Alston & Bird Consumer Finance Blog

Department of Housing and Urban Development (HUD)

FHA and VA Announce New Loss Mitigation Options

What Happened?

Both the FHA and VA have established new loss mitigation options to provide payment reduction to delinquent borrowers.  On February 21, 2024, the Federal Housing Administration (“FHA”) within the U.S. Department of Housing and Urban Development (“HUD”) issued a new mortgagee letter (ML 2024-02) which, among other things, establishes the Payment Supplement loss mitigation option for all FHA-insured Title II Single-Family forward mortgage loans (the “Payment Supplement”) and also extends FHA’s COVID-19 Recovery Options through April 30, 2025. The provisions of ML 2024-02 may be implemented starting May 1, 2024 but must be implemented no later than January 1, 2025. The Payment Supplement will bring a borrower’s mortgage current and temporarily reduce their monthly mortgage payment without requiring a modification.

And, on April 10, 2024 , the U.S. Department of Veterans Affairs (“VA”) announced the release of its much-anticipated Veterans Affairs Servicing Purchase (“VASP”) program, which is a new, last-resort tool in the VA’s suite of home retention options for eligible veterans, active-duty servicemembers, and surviving spouses with VA-guaranteed home loans who are experiencing severe financial hardship. The VASP program will take effect beginning on May 31, 2024.

Why Does it Matter?

FHA’s Payment Supplement

ML 2024-02 establishes the Payment Supplement as a new loss mitigation option to be added to FHA’s current loss mitigation waterfall. Specifically, if a servicer is unable to achieve the target payment reduction under FHA’s current COVID-19 Recovery Modification option, the mortgage must review the borrower for the Payment Supplement. The Payment Supplement is a loss mitigation option that utilizes Partial Claim funds to bring a delinquent mortgage current and couples it with the subsequent provision of a Monthly Principal Reduction (“MoPR”) that is applied toward the borrower’s principal due each month for a period of 36 months to provide payment relief without having to permanently modify the borrower’s mortgage loan. The maximum MoPR is the lesser of a 25 percent principal and interest reduction for 36 months, or the principal portion of the monthly mortgage payment as of the date the Payment Supplement period begins.

The Payment Supplement will temporarily reduce an eligible borrower’s monthly mortgage payment for a period of three years, without requiring modification of the borrower’s mortgage loan. At the end of the three-year period, the borrower will be responsible for resuming payment of the full monthly principal and interest amount. A borrower is not eligible for a new Payment Supplement until 36 months after the date the borrower previously executed Payment Supplement documents.

To be eligible for the Payment Supplement, servicers must ensure that:

  • that at least three or more full monthly payments are due and unpaid;
  • the mortgage is a fixed rate mortgage;
  • sufficient Partial Claim funds are available to bring the mortgage current and to fund the MoPR;
  • the borrower meets the requirements for loss mitigation during bankruptcy proceedings set forth in Section III.A.2.i.viii of FHA Single-Family Handbook 4000.1;
  • the principal portion of the borrower’s first monthly mortgage payment after the mortgage is brought current will be greater than or equal to a “Minimum MoPR” which must be equal to or greater than 5 percent of the principal and interest portion of the borrower’s monthly mortgage payment, and may not be less than $20.00 per month, as of the date the Payment Supplement period begins;
  • the MoPR does not exceed the lesser of a 25% principal and interest reduction for three years or the principal portion of the monthly mortgage payment as of the date the Payment Supplement period begins; and
  • the borrower indicates they have the ability to make their portion of the monthly mortgage payment after the MoPR is applied (servicers are not required to obtain income documentation from the borrower).

Servicers are responsible for making monthly disbursements of the MoPR from a Payment Supplement Account, which is a separate, non-interest bearing, insured custodial account that holds the balance of the funds paid by FHA for the purpose of implementing the Payment Supplement, and which must segregated from funds associated with the FHA-insured mortgage, including escrow funds, and any funds held in accounts restricted by agreements with Ginnie Mae. Neither the servicer nor the borrower has any discretion in how the Payment Supplement funds are used or applied.

Borrowers will be required to execute a non-interest-bearing Note, Subordinate Mortgage, and a Payment Supplement Agreement, which is a rider to and is incorporated by reference into the Payment Supplement promissory Note, given in favor of HUD, to secure the Partial Claim funds utilized and the amount of the MoPR applied toward the borrower’s principal during the 36-month period. The Note and Subordinate Mortgage do not require repayment until maturity of the mortgage, sale or transfer of the property, payoff of the mortgage, or termination of FHA insurance on the mortgage.

