Alston & Bird Consumer Finance Blog

Federal Housing Finance Agency (FHFA)

FHFA Announces UDAP Compliance Expectations

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What Happened?

On November 29, 2024, the Federal Housing Finance Agency (“FHFA”) released Advisory Bulletin AB 2024-06 (the “Advisory Bulletin”), which sets forth FHFA’s expectations and guidance for Fannie Mae and Freddie Mac (the “GSEs”) and the Federal Home Loan Banks (collectively, the “Regulated Entities”) regarding compliance with the prohibition against unfair and deceptive acts or practices under Section 5 of the Federal Trade Commission Act (“FTC Act”). The Advisory Bulletin follows the FHFA Final Rule on Fair Lending, Fair Housing, and Equitable Housing Finance Plans published in the Federal Register in May 2024 (“Final Rule”).

Why It Is important?

While the Advisory Bulletin applies directly to the Regulatory Entities, any company that does business with the GSEs or the Federal Home Loan Banks should take note, as there likely will be downstream implications. The Regulated Entities are required to certify compliance with Section 5 of the FTC Act.  The Advisory Bulletin, however, raises several concerns.

First, the Advisory Bulletin conflates Section 5 UDAP compliance and fair lending principles. The Bulletin cautions that Regulated Entities are not only subject to the prohibition in Section 5 of the FTC Act against “unfair or deceptive acts or practices in or affecting commerce” but also the Fair Housing Act, the Equal Credit Opportunity Act (“ECOA”) and implementing regulations. To that end, the Final Rule requires the Board of Directors of Regulated Entities to bring their operations into compliance with these obligations in their “oversight of the [R]egulated [E]ntity and its business activities.” However, while the stated intent of the Advisory Bulletin is to provide guidance to the Regulated Entities consistent with the FTC Act, the Advisory Bulletin lumps together UDAP and discrimination, reminiscent of the CFPB’s similar attempt in 2022. In carefully worded language, FHFA states that its UDAP expectations “complement FHFA’s expectations regarding compliance with applicable fair lending laws.” And, specifically with respect to “unfairness,” FHFA states that its “duty to affirmatively further fair housing” may be considered when determining whether an act or practice is unfair. Yet any rule or bulletin by the FHFA providing that a violation of Section 5 of the FTC Act may be a violation of other federal and state laws (including fair housing, fair lending, and other consumer protection laws) undoubtedly extends fair lending laws beyond the bounds carefully set by Congress. See American Bankers Association, Unfairness and Discrimination: Examining the CFPB’s Conflation of Distinct Statutory Concepts (June 2022).

Second, the Advisory Bulletin suggests various theories of liability for violations of Section 5 of the FTC Act. In particular, the Advisory Bulletin points out that, in addition to direct liability for UDAP violations, the Regulated Entities may be held vicariously liable for UDAPs resulting from the conduct of their employees, agents, or third parties (depending on the Entity’s control or other legal responsibility over the third party’s conduct) regardless of whether such Entity knew or should have known of that conduct consistent with agency law. Moreover, the Regulated Entity may be liable for failing to take prompt action to correct UDAP violations in certain circumstances. Here again, the Advisory Bulletin conflates UDAP with fair lending, as the Bulletin delves into liability principles typically applicable to the Fair Housing Act and ECOA.

Finally, given the potential liability to the Regulated Entities for the conduct of its agents or other third parties, the Advisory Bulletin may serve to further incentivize the Agencies to act as de facto regulators in their oversight of single-family and multi-family seller servicer relationships. Not surprisingly, the Advisory Bulletin reminds the Regulated Entities of the importance of “assessing, monitoring, and taking corrective action related to legal, compliance, and reputation risks associated with potential sellers and servicers, including risks associated with compliance programs, records of compliance, and other relevant information related to compliance with all applicable laws.” Yet, if the GSEs were to exit conservatorship, it remains uncertain what kind of authority they would have to enforce and remediate compliance deficiencies.

What Do I Need To Do?

The Regulated Entities are directed to identify, assess, monitor, and mitigate risks associated with UDAP, including legal, compliance, operational, strategic and reputational risks. Given that the Regulated Entities are required to certify compliance with Section 5 of the FTC Act, companies should expect downstream implications and should work to ensure it has sufficient controls in place to mitigate UDAP risks and avoid unwelcome repurchase demands or rep and warrant breaches.

CFPB and Other Federal Agencies Finally Adopt AVM Rule

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What Happened?

