.  It embodies the nationwide class action we previously predicted might flow from Tiger Lily, and may generate  more class action tag-along cases, miring the CDC Order in a morass of litigation akin to that involving the Paycheck Protection Program “agent fee” litigation.  The involvement of the National Apartment Association, which has nearly 83,000 members managing over 9.7 million rental homes in the United States, Canada, and the United Kingdom, credentializes and raises the profile of this matter as well.

As was true for Tiger Lily, success in this class action would result not just in restoration the ability for the plaintiff landlords to evict non-paying tenants, but it could yield important clarifications and limits on the regulatory power of the federal government in connection with the pandemic.  If the CDC Order is struck down, this could spur Congress to consider addressing residential evictions directly again, either through another statutory moratorium on evictions, or more stimulus payments for struggling renters.  For these reasons, Brown v. Azar is worth watching.

Pennsylvania Court Invalidates Statewide Pandemic Restrictions

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A&B ABstract:  In County of Butler v. Wolf, a federal court in Pennsylvania struck down as unconstitutional key aspects of the Pennsylvania Governor’s COVID-19 Emergency Order: limitations on the size of indoor gatherings and the “closure of all businesses that are not life sustaining.”  The decision has been appealed, but the breadth of the court’s order is striking and the issue now is whether other courts will follow suit.

Challenges to COVID-19 Restrictions Usually Fail

Federal courts have been hesitant to rule that COVID-19 regulations are unconstitutional.  Notably, the Seventh Circuit recently rejected the Illinois Republican Party’s challenge to the Illinois governor’s executive order limiting physical gatherings for a social event or a political rally but providing an exemption for religious gatherings.  Relatedly, the U.S. Supreme Court recently declined, in a 5-4 decision, to enjoin California’s restrictions on attendance at religious services.

The cases that have found COVID-19 regulations constitutionally defective have generally fallen into two camps: either the court finds the law is too poorly worded (i.e., unconstitutionally vague), or the application of the law is irrational (i.e., violates due process and/or equal protection).  These problems have usually been fixable once spelled out.  For example, a Wisconsin state court judge ruled in July that Racine’s regulations were unconstitutionally overbroad and vague, but held that the city would “maintain[] its full power to issue a new order addressing COVID-19.”

County of Butler v. Wolf Struck Down COVID-19 Restrictions

Unlike other courts, the U.S. District Court for the Western District of Pennsylvania found broad constitutional violations that could not be easily remedied in County of Butler v. Wolf.  The plaintiffs challenged Pennsylvania Governor Tom Wolf’s COVID-related “emergency” restrictions limiting the number of people permitted to attend gatherings and determining which businesses could remain open, based on whether they are “life-sustaining” in nature.  The challenge was rooted in alleged violations of equal protection, due process, and First Amendment rights.

Constitutional Issues

The court found three constitutional problems with the Governor’s orders.  First, the court held that the gathering limits—25 persons for indoor gatherings, and 250 for outdoor gatherings—violated the First Amendment right to assemble because the attendance caps for assemblies were more restrictive than the 25% or 50% occupancy restrictions on certain businesses.  Further, the court found that the 25-person restriction, and the fact that the restrictions applied equally across all counties regardless of their COVID statistics, was not rationally supported by evidence.

Second, the court held that the temporary closure of certain “non-life-sustaining” businesses violated plaintiffs’ substantive due process rights under the Fourteenth Amendment because it was too broad and harsh to pass constitutional muster, and violated the right to choose one’s profession.  Citing the century-old Supreme Court decision in Lochner v. New York, the court found that the order violated plaintiffs’ economic due process rights.

Finally, the court held that the closure of certain “non-life-sustaining” businesses also violated plaintiffs’ equal protection rights under the Fourteenth Amendment, finding no rational basis for the regulations because some businesses were treated differently than other, similar businesses.  The court illustrated its reasoning with an example that imposing constraints on a “mom-and-pop” hardware store while allowing Walmart to sell the same products would not keep a consumer at home; it would simply send her to Walmart, doing nothing to protect her or others from COVID.  As a result, the court found that the restrictions’ means did not rationally relate to their ends.

Impact of the County of Butler v. Wolf Decision

Governor Wolf has already sought a stay of the decision and filed an appeal to the U.S. Court of Appeals for the Third Circuit.  But even without a stay, the immediate impact of the decision is questionable because the challenged restrictions had, at the time of the court’s decision, already been eased by Governor Wolf as part of the Commonwealth’s phased reopening plan.  This raised questions of mootness that the district court brushed aside, but which are sure to be reviewed on appeal.  Moreover, the ruling does not impact other restrictions that are still in place involving teleworking, a mandatory mask order, and worker and building safety orders.

If the holding is affirmed in the Third Circuit, however, it will become precedential and could impact restrictions in other jurisdictions within the circuit, including New Jersey, Delaware, and the Virgin Islands.  At a minimum, until the Third Circuit decides the case, County of Butler will certainly be advanced as persuasive authority by other challengers in other courts.  Its reasoning and outcome could have far-reaching impacts if adopted elsewhere.

Takeaways

Constitutional challenges to pandemic restrictions are pending in other federal courts.  A federal court in Maine recently heard oral argument on challenges to Maine’s emergency rules, including a claim that the governor’s quarantine requirement is an unconstitutional restriction on people’s right to travel.  That court has not yet issued an opinion.  Other challenges to COVID-19 restrictions are pending in federal district courts across the country, including in Arizona, California, Massachusetts, and New York. County of Butler could influence these decisions.

There are also hints that the U.S. Supreme Court may have interest in considering these types of constitutional challenges.  County of Butler cited Justice Alito’s recent dissent in the Court’s denial of injunctive relief in Calvary Chapel Dayton Valley v. Sisolak.  That case involved a challenge to certain COVID-19 restrictions in Nevada.  Justice Alito’s dissent advocated for a stricter constitutional review of emergency health measures, stating, “we have a duty to defend the Constitution, and even a public health emergency does not absolve us of that responsibility.”  Justice Alito also noted that “a public health emergency does not give Governors and other public officials carte blanche to disregard the Constitution for as long as the medical problem persists.”  

The dissent (which was joined by Justices Thomas and Kavanaugh) signals that at least some members of the Supreme Court are mindful of these constitutional challenges, and may be ready to consider such a case when an appropriate petition for writ of certiorari is filed.  County of Butler could provide that vehicle for Supreme Court review.