After the Payment Supplement is finalized, servicers must send borrowers written disclosures annually and 60-90 days before the expiration of the Payment Supplement period. ML 2024-02 also sets forth servicers’ obligations if a borrower defaults during the Payment Supplement period.

Contemporaneous with the publication of ML 2024-02, HUD published the following model documents necessary to complete a Payment Supplement: (1) Payment Supplement Promissory Note and Security Instrument, (2) Payment Supplement Agreement Rider, (3) Annual Payment Supplement Disclosure, and (4) Final Payment Supplement Disclosure. However, servicers will need to ensure these model documents comply with applicable state law.

Given that the Payment Supplement only provides temporary relief, it is likely that borrowers will experience “payment shock” at the end of the Payment Supplement period. HUD has indicated that it is aware of this risk and intends to assess this issue on an ongoing basis as borrowers begin to reach the end of their Payment Supplement period to help inform future updates to FHA loss mitigation.

VA’s VASP Program

Effective May 31, 2024, VASP will be added as the final home retention option on the VA Home Retention Waterfall where the VA may elect to purchase a loan from the servicer under an expediated basis after the servicer evaluates the loans and certain criteria are met.  Unlike a traditional VA Purchase, a trial payment period may also be required before VA purchases the loan.

Importantly, a borrower cannot elect to use the VASP program. Rather, servicers must follow the VA’s home retention waterfall to determine the most appropriate home retention option. If the waterfall leads to VASP, then the servicer must determine if certain qualifying loan criteria are met, including:

  • the loan is between 3 to 60-months delinquent on the date the servicer submits to VALERI either the VASP TPP event or VASP with No TPP event;
  • the property is owner-occupied;
  • none of the obligors are in active bankruptcy at the time of the applicable VASP event;
  • the reason for default has been resolved and the borrower has indicated they can resume scheduled payments;
  • the loan is in first-lien position and is not otherwise encumbered by any liens or judgments that would jeopardize VA’s first-lien position;
  • the borrower has made at least six monthly payments on the loan since origination;
  • the borrower is the property’s current legal owner of record; and
  • the borrower and all other obligors agree to the terms of the VASP modification.

After determining that a loan qualifies for VASP, the servicer must determine the appropriate terms that may be offered to the borrower. Until further notice, all VASP loans will be modified at a fixed rate of 2.5% interest, with either a 360-month term or, if this does not realize at least a 20% reduction in the principal and interest payment, a 480-month term. Borrowers who cannot afford to resume monthly payments at the 480-month term are to be evaluated for and offered any appropriate alternatives to foreclosure. A three-payment trial payment plan will be required if (i) the loans is 24 months or more delinquent, or (ii) the principal and interest portion of the monthly payment is not reduced by at least 20%. Borrowers who fail three trial payment plans during a single default episode are no longer eligible for VASP.

Once VA has certified the VASP payment, servicers have 60 days to complete a standard transfer to VA’s contractor, after which the servicer must report the transfer event in VALERI.

Importantly, servicers that fail to properly evaluate the loan in accordance with VA’s requirements may be subject to enforcement action and/or refusal by VA to either temporarily or permanently guarantee or insure any loans made by such servicer and may bar such servicer from servicing or acquiring guaranteed loans. The risk of enforcement is exacerbated by the VASP program’s technical requirements, which may cause operational challenges for servicers.

What Do I Need to Do?

FHA’s Payment Supplement and VA’s VASP programs both have relatively short implementation timelines but will likely require substantial effort to operationalize given their technical requirements.  Therefore, servicers of FHA-insured and/or VA-guaranteed mortgage loans should begin reviewing the requirements of both programs now, as applicable, and ensure that they make any necessary updates to policies, procedures, systems, training, and other controls to ensure compliance with these programs once they take effect. Alston & Bird’s Consumer Financial Services team is well-versed in these programs and is happy to assist with such a review.

HUD Seeks Comment on Proposed Notice to Change HECM for Purchase Program to Expand Funding Sources and Interested Party Contributions

A&B Abstract:

On October 24, 2023, the U.S. Department of Housing and Urban Development (“HUD”) published, for public comment, a Federal Register Notice (“Proposed Notice”) to implement changes to the Federal housing Administration’s (“FHA”) Home Equity Conversion Mortgage (“HECM”) for Purchase program. The Proposed Notice expands the list of acceptable funding sources and permits additional interested party contributions to satisfy the borrower’s monetary investment requirement. Under the Proposed Notice, the FHA would also remove existing restrictions that prohibit the borrower from accepting cash from a seller or another person or entity that financially benefits from the HECM for Purchase transaction. HUD is seeking comment from interested members of the public on the Proposed Notice. The period for public comment ends on November 24, 2023.

