Alston & Bird Consumer Finance Blog

COVID-19

The Federal Moratorium On Residential Evictions Faces Constitutional Challenge

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A&B ABstract: Landlords in Tennessee have challenged the order of the Centers for Disease Control and Prevention (“CDC”) that imposed a nationwide moratorium on certain residential evictions. If sustained, the challenge could have a major impact on the scope of federal power during the pandemic.

Background of the Eviction Moratorium

The CARES Act imposed a 120-day moratorium on certain residential evictions that elapsed on August 25, 2020.  With this date impending, 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.” He also ordered the CDC and the Department of Health and Human Services (“HHS”) to consider whether any measures “temporarily halting residential evictions” are “reasonably necessary to prevent further spread of COVID-19” between states.

The CDC Emergency Order

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”).  In doing so, the CDC coordinated with HHS and the Department of Housing and Urban Development (“HUD”). The CDC Order prevents the eviction of any tenant who certifies that he or she: (1) is “using best efforts to obtain all governmental assistance for housing”; (2) earns no more than $99,000 per year in income; (3) cannot pay rent in full due to a substantial loss in income or extraordinary medical expenses; (4) is “using best efforts to make timely partial payments”; and (5) would likely become homeless, or be forced to live in a shared living setting, if evicted.

Significantly, the CDC Order does not provide any compensation for landlords or property owners who are prevented from evicting non-paying tenants, nor does it establish any hearing process for challenges to a tenant’s Declaration.  Conversely, the Order also does not exempt tenants from their legal obligation to pay outstanding rent they accumulate.  It further provides that the moratorium can also be extended beyond December 31.

The Constitutional Challenge

On September 16, a group of seven landlords – which together own and manage over 5,000 residential rental units in western Tennessee – filed a lawsuit in federal court that challenges the constitutionality of the CDC Order.

In Tiger Lily LLC et al. v. Dep’t of Housing & Urban Devel. et al., No. 2:20-2692 (W.D. Tenn.), the plaintiffs assert seven causes of action – spanning the Takings clause, to due process, to the improper displacement of state law – that all rest on the contention that the CDC Order was not authorized by law and exceeds federal authority.  Plaintiffs seek an injunction against enforcement of the CDC Order, but not monetary damages.

The Claims

Plaintiffs’ key substantive contention is that the CDC Order is not authorized by the statute or regulations upon which it relies, rendering it unconstitutional.  The Complaint’s specific claims in this respect appear questionable.  For example, the Order is rooted in Section 361 of the Public Health Services Act, which Plaintiffs say gives the Surgeon General only limited authority to issue orders addressing specific incidents of contamination.  But Section 361 empowers the Surgeon General to “make and enforce such regulations as in his judgment are necessary to prevent the introduction, transmission, or spread of communicable diseases.”  42 U.S.C. § 264(a) (emphasis added). After listing several categories, Section 361 then repeats that the Surgeon General may enact “other measures, as in his judgment may be necessary.”  Id. 

The Complaint makes a similar argument about a federal CDC regulation the Order relies on, but it too vests the CDC Director with power to “take such measures to prevent [disease spread] as he/she deems reasonably necessary.”  42 C.F.R. § 70.2 (emphasis added).  Plaintiffs also cite a “savings” clause in the Public Health Services Act, which provides that it cannot supersede state law.  But there is an exception for state laws that “conflict” with an exercise of federal authority under the Act.  42 U.S.C. § 264(e).  Such a conflict appears to be present here.  In addition, “regulatory” Takings of the sort asserted by Plaintiffs are notoriously difficult to establish.  A New York federal judge recently rejected such a claim made against that state’s eviction moratorium.  Elmsford Apartment Assocs. LLC et al. v. Andrew Cuomo, No. 1:20-cv-04062 (S.D.N.Y. June 29, 2020).

The Deeper Roots of the Challenge

Given these issues, the constitutional challenge may instead turn on the general question of whether the scope of the CDC Order is consistent with past practice and the intent underlying Section 361.  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.

Further, the eviction moratorium is very different than exemplary public health measures listed in the statute, perhaps exceeding its intended scope. The moratorium also applies to purely intrastate evictions, which may not threaten interstate spread of COVID-19, as required for federal action.  Further, if the court were to conclude that the broad CDC Order is not “necessary” (42 U.S.C. § 264(a)) or “reasonably necessary” (42 C.F.R. § 70.2) to prevent the interstate spread of COVID-19, the Order could be invalidated.  This appears to be a matter of first impression, although statewide moratoriums have a long history and have been upheld by courts.  E.g., Home Bldg. and Loan Assn. v. Blaisdell, 290 U.S. 398 (1934) (upholding Minnesota foreclosure moratorium).

