Alston & Bird Consumer Finance Blog

Federal Housing Finance Agency (FHFA)

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

By , ,

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.

Connecticut and Maryland Adopt Model Mortgage Servicer Prudential Standards

By , ,

A&B Abstract:

On May 24, 2022, Connecticut enacted legislation that, among other things, adds financial condition and corporate governance requirements for certain licensed mortgage servicers (the “CT Standards”). In similar fashion, the Maryland Commissioner of Financial Regulation (the “Commissioner”) issued a notice of final action on March 25, 2022 adopting similar standards by regulation (the “MD Standards”).  In both instances, the CT and MD Standards are intended to implement the Model State Regulatory Prudential Standards for Nonbank Mortgage Servicers (the “Model Standards”) drafted and released by the Conference of State Bank Supervisors (“CSBS”) last July.

The CSBS Model Standards

As mentioned in our prior blog post, the CSBS initially proposed standards for mortgage servicers in 2020. In July 2021, after substantial revision to the proposed standards, the CSBS adopted the Model Standards to provide states with uniform financial condition and corporate governance requirements for nonbank mortgage servicer regulation while preserving local accountability to consumers and to “provide a roadmap to uniform and consistent supervision of nonbank mortgage servicers nationwide.”

The Model Standards cover two major categories that comprise prudential standards: financial condition and corporate governance. The financial condition component consists of capital and liquidity requirements. Corporate governance components include separate categories for establishment of a board of directors (or “similar body”); internal audit; external audit; and risk management.

The Model Standards apply to nonbank mortgage servicers with portfolios of 2,000 or more 1 – 4-unit residential mortgage loans serviced or subserviced for others and operating in two or more states as of the most recent calendar year end, reported in the Nationwide Multistate Licensing System (“NMLS”) Mortgage Call Report. For purposes of determining coverage under the Model Standards, “residential mortgage loans serviced” excludes whole loans owned and loans being “interim” serviced prior to sale. Additionally, the financial condition requirements in the Model Standards do not apply to servicers solely owning and/or conducting reverse mortgage servicing or the reverse mortgage portfolio administered by forward mortgage servicers that may otherwise be covered under the standards. The capital and liquidity requirements also have limited application to entities that only perform subservicing for others. Moreover, the whole loan portion of portfolios are not included in the calculation of the capital and liquidity requirements.

While CSBS drafted the Model Standards, they are implemented only through individual state legislation or other rulemaking.

Connecticut’s and Maryland’s Implementation of the Model Standards

The CT and MD Standards both track the Model Standards in many respects, including the following:

  • Covered servicers are required to satisfy the Federal Housing Finance Agency’s (“FHFA”) Eligibility Requirements for Enterprise Single-Family Seller/Servicers for minimum capital ratio, net worth and liquidity, whether or not the mortgage servicer is approved for servicing by the government sponsored enterprises (i.e., Fannie Mae and/or Freddie Mac) (the “GSEs”), as well maintain policies and procedures implementing such requirements; these requirements do not apply to servicers solely owning and/or conducting reverse mortgage loan servicing, or the reverse mortgage loan portfolio administered by covered institution that may otherwise be covered under the standards, and do not include the whole loan portion of servicers’ portfolios.
  • With respect to corporate governance, covered servicers are required to establish and maintain a board of directors responsible for oversight of the servicer; however, for covered servicers that are not approved to service loans by one of the GSEs, or Ginnie Mae, or where a federal agency has granted approval for a board alternative, a covered servicer may establish a similar body constituted to exercise oversight and fulfill the board of directors’ responsibilities.
  • A covered mortgage servicer’s board of directors, or approved board alternative, must (1) establish a written corporate governance framework, including appropriate internal controls designed to monitor corporate governance and assess compliance with the corporate governance framework, (2) monitor and ensure institutional compliance with certain established rules, and (3) establish internal audit requirements that are appropriate for the size, complexity and risk profile of the servicer, with appropriate independence to provide a reliable evaluation of the servicer’s internal control structure, risk management and governance.
  • Covered mortgage servicers must receive an annual external audit, which must include audited financial statements and audit reports, conducted by an independent accountant, and which must include: (1) annual financial statements, (2) internal control assessments, (3) computation of tangible net worth, (4) validation of MSR valuation and reserve methodology, (5) verification of adequate fidelity and errors and omissions insurance, and (6) testing of controls related to risk management activities, including compliance and stress testing, as applicable.
  • Covered mortgage servicers must establish a risk management program under the oversight of the board of directors, or the approved board alternative, that addresses the following risks: credit, liquidity, operational, market, compliance, legal, and reputation.
  • Covered mortgage servicers must conduct an annual risk assessment, concluding with a formal report to the board of directors, which must include evidence of risk management activities throughout the year including findings of issues and the response to address those findings.