Background

The HECM for Purchase program allows mortgagees to originate HECM for Purchase transactions to purchase a 1-to-4 family dwelling unit, one unit of which will serve as the borrower’s principal residence. The program requires borrowers to contribute substantial liquid assets to meet the negotiated contract sales price for the property plus standard origination fees and charges.

In 2009, the FHA published Mortgage Letter 2009-11 (“ML 2009-11”) which prohibited certain funding sources for the investment:

  • sweat equity;
  • trade equity;
  • rent credit; and
  • cash or its equivalent, in whole or in part, received from the seller or any other person or entity that financially benefits from the HECM for Purchase transaction, or any third party or entity that is reimbursed, directly or indirectly, by the seller or any other person or entity that financially benefits from the HECM for Purchase transaction.

In addition, ML 2009-11 prohibited seller contributions (or “seller concessions”) in any HECM for Purchase transaction. “Seller concessions” are the use of “loan points, interest rate buy-downs, closing cost down payment assistance, builder incentives, gifts or personal property given by the seller, or any other party involved in the transaction.” These limits are meant to redirect expenses customarily paid by the seller or other interest parties to the borrower.

In 2017, the FHA codified the requirements for the HECM for Purchase program, and other program changes, and also codified three permitted funding sources for the borrower’s required money investment (the “Final Rule”):

  • Cash on hand;
  • Cash from the sale or liquidation of the borrower’s assets; and
  • HECM proceeds.

The Final Rule also changed the funding source restrictions to permit interested party contributions to pay for:

  • fees required to be paid by the seller under state or local law;
  • fees that are customarily paid by the seller in the locality of the subject property; and
  • purchase of the Home Warranty policy by the seller.

The Proposed Notice

The Proposed Notice would permit interested parties to contribute up to six percent of the sales price and expand the list of permitted interested party contributions.

Under the Proposed Notice, an “interested party contribution” would be defined to mean a payment by an interested party or combination of parties, toward the borrower’s origination fees, other closing costs including any items paid outside of closing, prepaid items, and discount points. “Interested Parties” refers to sellers, real estate agents, builders, developers, mortgagees, third-party originators, or other parties with an interest in the transaction.

Under the Proposed Notice, the six percent limit on interest party contributions may be applied towards but may not exceed the cost of:

  • origination fees;
  • other closing costs paid outside of closing (e.g., credit report and appraisal);
  • prepaid items;
  • discount points;
  • interested party payment for permanent and temporary interest rate buydowns; and
  • payment of the initial mortgage insurance premium.

Additionally, the Proposed Notice would also permit the following additional funding sources to satisfy the borrower’s monetary investment:

  • premium pricing;
  • gifts;
  • disaster relief grants; and
  • employer assistance.

This would be the first time that premium pricing is permitted for use in the HECM for Purchase program. Under the Proposed Notice, borrowers would be able to receive a credit from the mortgagee or third-party originator to reduce their closing costs in exchange for a certain initial mortgage interest rate.

Premium pricing credits from the mortgagee or third-party originator would be excluded from the six percent limit if the mortgagee or third-party originator is not the seller, real estate agent, builder, or developer. The interested party contributions for the various fees permitted under 24 C.F.R. § 206.44(c)(1) will also be excluded from the six percent interested party contribution limit. The FHA will also exclude the satisfaction of a Property Assessed Clean Energy (“PACE”) lien or obligation against the property by the property seller from the definition of an interested party contribution in the HECM for Purchase program.

Takeaway

The Proposed Notice is an effort by the FHA to more closely align the HECM for Purchase program with its forward mortgage programs. If implemented, the Proposed Notice would likely make it easier for borrowers to meet their monetary investment requirement by expanding the list of funding sources and permitting interested party contributions. Lenders participating in the HECM for Purchase program should review the Proposed Notice and consider submitting a comment.

The COVID-19 National Emergency is Ending: Are mortgage servicers ready?