Takeaways

The Tiger Lily case may be significant regardless of its outcome.  As a procedural matter, it could spawn future lawsuits challenging the CDC Order in other courts, and potentially in the form of a nationwide class action.  Litigation over the CDC Order could eventually rival the onslaught of lawsuits involving the CARES Act, such as the Paycheck Protection Program “agent fee” litigation.

Further, if successful, Tiger Lily would also 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.  Particularly if it is appealed to the Sixth Circuit (if not the U.S. Supreme Court), the Tiger Lily case could have meaningful ramifications for all future federal regulations related to COVID-19.

Moreover, if the CDC Order is struck down, this could spur Congress to consider addressing residential evictions directly again.  For example, Congress could enact its own broad moratorium by statute or provide more stimulus payments to struggling renters, enabling them to pay rent on time – which, in turn, would help landlords, albeit at taxpayer expense.  For these reasons, Tiger Lily and any subsequent related cases will be worth watching as they move through the courts.

A&B Attorneys Address “The Impact of COVID-19 on Mortgage Servicing Rights and Servicing Advances”

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On August 11, a multidisciplinary group of Alston & Bird lawyers hosted the webinar “The Impact of COVID-19 on Mortgage Servicing Rights and Servicing Advances.”  Participants were Karen Gelernt and Katrina Llanes, Finance practice partners; Matthew Mamak, Corporate Transactions and Securities practice partner; and Nanci Weissgold, Financial Services & Products practice partner.

The webinar addressed the impact of COVID-19 on servicers generally, focusing on servicing rights, servicing advances, implications of the CARES Act, and forbearance moratoriums. Additional topics included: (1) the approaches of Ginnie Mae, Fannie Mae and Freddie Mac to financing servicing advances, and servicing rights; (2)  industry consolidation; and (3) how M&A transactions in this sector will need to address additional concerns arising from changes brought about by COVID-19 and the government responses to the pandemic and resulting economic stressors.

Please click here to listen to the playback and here to view the presentation.

 

House Financial Services Committee Subcommittee on Oversight and Investigations Holds Hearing on Mortgage Servicers and CARES Act Implementation

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A&B Abstract:

 On July 16, 2020, the U.S. House Committee on Financial Services’ (the “Committee”) Subcommittee on Oversight and Investigations (the “Subcommittee”) held a hearing to discuss mortgage servicers and their implementation of the Coronavirus Aid, Relief, and Economic Stability Act (“CARES Act”). On May 4, 2020, Chairwoman of the Committee, Maxine Waters, sent a request for information (“RFI”) to eleven servicers, requesting information on their forbearance procedures and overall compliance with the CARES Act. The hearing focused on the data received through the RFI, as well as questions directed to witnesses regarding how COVID-19 has affected vulnerable communities and what additional steps Congress should take to provide borrowers with further relief.

Implementation of the CARES Act

 Subcommittee Chairman, Al Green, opened the hearing by noting that the information received from the eleven servicers in response to the Committee’s RFI indicated that over two million forbearance requests had been received since March 27, 2020.  However, Subcommittee Chairman Green raised concerns that some borrowers may not have been made aware of their right to the full 180 days (plus an additional 180 days) of forbearance provided under the CARES Act. Ranking Member Andy Barr acknowledged that mortgage servicers experienced “hiccups” in implementing the CARES Act’s forbearance and foreclosure provisions, but noted that the data received from the eleven servicers suggested that servicers were generally doing a “good job” in implementing and complying with the CARES Act.

Committee Chairwoman Waters and Subcommittee Chairman Al Green identified areas where servicers struggled to effectively implement the CARES Act’s protections. Specifically, both the Committee’s majority staff memorandum and Subcommittee Chairman Green noted that, in some cases, servicers failed to properly offer or inform borrowers about the full 180-day initial forbearance period available to borrowers under the CARES Act and only offered initial forbearance of 90-days.