On June 20, 2024, a group of federal regulators published a rule addressing for the use of automated valuation models (AVMs) in mortgage origination and secondary market transactions.

The rule adoption – by the Consumer Financial Protection Bureau, Office of Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), and Federal Housing Finance Agency (collectively, the Agencies) – comes more than 13 years after the enactment of the Dodd-Frank Act.  Section 1473 of the Dodd-Frank Act mandated the promulgation of a rule to implement quality control standards for the use of automated valuation models by mortgage originators and secondary market issuers in valuing the collateral worth of a mortgage secured by a consumer’s principal dwelling – even one made for business, commercial, agricultural, or organizational purposes.  The rule will take effect October 1, 2025 (the first day of a calendar quarter following the 12 months after publication in the Federal Register).

Section 1473(q) of the Dodd-Frank Act amended the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), addressing the use of AVMs to estimate the collateral value of a mortgage for mortgage lending purposes in new section 12 U.S.C. § 3354.  The statute sets forth the framework for developing quality control standards to which AVMs must adhere and directs the Agencies to promulgate regulations implementing the standards.

What AVMs does the Rule Cover?

An AVM is any computerized model used by mortgage originators and secondary market issuers to determine the value of a consumer’s principal dwelling collateralizing a mortgage.  The rule’s quality control standards apply only to AVMs used in connection with making credit decisions or covered securitization determinations regarding a mortgage.  For example, the standards apply when determining a new value before originating, modifying terminating a mortgage, or making other changes to a mortgage including a decision whether to extend new or additional credit or change the credit limit on a home equity line of credit (including reductions or suspensions), or placing a loan in a securitization pool.  The rule treats assumptions as credit events.  By contrast, the rule does not cover other uses such as monitoring collateral in mortgage-backed securitizations after they have already been issued or validating an already completed valuation.

Why Is It Important?

The rule requires institutions that engage in covered credit decisions or securitization determinations – whether themselves, or through or in cooperation with a third party affiliate – to adopt policies, practices, procedures and control systems to ensure that the use of AVMs adheres to quality control standards.

“Control systems” are the functions (such as internal or external audits, risk review, quality control and quality assurance) and information systems that are used to measure performance, make decisions about risk, and assess the effectiveness of processes and personnel, including with respect to compliance with statutes and regulators.

In keeping with FIRREA, the rule’s quality control standards are designed to:

  • Ensure a high level of confidence in the estimates produced by the AVMs;
  • Protect against the manipulation of data;
  • Seek to avoid conflicts of interest;
  • Require random sample testing and reviews; and
  • Comply with applicable nondiscrimination laws.

In the rule, the Agencies take the standards one step further than the Dodd-Frank Act mandate, by requiring AVM quality control standards to comply with applicable nondiscrimination laws.  Exercising their statutory authority to account for other appropriate quality control factors, the Agencies’ inclusion of this fifth factor addresses concerns about the potential for AVMs to produce property estimates that reflect discriminatory bias.  In doing so, the Agencies have acted consistent with the Biden administration’s focus on appraisal bias, as exhibited in the PAVE initiative.

In adopting the rule, the Agencies remind institutions that the Equal Credit Opportunity Act and Regulation B, as well as the Fair Housing Act, apply to appraisals and AVMS.  Further, “institutions have a preexisting obligation to comply with all Federal laws including Federal nondiscrimination laws.” To that end, this fifth factor creates an independent obligation for institutions to establish policies, procedures, and control systems to ensure compliance with nondiscrimination laws.

The rule does not include specific requirements on how institutions are to structure their policies and procedures.  The Agencies intend this nonprescriptive approach to provide institutions the flexibility to set quality controls for AVMs as appropriate, based on the size of the institution and the risk and complexity of the transactions for which AVMs will be used.

Rule Applicability

Key to understanding the rule’s impact is an evaluation of what persons and loans are within its scope.