A&B Abstract:

On January 30, 2023, President Biden informed Congress that the COVID-19 National Emergency (the “COVID Emergency”) will be extended beyond March 1, 2023, but that he anticipates terminating the national emergency on May 11, 2023. The White House Briefing Room reiterated the President’s position on February 10, 2023. Given the significant updates mortgage servicers made to their compliance management systems (“CMS”) to ensure compliance with the myriad of COVID-19-related laws, regulations and guidance issued in response to the pandemic, servicers should begin evaluating their CMS now to determine whether updates are necessary to minimize the risk of non-compliance and consumer harm as the COVID Emergency comes to an end. Set forth below, we discuss some of the key areas on which servicers should focus as they develop a plan for winding down COVID-19 protections.

Background

The COVID-19 pandemic created unprecedented operational challenges for mortgage servicers – challenges servicers sought to overcome through significant actions that were taken at the outset of the pandemic and over the last three years to implement the myriad of federal and state laws, regulations, and guidance that were enacted or promulgated in response to the pandemic.

Indeed, in response to the pandemic, the US Congress passed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, Sections 4021 and 4022 of which provided certain borrowers impacted by the pandemic with certain credit reporting and mortgage-related protections.

Section 4021 of the CARES Act amended the Fair Credit Reporting Act by adding a new section providing special instructions for reporting consumer credit information to credit reporting agencies when a creditor or other furnisher offers an “accommodation” to a consumer affected by the pandemic during the “covered period,” which ends 120 days after the COVID Emergency terminates.

Section 4022 of the CARES Act granted forbearance rights and protection against foreclosure to certain borrowers with a “federally backed mortgage loan.” Specifically, during the “covered period,” a borrower with a federally backed mortgage loan who is experiencing a financial hardship that is due, directly or indirectly, to the COVID Emergency may request forbearance on their loan, regardless of delinquency status, by submitting a request to their servicer during and affirming that they are experiencing a financial hardship during the COVID Emergency. When the CARES Act was enacted, there was uncertainty in the industry as to how to define the “covered period” as the term was undefined. However, because the borrower must attest to a financial hardship during the COVID Emergency, the industry came to understand the “covered period” to be synonymous with the COVID Emergency, such that borrower requests received outside the COVID Emergency need not be granted.

Additionally, under Section 4022, a servicer of a federally backed mortgage loan were prohibited from initiating any judicial or nonjudicial foreclosure process, moving for a foreclosure judgment or order of sale, or executing a foreclosure-related eviction or foreclosure sale (except with respect to vacant and abandoned properties) through May 16, 2020.

In response to the CARES Act, mortgage servicers were inundated with directives issued by the US Department of Housing and Urban Development (“HUD”), the US Department of Veterans Affairs (“VA”), the US Department of Agriculture (“USDA”), the Consumer Financial Protection Bureau (“CFPB”), as well as the guidelines published by Fannie Mae and Freddie Mac (collectively, the “Agencies”), as the Agencies (other than the CFPB) were tasked with implementing the protections afforded by the CARES Act.  As result of these directives, servicers were required to quickly implement changes to their servicing operations, while ensuring accurate communication of such changes to its customers. For example, HUD alone issued over 20 mortgagee letters since the outset of the pandemic that were directly related to the operations of HUD-approved servicers.

In addition to the Agencies, several states either passed legislation, promulgated regulations or issued directives that mortgage servicers were required to implement. Servicers were also required to respond to the CFPB’s Prioritized Assessments, inquiries from Congress, and requests from the Agencies. Accordingly, servicers devoted substantial legal, compliance, and training resources to ensure compliance with applicable laws and requirements.

In implementing the foregoing laws and regulations, servicers made significant updates to their CMS and the various components that support an effective CMS, including, among others, policies, procedures, training, scripting, correspondence, system updates, and vendor management. Similarly, now that the COVID Emergency appears to be nearing an end, servicers should reevaluate what updates are necessary to effectively wind-down COVID-19 protections while minimizing regulatory risk and consumer harm.

Below we discuss several issues servicers should be particularly mindful of in developing a plan for winding down COVID-19 protections.