Notwithstanding the foregoing, the CT Standards appear to deviate from the Model Standards in a few notable ways. First, with respect to coverage, the CT Standards differ from the Model Standards, in that the CT Standards can apply to a servicer who only services Connecticut residential mortgage loans, whereas the Model Standards do not apply unless the servicer operates “in two or more states as of the most recent calendar year end, reported in the [NMLS] Mortgage Call Report.” Additionally, the capital and liquidity requirements under the Model Standards have limited application to entities that only perform subservicing for others, including limiting the definition of “servicing liquidity or liquidity” to entities who own servicing rights. The comments to the Model Standards explain that “[f]inancial condition requirements for subservicers are limited under the FHFA eligibility requirements due to the lack of owned servicing. For example, net worth add-on and liquidity requirements apply only to UPB of servicing owned, thereby limiting the financial requirements for subservicers, and servicers who own MSRs and also subservice for others. However, the base capital and operating liquidity requirements … apply to subservicers.” On the other hand, the capital and liquidity requirements under the CT Standards explicitly do not apply to an entity that solely “performs subservicing for others with no responsibility to advance moneys not yet received in connection with such subservicing activities.”

The MD Standards, on the other hand, largely adopt the Model Standards. However, with respect to internal audit requirements, the MD Standards contain additional guidance, specifying that “[u]nless impracticable given the size of the licensee, internal audit functions shall be performed by employees of the licensee who report to the licensee’s owners or board of directors and who are not otherwise supervised by the persons who directly manage the activities being reviewed.” That said, it is worth noting that in an accompanying notice to servicers and lenders, the Maryland Commissioner of Financial Regulation clarified that the purpose of the MD Standards is “aligning Maryland regulations with nationwide model standards and creating uniform standards regarding safety and soundness, financial responsibility, and corporate governance for certain mortgage service providers.”

Takeaway

Connecticut and Maryland are the first two states to adopt implementing laws or regulations following the CSBS’s adoption of the Model Standards. Connecticut-licensed mortgage servicers subject to the CT Standards must comply by October 1, 2022, the section’s effective date. The MD Standards took effect on June 27, 2022. Servicers subject to the CT and/or MD Standards should review the standards and ensure their business satisfies the applicable requirements. As with any model law, the Model Standards require states to adopt implementing laws or regulations. Accordingly, we expect to see additional states begin to adopt similar measures.

Upcoming Webinar on Implications of Collins v. Yellen

By

On Friday, July 2, Alston & Bird partner Jason Levine will participate in a Federalist Society webinar discussing the Supreme Court’s Collins v. Yellen ruling and its implications.  In Collins v. Yellen, issued on June 23, the Court held that: (1) because the Federal Housing Finance Agency did not exceed its authority under the Housing and Economic Recovery Act of 2008, the anti-injunction provisions of the Recovery Act bar the statutory claim brought by shareholders of Fannie Mae and Freddie Mac; and (2) the Recovery Act’s structure violates the separation of powers.