  • Mortgage Originators, Brokers, and Servicers: For purposes of the rule, the term “mortgage originator” has the same definition as under the Truth in Lending Act: any person who, for direct or indirect compensation or gain, or in the expectation of direct or indirect compensation or gain, takes a mortgage application, assists a consumer in obtaining or applying to obtain a mortgage, or offers or negotiates terms of a mortgage secured by a consumer’s principal dwelling, even if the mortgage is primarily for business, commercial agricultural or organizational purposes.  That definition includes a mortgage broker; however, the rule does not apply to mortgage brokers if they do not engage in making covered credit decisions or securitization determinations.  The rule generally does not cover mortgage servicers, unless they are engaged in covered origination activity (for example, in connection with an assumption or a refinancing).  A mortgage originator does not include an individual who engages in “modifying, replacing and subordinating principal or existing mortgages where borrowers are behind in their payments, in default or have a reasonable likelihood of being in default of falling behind.”
  • Secondary Market Issuers: The rule applies to secondary market participants, including the GSEs or “any other party that creates, structures or organizes a mortgage-backed securities transaction,” which includes coverage of entities that are responsible for determining the collateral worth of a mortgage when issuing mortgage-backed securities. This encompasses secondary market participants in the securitization process that make these types of determinations, as opposed to verifying or monitoring such determinations.
  • Loan Applicability: The rule applies when a mortgage is secured by a consumer’s principal dwelling even if the mortgage is primarily for business, agricultural, or organizational purposes.  For purposes of the rule, a “dwelling” means a residential structure that contains one to four units, regardless of whether the structure is attached to real property.
Use of AVMs by Appraisers Not Subject to the Rule

The rule excludes from its scope a certified or licensed appraiser using AVMs in the development of an appraisal.  In creating this exclusion, the Agencies recognize that to comply with the Uniform Standards of Professional Appraisal Practice, appraisers must make valuation conclusions that are supportable independently and do not rely on the results produced by AVMs. Moreover, the rule excludes reviews of completed determinations from the scope of the rule: “if an AVM is being used solely to review the completed determination, the AVM is not covered by the [r]ule regardless of when the AVM is used after that determination.”

Additionally, the Agencies’ existing guidance regarding AVMs remains applicable separately from the rule.  For example, the OCC, Board, FDIC, and NCUA have issued guidance about prudent appraisal and evaluation programs in Appendix B to the Interagency Appraisal and Evaluation Guidelines.

What To Do Now?

Largely as proposed, the rule requires regulated mortgage originators and secondary market issuers to take appropriate steps and adopt policies, practices, procedures, and control systems to ensure that the use of AVMs in valuing real estate collateral securing mortgage loans adhere to the specified quality control standards, including compliance with nondiscrimination laws to avoid potential valuation bias. The rule requires institutions to create their own policies and procedures to ensure the credibility and integrity of valuation determinations produced by AVMs.

While AVM developers and vendors are not covered by the rule, covered institutions will need to work with their AVM developers and vendors to ensure compliance with its obligations.  It is likely that third party AVM testing entities will emerge to assist with these obligations. Vendor management oversight will be important.  Institutions will need to start thinking through their existing policies, practices,  procedures, and control systems now to identify what changes are necessary to ensure compliance on or before the rule’s effective date.

FSOC Issues Report on Nonbank Mortgage Servicing Highlighting Strengths, Vulnerabilities and Recommendations

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What Happened?

In May 2024, the Financial Stability Oversight Council (FSOC or Council) issued a Report on Nonbank Mortgage Servicing (the Report). The Report recognizes the strengths of nonbank mortgage companies (NMCs) and the important role they serve. However, the Council warns that the vulnerabilities of NMCs are more acute due, in part, to the mortgage market shift from banks to NMCs, the increasing federal government exposure to NMCs, financial strain of nonbank originators following the end of the refinance boom, and considerable liquidity risk from NMCs funding sources. The Council warns that it will continue to monitor such risks and take or recommend additional actions in accordance with its Analytic Framework (the 2023 Analytic Framework) and Nonbank Designation Guidance (the 2023 Nonbank Designation Guidance), which we discussed in a prior blog post. The Council also makes several recommendations, including asking Congress to establish a fund financed by the nonbank mortgage sector and administered by an existing federal agency to ensure there are no taxpayer-funded bailouts should a nonbank mortgage servicer fail.

Why Does it Matter?

Background

The Dodd-Frank Act empowers FSOC to designate a nonbank financial company subject to enhanced prudential standards and supervision by the Federal Reserve’s Board of Governors by a two-thirds vote of the Council. The Council is comprised of 10 voting members consisting of the U.S. prudential regulators, the Director of the Consumer Financial Protection Bureau (CFPB), the Director of the Federal Housing Finance Agency, the Chair of the Securities and Exchange Commission, the Chairman of the Commodity Futures Trading Commission, an independent member having insurance expertise, and five non-voting members with the Secretary of the Treasury serving as Chairperson of the Council.

This designation can be made upon the Council’s finding that:

  • Material financial distress at the nonbank financial company could pose a threat to the financial stability of the United States; or
  • The nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the nonbank financial company could pose a threat to the financial stability in the United States.