Key Areas of Focus for Servicers

Agency/GSE Guidelines: The myriad of Agency guidance issued in response to the pandemic included new and evolving requirements regarding the offering of COVID-19 Forbearance Plans, COVID-19-specific loss mitigation options, and other COVID-19-related borrower protections. For example, HUD, VA, and USDA have largely tied a borrower’s ability to request an initial COVID-19 Forbearance to the expiration of the COVID Emergency. HUD has indicated that a borrower may only request an additional forbearance extension of up to six months if the initial forbearance will be exhausted and expires during the COVID Emergency. On the other hand, Fannie Mae and Freddie Mac have previously informally indicated that servicers should continue to process borrower requests for COVID-19 Forbearances until the GSEs announce otherwise. Moreover, there is the possibility that all or some of the Agencies will expand post-forbearance COVID-19 protections to a broader class of borrowers given the apparent success of the streamlined options. On January 30, 2023, HUD issued a mortgagee letter (which was corrected and reissued on February 13th) extending its COVID-19 Recovery Loss Mitigation Options to include additional eligible borrowers, increase its COVID-19 Recovery Partial Claims, and add incentive payments to servicers. Notably, the mortgagee letter does not appear to update HUD’s existing guidance on the availability of COVID-19 Forbearance Plans, and it temporarily suspends several of HUD’s non-COVID-19 loss mitigation options, such as all FHA-HAMP options. In preparing for the end of the COVID Emergency, servicers should ensure that they identify and carefully review applicable Agency guidelines to determine what, if any, updates to existing processes are necessary.

Policies, Procedures, and Training: Whether a servicer created a specific COVID-19/CARES Act policy and/or updated its existing policies to reflect applicable COVID-19 protections, servicers must now review and update those policies to ensure they do not inaccurately reflect requirements no longer in effect as a result of the termination of the COVID Emergency. As a reminder, Regulation X requires servicers to maintain policies and procedures that are reasonably designed to achieve the objectives in 12 C.F.R. § 1024.38. Commentary to Regulation X clarifies that “procedures” refers to the actual practices followed by the servicer. Thus, servicers should ensure that its procedures reflect its policies. It is also important that updated and accurate training and job aids are provided to servicing employees, particularly to consumer service representatives, to ensure clear, accurate, and up to date information is communicated to consumers. It’s also a good time to ensure that policies, procedures, and training reflect the expiration of certain CFPB COVID-19-related measures. For example, the enhanced live contact requirements for borrowers experiencing COVID-19 related hardships were in effect from August 31, 2021 through October 1, 2022.

Scripts, Letters and Agreements: The CFPB called for mortgage servicers to take proactive steps to assist borrowers impacted by COVID-19 including prioritizing clear communications and proactive outreach to borrowers. In response, servicers updated communications through emails, texts, letters, loss mitigation agreements, buck slips, periodic statements, and other standard communications alerting borrowers of requirements for accepting and processing requests for forbearance, approving forbearance requests, providing credit reporting accommodations, and providing information on post-forbearance loss mitigation options and foreclosure. One of the standards the CFPB uses in assessing whether an unfair, deceptive, or abusive act or practice (“UDAAP”) occurred is whether a representation, omission, act or practice is deceptive, meaning that it misleads or is likely to mislead the consumer, the consumer’s interpretation of the representation is reasonable under the circumstances, and the misleading representation, omission, act or practice is material. Thus, it is important for servicers to review their communication library to make sure outdated CARES Act and other COVID-19-related information is not included in borrower communications.

System Updates: Throughout the last three years servicers were required to implement substantial system enhancements to ensure compliance with the myriad of requirements that arose in response to the pandemic. These enhancements included, among others, stop codes to ensure compliance with applicable foreclosure moratoria; changes to loss mitigation decisioning systems to reflect new and revised loss mitigation waterfalls; updates to borrower-facing websites and interactive voice response (“IVR”) systems to provide borrowers with information on available COVID-19 protections and to facilitate a borrower’s ability to self-serve when requesting a COVID-19 Forbearance; enhancing credit reporting systems to ensure accurate credit reporting for borrowers who are provided an accommodation under the CARES Act; and implementing system updates to ensure compliance with applicable fee restrictions. Given the significant time, effort, and resources required to implement the foregoing enhancements, servicers should begin evaluating their systems now to determine what changes are necessary to reflect that some or all of these protections will no longer be in effect.

State Law: In response to the COVID-19 pandemic, several states (including but not limited to California, the District of Columbia, Maryland, Massachusetts, New York, and Oregon) enacted their own protections, most of which have since expired. Now is the time for servicers to ensure that their CMS is updated to reflect that these laws are no longer in effect.

Instructions to Service Providers: Many servicers rely on third-party service providers to provide certain support functions. During the pandemic, reliance on such service providers was even more critical as servicers worked to implement the above-referenced requirements. Such service providers include, among others, print/mail vendors, foreclosure counsel, and third-party customer support representatives. In preparing for the end of the COVID Emergency, servicers should ensure accurate and consistent instructions are provided to, and appropriate oversight is exercised over, service providers to ensure compliance with applicable law and to minimize UDAAP risk.