Subcommittee Chairman Green noted that he believed the intent of the CARES Act was to ensure borrowers receive the full 180-day initial forbearance period, with the right to shorten forbearance upon request. Additionally, Chairman Green noted that in certain cases servicers advised borrowers that a lump sum repayment would be required at the end of the forbearance period, which could discourage borrowers from taking advantage of the CARES Act’s forbearance protections, and is inconsistent with federal agency guidance prohibiting servicers from requiring a lump sum repayment. That said, Representative Nydia Velazquez acknowledged that a HUD Office of Inspector General report found that the FHA may have provided incomplete, inconsistent data and suggested that additional guidance from the FHA is needed.  A similar sentiment was echoed in the Committee’s majority staff memorandum, wherein the majority staff noted that “Fannie Mae and Freddie Mac have at times provided inconsistent and potentially confusing guidance regarding the CARES Act forbearance protections.”

Witnesses Marcia Griffin, founder and president of Homefree USA, and Donnell Williams, President of the National Association of Real Estate Brokers, acknowledged that servicers’ implementation of the CARES Act has improved since the start of the pandemic, but also noted certain areas for improvement.  For example,  Ms. Griffin and Mr. Williams both noted that servicers experienced a delay in implementing the CARES Act and in providing appropriate training to employees regarding the CARES Act’s protections as well as the post-forbearance loss mitigation options that would be available to impacted borrowers exiting forbearance. Furthermore, Ms. Griffin and Mr. Williams advocated for better training for customer service employees, more support for housing counselors, and more extensive borrower outreach.

Post Forbearance Measures and the Health Economic Recovery Omnibus Emergency Solutions (“HEROES”) Act

Members of the Subcommittee also questioned witnesses regarding what further measures should be taken by Congress to provide additional relief to impacted borrowers to ensure they can remain in their homes after their forbearance ends. Ranking Member Andy Barr noted that the HEROES Act, recently passed by the House, would require automatic forbearance and mandate certain post-forbearance loss mitigation options.  However, both he and Representative Lee Zeldin cautioned that mandating certain loss mitigation options may impact servicers’ ability to work effectively with impacted borrowers, and that it is best for servicers to speak with borrowers to determine the best option available for each borrower. Representative Rashida Tlaib and Subcommittee Chairman Green also indicated that Congress is considering whether to provide additional direct payments to borrowers.  Representative Zeldin noted that while mortgage servicers have a vital role to play in helping impacted borrowers, they cannot shoulder all of the associated financial burden without increased liquidity.

Alys Cohen, Staff Attorney for the National Consumer Law Center, supported providing protections similar to the CARES Act for borrowers with non-federally backed mortgages, including a requirement to provide automatic forbearance.  However, Dr. DeMarco cautioned that automatic forbearance may not be an appropriate tool. Dr. DeMarco indicated that rather than automatic forbearance, borrowers should communicate with their servicers before being put into forbearance so that the servicer and borrower can work together to determine the best path forward. While Ms. Cohen agreed that borrowers should try to speak with their servicers, she noted that more borrowers are missing payments than requesting forbearance.

Representative William Timmons asked witnesses to comment on whether certain temporary policies adopted in response to COVID-19, such as remote online notarization and additional flexibility regarding appraisals, should be made permanent.  Mr. Williams indicated, without specificity, that some of these temporary policies should be made permanent. Dr. Demarco supported extending the temporary flexibility around remote online notarization. Finally, Ms. Cohen noted that there was room for these temporary polices to be made permanent, but that appraisals should remain accurate.

Addressing Racial Disparities

Certain members of the Subcommittee’s majority caucus, including Subcommittee Chairman Green, Committee Chairwoman Waters, and Representative Velazquez highlighted the fact that COVID-19 has had a disproportionate impact on Black and Latinx communities. Of the witnesses, Ms. Cohen and Mr. Williams, in particular, suggested that people of color were less likely to receive a forbearance than their white counterparts. For example, Mr. Williams noted that there is currently a 13% gap between Black and White homeowners who receive forbearance. Ms. Cohen, Ms. Griffin, and Mr. Williams all noted that more communication from the federal government regarding forbearance protections, and additional funding to support Black and Latinx communities, such as funding for legal aid and housing counseling services, would help mitigate some of this apparent disparity.

Takeaway

The Subcommittee hearing suggested that servicers have been largely effective in implementing the CARES Act and communicating with borrowers, but that additional work is still needed.  Subcommittee Chairman Green, in particular, noted that additional legislation as well as further communication by servicers is needed to ensure all borrowers receive clear and consistent guidance regarding available relief options. As the COVID-19 pandemic continues, it will be interesting to see what further legislation is promulgated to provide additional relief to borrowers facing financial hardship due to COVID-19.