The Council’s 2023 Analytic Framework provides a non-exhaustive list of eight potential risk factors and the indicators that FSOC intends to monitor that include: (i) leverage, (ii) liquidity risks and maturity mismatches, (iii) interconnections, (iv) operational risk, (v) complexity of opacity, (vi) inadequate risk management, (vii) concentration, and (viii) destabilizing activities. Additionally, FSOC will assess the transmission of those risks by evaluating: (i) exposure, (ii) asset liquidation, (iii) critical function or service, and (iv) contagion. The 2023 Nonbank Designation Guidance, procedural in nature, defines a two-stage process the Council will use to make a firm-specific “nonbank financial company determination” pursuant to FSOC’s Analytic Framework. The Council also has the authority to make recommendations to regulators and Congress and engage in interagency coordination.

The 2024 Report on Nonbank Mortgage Servicing

At the outset, the Council recognizes that the NMC market share has increased significantly. Based on HMDA data, NMCs originate around two-thirds of mortgages in the United States and owned the servicing rights on 54 percent of mortgage balances in 2022 as compared to 2008 when NMCs originated only 39 percent of mortgages and owned the servicing rights on only four percent of mortgage balances. Moreover, in the 10-year period between 2014 and 2024, the share of Agency (i.e., Fannie Mae, Freddie Mac, and Ginnie Mae) servicing handled by NMCs increased from 35 percent 66 percent.

In 2023, NMCs serviced around $6 trillion for the Agencies and approximately 70 percent of the total Agency market.

FSOC recognizes that NMCs filled a void following the 2007-2009 crisis when banks exited the market due to several factors (such as the revised capital rules on banks, making MSRs less attractive, as well as perceived increased costs of default servicing resulting from the National Mortgage Settlement, the Independent Foreclosure Review, prosecutions under the False Claims Act, and private litigation.) According to FSOC, NMCs developed substantial operational capacity and embraced technology. The Council also recognizes NMCs’ strength in servicing historically underserved borrowers. In 2022, NMCs originated greater than 70 percent of mortgages extended to Black and Hispanic borrowers and more than 60 percent of low- and moderate-income borrowers.

While recognizing the strengths of NMCs, the Report also highlights several vulnerabilities. Of the eight risk factors identified in the 2023 Analytic Framework, FSOC focuses its concerns on the following four vulnerabilities:

  • Liquidity Risks & Maturity Mismatches: As provided in the 2023 Analytic Framework, a shortfall of sufficient liquidity to cover short-term needs, or reliance on short-term liabilities to finance longer-term assets, can lead to rollover or refinance risk. FSOC may measure this risk by looking at the ratios of short-term debt to unencumbered liquid assets and the amount of additional funding available to meet unexpected reductions in available short-term funds. FSOC reports “considerable” liquidity concerns from NMCs’ funding sources and servicing contracts. First, NMCs’ reliance on warehouse lines of credit can result in (i) margin calls, (ii) repricing or restructuring lines by raising interest rates, changing the types of acceptable collateral, or canceling lines, (iii) exercising cross default provisions, and (iv) the risk of multiple warehouse lenders enforcing covenants or imposing higher margin requirements at the same time. Second, NMCs face liquidity risk from margin calls on the hedges in place to protect interest rate movements while mortgages are on a warehouse line. Third, NMCs face liquidity risks from their lines of credit that are collateralized by mortgage servicing rights (MSRs), that can also result in margin calls. Finally, requirements to advance funds on behalf of the investor (particularly Ginnie Mae) or repurchase mortgages from securitization pools may result in liquidity strains.
  • Leverage: As provided in the 2023 Analytic Framework, leverage is assessed by levels of debt and other off-balance sheet obligations that may create instability in the face of sudden liquidity restraints, within a market or at a limited number of firms in a market. To assess leverage, the Council may look at quantitative metrics such as ratios of assets, risk-weighted assets, debts, derivatives liabilities or exposures, and off-balance sheet obligations to equity. The Report cites to data from Moody’s Ratings which requires an NMC to have a ratio of secured debt to gross tangible assets of less than 30 percent for its long-term debt rating to be investment grade. In the third quarter of 2023, 37% of NMCs met this standard and 35% of NMCs had ratios in excess of 60 percent which is considered a high credit risk. According to FSOC, equity funding by NMCs add to leverage vulnerability.
  • Operational Risk: As provided in the 2023 Analytic Framework, operational risk arises for the “impairment or failure of financial market infrastructures, processes or systems, including due to cybersecurity vulnerabilities.” The Report highlights that for NMCs operational risks include continuity of operations, threats from cyber events, third-party risk management, quality control, governance, compliance, and processes for servicing delinquent loans.
  • Interconnections: As provided in 2023 Analytic Framework, direct or indirect financial interconnections include exposures of creditors, counterparties, investors, and borrowers that can increase the potential negative effect measured by the extent of exposure to certain derivatives, potential requirement to post margin or collateral, and overall health of the balance sheet. Through warehouse lenders, other financing sources, servicing and subservicing relationships, NMCs are connected to each other. Because of such linkages, the Council is concerned that financial difficulties at one core lender could affect many NMCs.