Takeaway

The implementation of federal and state COVID-19 protections required that servicers devote substantial time, effort, and resources to ensure consumers could avail themselves of available protections and to minimize the risk of harm. Unfortunately, when the pandemic first began, servicers did not have the luxury of time when implementing these measures. However, given that the end of the COVID Emergency is not until May 11th, servicers should utilize this time to think through what impact the termination of the emergency will have on their current processes and controls, and begin making necessary updates.

Assumptions on the Rise: Are You Ready for Mortgage Assumptions?

A&B ABstract:

Mortgage assumptions – where a buyer assumes the existing mortgage loan of a seller – have fluctuated in popularity since the 1980s. However, inflation and the high interest rate environment, coupled with an observable shift to a buyer’s market, are raising the prospect that assumable mortgages – especially those with historically low interest rates – are likely to become a selling point for potential sellers. Statements by the real estate broker industry, U.S. Department of Housing and Urban Development (HUD), and former Ginnie Mae officials, to name a few, corroborate this hunch. Ultimately, given these rumblings, it appears that lenders, and more so mortgage servicers, will need to prepare for a potential increase in mortgage assumption volume. Below are several key considerations with respect to mortgage assumptions.

Servicer Capabilities

Servicers generally will need to diligently evaluate the assuming buyer’s creditworthiness. In certain cases, servicers may need to offer and service home equity lines of credit (HELOCs) and second liens to support the cost difference between the amount of the loan to be assumed and the cost of the property. Further, as servicers will likely have to evaluate the assuming consumer’s credit eligibility in connection with the processing of most mortgage assumptions, such activities may give rise to additional state mortgage lender and/or loan originator licensing obligations. While the federal SAFE Mortgage Licensing Act and its implementing Regulation G and H generally do not consider mortgage loan origination activity to encompass a servicer’s activities in connection with the processing of a loan modification, when the borrower is reasonably likely to default, there is no such exemption for mortgage assumptions. Moreover, states that license mortgage loan origination activities may vary as to whether a license is required to process an assumption.

 Investor Restrictions

Even if a buyer is deemed creditworthy to assume the seller’s mortgage payments, the agency or investor backing the seller’s mortgage loan must approve the assumption. Most government-backed mortgage loans, such as those guaranteed or insured by the Federal Housing Administration (FHA), U.S. Department of Veteran Affairs (VA), and U.S. Department of Agriculture (USDA) are assumable, provided specific requirements are met.  On the other hand, conventional mortgages (i.e., loans meeting the requirements for purchase by Fannie Mae and Freddie Mac (the “GSEs”)) may be more difficult to assume.

It is important to note that the requirements for processing and/or approving an assumption vary from agency to agency and among the GSEs. By way of example:

  • FHA loans are assumable if the buyer meets certain credit requirements, according to FHA guidelines. Buyers who assume FHA mortgages pay off the remaining balance at the current rate, and the lender releases the seller from the loan.
  • VA mortgage assumption guidelines are similar to FHA, with some notable differences. The VA or the VA-approved lender must evaluate the creditworthiness of the buyer, who generally must also pay a VA funding fee of 0.5% of the loan balance as of the transfer date. Unlike new loans, buyers can’t finance the funding fee when assuming a loan, it must be paid in cash at the time of transfer. Moreover, the only way the seller can have their VA entitlement restored would be to have the home assumed by a fellow eligible active-duty service member, reservist, veteran, or eligible surviving spouse.
  • USDA permits loan assumptions but operates differently from FHA-insured or VA-guaranteed loans. For example, according to USDA guidelines, when most buyers assume a USDA loan, the lender will generally issue new terms, which may include a new rate.
  • Fannie Mae and Freddie Mac may permit an assumption under certain circumstances. For example, Fannie Mae may permit the assumption of certain first-lien adjustable-rate mortgage (ARMs) loans that have not been converted to a fixed-rate-mortgage loan.

Due-on-Sale Clauses

Many conventional mortgages today contain “due-on-sale” clauses that authorize a lender, at its option, to declare due and payable sums secured by the lender’s security interest if all or any part of the property, or an interest therein, securing the loan is sold or transferred without the lender’s prior written consent. However, the Garn-St. Germain Depository Institutions Act prohibits a lender from exercising its option pursuant to a due-on-sale clause in connection with certain exempt transfers or dispositions, including, among others: (1) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety; (2) a transfer to a relative resulting from the death of a borrower; (3) a transfer where the spouse or children of the borrower become an owner of the property; and (4) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property. 12 U.S.C. § 1701j–3(d).

Fees

Whether an assumption fee can be charged, and the amount of such fee, will depend on many factors including application of the Garn-St. Germain Act, the CFPB mortgage servicing rules, investor and agency guidelines, and state laws. Further, the Fair Debt Collection Practices Act (FDCPA) may impact whether a servicer may assess and collect an assumption fee. While most states neither expressly permit nor prohibit assumption fees, several other states, such as Idaho and Michigan, explicitly recognize and permit assumption fees in limited cases (e.g., only where the fee is included in the purchase contract or other agreement). Other states may regulate the amount of an assumption fee. For example, Colorado law limits assumption fees to one-half of 1% of the outstanding principal mortgage amount.

General Federal Consumer Financial Compliance

Assumption transactions also raise compliance considerations under federal consumer financial laws. Under TILA and Regulation Z, an assumption occurs if the transaction meets the following elements: (1) includes the creditor’s express acceptance of the new consumer as a primary obligor; (2) includes the creditor’s express acceptance in a written agreement; and (3) is a “residential mortgage transaction” as to the new consumer. 12 C.F.R. § 1026.20(b). A “residential mortgage transaction” is a transaction: (a) in which a security interest is created or retained in the new consumer’s principal dwelling; and (b) which finances the acquisition or initial construction of the new consumer’s principal dwelling. 12 C.F.R. 1026.2(a)(24). If the transaction is an assumption under Regulation Z (12 C.F.R. § 1026.20(b)), then, as noted by the CFPB in its TILA-RESPA Factsheet, creditors must provide a Loan Estimate and Closing Disclosure, unless the transaction is otherwise exempt. Moreover, the assumption transaction may also trigger requirements under Regulation Z’s loan originator compensation and ability-to-repay rules.

With respect to RESPA and Regulation X, however, assumptions are exempt unless the mortgage instruments require lender approval for the assumption and the lender approves the assumption. Specifically, Regulation X expressly exempts from its coverage any “assumption in which the lender does not have the right expressly to approve a subsequent person as the borrower on an existing federally related mortgage loan.” 12 C.F.R. § 1024.5(b)(5). By way of example, the Fannie/Freddie Uniform Security Instrument provides that:

Subject to the provisions of Section 18, any Successor in Interest of Borrower who assumes Borrower’s obligations under this Security Instrument in writing, and is approved by Lender, shall obtain all of Borrower’s rights and obligations under this Security Instrument.  Borrower shall not be released from Borrower’s obligations and liability under this Security Instrument unless Lender agrees to such release in writing.  The covenants and agreements of this Security Instrument shall bind (except as provided in Section 20) and benefit successors of Lender.

Finally, with respect to the CFPB’s Mortgage Servicing Rules, if a successor in interest assumes a mortgage loan obligation under state law or is otherwise liable on the mortgage loan obligation, the protections that the consumer enjoys under Regulation X go beyond the protections that apply to a confirmed successor in interest. 12 C.F.R. § 1024.30(d).

Takeaway

The processing of mortgage assumptions involves many of the same regulatory considerations as originating a new loan. However, because of varying requirements under agency and investor guidelines, there are several unique aspects to processing assumptions, which may pose challenges for servicers that do not regularly engage in mortgage origination. The economic climate appears to be ripe for an uptick in mortgage loan assumption activity. Accordingly, servicers should ensure their compliance management systems are prepared to manage the associated compliance risks.

FHA Issues Final Rule on Acceptance of Private Flood Insurance Policies

A&B ABstract:

 On November 21, 2022, the Federal Housing Administration (“FHA”) announced a final rule to provide for the acceptance of private flood insurance in connection with FHA-insured loans.

FHA to Permit Private Flood Insurance Policies

Effective December 21, 2022, the FHA has adopted a long-awaited final rule (the “FHA Rule”) permitting the acceptance of private flood insurance policies in connection with FHA-insured loans.  Proposed nearly two years ago, the regulations align requirements for the acceptance of private flood insurance for FHA-insured loans with those that apply to loans made by federally regulated financial institutions (“federally regulated lenders”).