Because of these NMC vulnerabilities, FSOC is concerned that NMCs could transmit the negative effects of such shocks to the mortgage market and broader financial system through the following channels discussed in the 2023 Analytic Framework:

  • Critical Functions and Services: As provided in 2023 Analytic Framework, a risk to financial stability can arise if there could be a disruption of critical functions or services that are relied upon by market participants for which there is no substitute. FSOC is concerned that if an NMC is under financial strain, it would not have the resources to carry out its core responsibilities, which could result in bankruptcy, borrower harm, operational harm, or servicing transfers mandated by state regulators.
  • Exposures: This refers to the level of direct and indirect exposure of creditors, investors, counterparties, and others to particular instruments or asset classes. Again, if an NMC faced financial strain that impacted the ability of the NMS to execute its functions, other counterparties could be harmed, including investors and credit guarantors. The Agencies could also experience high costs and credit losses and may have challenges in transferring servicing to a more stable servicer. The Report notes that “servicing assumption risk may be slightly less acute (though not less costly) for the enterprises, which have more preemptive tools available to them to assist a servicer in distress than Ginnie Mae does.”
  • Contagion and Asset Liquidation: While these are two separate risks, the Council grouped them together. As defined in the 2023 Analytic Framework, contagion is the potential for financial contagion arising from public perceptions of vulnerability and loss of confidence in widely held financial instruments. Asset liquidation is rapid asset liquidation and the snowball effect of a widespread asset selloff across sectors. The Council is concerned that because MSRs are a large share of NMCs’ assets, “changes in macroeconomic conditions or funder risk appetite” could depress MSR valuations resulting in rapid liquidation and have a material impact on NMC solvency and access to credit.

Because of the federal government’s financial support to Fannie Mae and Freddie Mac, and the direct responsibility for Ginnie Mae’s guarantee to bond investors, the federal government has an interest in addressing servicing risks. FSOC does not believe such risks, as identified above, are sufficiently addressed by the states or existing federal authority. First, “[n]o federal regulator has direct prudential authorities over nonbank mortgage servicers.” Second, the state regulators have prudential authority, however, only nine states (as of April 2024) have adopted prudential financial and corporate governance standards. To that end, the Council recommends:

  • State regulators adopt enhanced prudential requirements, further coordinate supervision of nonbank mortgage servicers, and require recovery and resolution planning for large nonbank mortgage servicers.
  • Federal and state regulators should continue to monitor the nonbank mortgage sector and develop tabletop exercises to prepare for the failure of nonbank mortgage servicers.
  • Congress should provide the Federal Housing Finance Agency and Ginnie Mae with additional authority to establish safety and soundness standards and directly examine nonbank mortgage servicer counterparties for compliance with such standards. Congress should also authorize Ginnie Mae and encourage state regulators to share information with each other and Council members.
  • Congress should consider legislation to provide more protections for borrowers to keep their homes.
  • Congress should consider providing Ginnie Mae with authority to expand its Pass-Through Assistance Program (PTAP) to include tax and insurance payments, foreclosure costs and or advances during periods of severe market stress.
  • Congress should through legislation establish a fund (financed by the nonbank mortgage servicing sector) to facilitate operational continuity of servicing for servicers in bankruptcy or failure to ensure the servicing obligations can be transferred, or the company is recapitalized or sold. The Council recommends that Congress provide “sufficient authority to an existing federal agency to implement and maintain the fund, assess appropriate fees, set criteria for making disbursements, and mitigate risks associated with the implementation of the fund.”

What Do I Need to Do?

Well, shortly after the Report was issued, CFPB Director Chopra issued a statement, indicating that: “The Report is silent on what, if any, tools the FSOC itself should use to address these risks. That must be the next phase of our work. In line with the 2023 Analytic Framework and Nonbank Designation Guidance, we should carefully consider whether any large nonbank mortgage companies meet the statutory threshold for enhanced supervision and regulation by the Federal Reserve Board.”

Given that warning, NMCs should pay careful attention to the statutory threshold for enhanced supervision and work on mitigating their liquidity and other risks. The Report points out that the CSBS enhanced prudential standards are enforceable by the states that have adopted such standards “including through multistate examinations that include at least one state that has adopted the standards or through referrals to states that have adopted these standards.” Thus, servicers should anticipate more state or multistate probes concerning liquidity and corporate governance. And, while stating the obvious, now is the time to double down on managing operational risks, including but not limited to continuity of operations, threats from cyber events, third-party risk management, quality control, governance, compliance, and processes for servicing delinquent loans.

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

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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.

GSEs to Require Mortgage Servicers to Obtain and Maintain Fair Lending Data

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A&B Abstract:

On August 10, 2022, the Federal Housing Finance Agency (“FHFA”) announced that Fannie Mae and Freddie Mac (the “GSEs”) will require mortgage servicers to obtain and maintain fair lending data on their loans, beginning March 1, 2023. That same day, Fannie Mae and Freddie Mac (the “GSEs”) each issued guidance implementing the FHFA announcement.

FHFA and GSEs’ Announcements

In its announcement, the FHFA indicated that Fannie Mae and Freddie Mac will require mortgage servicers to obtain and maintain fair lending data, to include borrower age, race, ethnicity, gender, and preferred language (“Fair Lending Data”), and to ensure that this data transfers with servicing throughout the mortgage term. The announcement follows FHFA’s May 2022 announcement that Fannie Mae and Freddie Mac will require mortgage lenders to collect borrowers’ language preference data as part of the loan application process via a Supplemental Consumer Information Form (SCIF). Shortly after the FHFA announcement, Fannie Mae and Freddie Mac each announced that their respective guides had been updated to require servicers to maintain  Fair Lending Data in a “queryable” format for each mortgage loan, if obtained during the origination process, for loans originated on or after Mach 1, 2023. Additionally, in instances of post-delivery servicing transfers, the transferor servicer must deliver to the transferee servicer the Fair Lending Data in a queryable format for each mortgage loan, if obtained during the origination process, for mortgage loans originated on or after March 1, 2023.  In the event of a future transfer of ownership or assumption of the mortgage loan, servicers are authorized, but not required, to update the Fair Lending Data elements.

Of course, many mortgage servicers currently do not receive complete and accurate borrower demographic data from originating lenders in a readily accessible format for all loans in their servicing portfolio. And servicers may have different resources, capabilities, roles (master servicers vs. subservicer), and electronic systems, which may present additional limitations. For example, Home Mortgage Disclosure Act (“HMDA”) data currently may not transfer to a transferee servicer as part of a servicing transfer. The Fair Lending Data elements generally reflect data that is collected for HMDA-purposes. Therefore, mortgage lenders and servicers will need to ensure that the Fair Lending Data is transferred to the transferee servicer such that the data remains queryable post-transfer. Finally, even where a servicer has access to robust HMDA data, it is unlikely that all the fair lending data elements noted in the FHFA and GSE announcements would be available. For example, mortgage loan originators subject to the data collection requirements of HMDA are required to collect information regarding a consumer’s sex, but not their gender. In this case, it is unclear how much, if any, information a mortgage servicer will ultimately have regarding a consumer’s gender.

Takeaway

Ultimately, even if a servicer is able to obtain and maintain the required Fair Lending Data elements, it remains to be seen what servicers will be expected to do with that information. Depending on the quality and completeness of the data, the servicer may engage in statistical analysis in order to monitor for fairness in servicing outcomes, such as approval rates, foreclosure rates, and processing timelines for loss mitigation evaluations, as well as fee assessment/waiver rates for all serviced loans. Yet this monitoring can only be done if the various parties – originating lender, master servicer, and subservicer – work together to ensure that all necessary data is complete and travels with the servicing of the loan. Thus, mortgage lenders/servicers should begin evaluating their systems to ensure the required Fair Lending Data can be obtained and maintained in a queryable format. Moreover, mortgage lenders/servicers should reevaluate their servicing transfer protocols to ensure Fair Lending Data is transferred and onboarded seamlessly such that the data remains queryable. Finally, it will be interesting to see whether the federal agencies (i.e., HUD, VA, USDA) follow in the GSEs’ footsteps and impose similar fair lending data requirements.