Background

In 2012, Congress enacted the Biggert-Waters Act Flood Insurance Reform Act, amending the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973 (collectively, the “Flood Act”) to clarify the obligations of federally regulated lenders to accept private flood insurance – among other provisions.  Specifically, Biggert-Waters included a provision requiring the federal banking regulatory agencies  – the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the National Credit Union Administration (the “Agencies”) – to adopt a rule directing regulated lenders to accept private flood insurance policies meeting statutory criteria, and to notify borrowers of the availability of private flood insurance coverage as an alternative to that available through the National Flood Insurance Program (“NFIP”).  The Agencies first proposed such a rule in October 2013, and finalized it in February 2019 – with the provisions taking effect on July 1 of that year.

The FHA Rule

Neither the Biggert-Waters provision addressing private flood insurance nor the Agencies’ rule on the same topic, however, applies to FHA-insured loans.  As a result, as of July 2019, there existed a significant disparity between most loans made by federally regulated lenders and those insured by the FHA:  Private flood insurance was an option for the former, but prohibited for the latter because it did not comport with the requirements of FHA regulations. To address the differences, in November 2020, the FHA proposed to amend its regulations (24 CFR Parts 201, 203, and 206) to permit the acceptance of private flood insurance policies and provide other clarification on mortgagees’ obligation to ensure that appropriate flood insurance coverage is in place for FHA-insured loans.

Definition of Private Flood Insurance

Amending 24 C.F.R. 203.16a, the FHA Rule mirrors the definition of “private flood insurance” found in the Agencies’ rule, which includes four prongs.  First, such a policy must be issued by an insurance company that is:

    • Licensed, admitted, or otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located; or
    • Recognized, or not disapproved, as a surplus lines insurer by the insurance regulator of the State or jurisdiction in which the property to be insured is located in the case of a policy of difference in conditions, multiple peril, all risk, or other blanket coverage insuring nonresidential commercial property.

Second, the policy must provide flood insurance coverage that is at least as broad as the coverage provided under an NFIP Standard Flood Insurance Policy (“SFIP”) for the same type of property, including when considering deductibles, exclusions, and conditions offered by the insurer (and as further specified in the definition).

Third, the policy must include:

    • A requirement for the insurer to give written notice 45 days before cancellation or non-renewal of flood insurance coverage to the insured and the federally regulated lender that made the designated loan secured by the property covered by the flood insurance, or the servicer acting on its behalf;
    • Information about the availability of flood insurance coverage under the NFIP;
    • A mortgage interest clause similar to the clause contained in an SFIP; and
    • A provision requiring an insured to file suit not later than one year after the date of a written denial of all or part of a claim under the policy.

Finally, the policy must contain cancellation provisions that are as restrictive as the provisions contained in an SFIP.  The Agencies’ rule also gives a federally regulated lender discretion to accept a policy offered by a private insurer that does not meet all of the above criteria – such as a policy offered by a mutual aid society.

Like the Agencies’ rule, the FHA Rule includes a compliance aid intended to help mortgagees identify whether a private flood insurance policy meets the regulatory standard.  The FHA Rule makes clear, however, that regardless of the presence of the compliance aid statement, a mortgagee may make its own determination of whether a private flood insurance policy meets the definition above.  Unlike the Agencies’ counterpart, the FHA Rule does not provide discretion for a lender to accept a policy that does not meet the definition of (or other criteria for) private flood insurance as set forth in the rule.  As a result, in its Federal Register notice of the rule adoption, the FHA emphasized that a policy acceptable under the Agencies’ rule may not satisfy the FHA standard.

Other Provisions

The FHA Rule includes other important clarifications regarding the maintenance of flood insurance on FHA-insured loans.

First, under the Flood Act and the Agencies regulations, the minimum amount of coverage that must remain in place on property securing a loan throughout the life of the loan is the lesser of: (1) the outstanding principal balance of the loan; (2) the maximum limit of coverage available for the particular type of property under the Flood Act; or (3) the insurable value of the property.  The FHA Rule states that for an FHA loan, the insurable value should be calculated as “100 percent replacement cost of the insurable value of the improvements, which consists of the development of project cost less estimated land cost.”

Second, the FHA Rule clarifies the application of flood insurance obligations to Home Equity Conversion Mortgages (HECMs), adding language to mirror the loss payee and compliance aid provisions of the rule applicable to forward mortgages.

Takeaway

The FHA Rule provides long-awaited clarity for lenders, brings FHA requirements relating to the acceptance of private flood insurance policies more into line with those applicable to federally regulated lenders, and expands the options that FHA borrowers have when their properties are located in special flood hazard areas.