 

Biden-Harris Administration Announces Extension of COVID-19 Foreclosure Moratorium

By ,

A&B Abstract:

Today, the Biden Administration announced an extension of the foreclosure moratorium for federally-backed mortgage loans (the “Presidential Announcement”). To implement the Presidential Announcement, the federal agencies (i.e., HUD/FHA, USDA, and VA) and GSEs (i.e., Fannie Mae and Freddie Mac) have announced (or are anticipated to announce) extensions of the foreclosure moratorium until July 31, 2021.

Presidential Announcement

According to the Presidential Announcement, the three federal agencies that back mortgages – the Department of Housing and Urban Development (HUD), Department of Veterans Affairs (VA), and Department of Agriculture (USDA) – will extend their respective foreclosure moratorium for one, final month, until July 31, 2021. Similarly, the Federal Housing Finance Agency (FHFA) will announce that it has extended the foreclosure moratorium for mortgages backed by Fannie Mae and Freddie Mac until July 31, 2021.

The Presidential Announcement goes on to provide that once the moratoria end, HUD, VA, and USDA will take additional steps to prevent foreclosures on mortgages backed by those agencies until borrowers are reviewed for COVID-19 streamlined loss mitigation options that are affordable, while FHFA will continue to work with Fannie Mae and Freddie Mac to ensure that borrowers are evaluated for home retention solutions prior to any referral to foreclosure.

In addition, the Presidential Announcement notes that HUD, VA, and USDA will also continue to allow homeowners who have not taken advantage of forbearance to date to enter into COVID-related forbearance through September 30, 2021, while homeowners with Fannie Mae or Freddie Mac-backed mortgages who have COVID-related hardships will also continue to be eligible for COVID-related forbearance.

Finally, the Presidential Announcement indicates that HUD, VA, and USDA will be announcing additional steps in July to offer borrowers payment reduction options that will enable more homeowners to stay in their homes.

Federal Agency and GSE Announcements

In addition to the foregoing, the USDA and the GSEs issued the following guidance today implementing the Presidential Announcement:

  • USDA:  Today, the USDA issued a brief press release announcing a one-month extension, through July 31, 2021, of the moratorium on foreclosure from properties financed by USDA Single-Family Housing Direct and Guaranteed loans. Beyond July 31, 2021, the USDA indicated that it would continue to support homeowners experiencing financial hardship due to the pandemic by making loss mitigation options available to help keep them in their homes.
  • Fannie Mae LL-2021-02:  Today, Fannie Mae updated LL-2021-02 to extend the moratorium on foreclosures with respect to Fannie Mae loans through July 31, 2021.  Specifically, servicers must continue the suspension of the following foreclosure-related activities through July 31, 2021. Servicers may not, except with respect to a vacant or abandoned property: (1) initiate any judicial or non-judicial foreclosure process, (2) move for a foreclosure judgment or order of sale, or (3) execute a foreclosure sale.  All other guidance set forth in LL-2021-02 remains the same.
  • Freddie Mac Guide Bulletin 2021-23:  Similarly, today Freddie Mac issued Guide Bulletin 2021-23, which announces an extended effective date for the COVID-19 foreclosure moratorium.  Specifically, Freddie Mac is extending the foreclosure moratorium last announced in Guide Bulletin 2021-8. Servicers must suspend all foreclosure actions, including foreclosure sales, through July 31, 2021. This includes initiation of any judicial or non-judicial foreclosure process, motion for foreclosure judgment or order of sale. This foreclosure suspension does not apply to mortgages on properties that have been determined to be vacant or abandoned.

As of today, we are not aware of any formal announcement by HUD or VA regarding the implementation of the Presidential Announcement. However, we anticipate that both HUD and VA will issue guidance consistent with the above announcement in short order.

Takeaway 

The takeaway from today’s announcements is that, except with respect to vacant and abandoned properties, all foreclosure-related activities that could constitute the initiation of any judicial or non-judicial foreclosure process, movement for a foreclosure judgement or order of sale, or execution of a foreclosure sale should continue to be paused until the expiration of the extended foreclosure moratorium.  Moreover, the Presidential Announcement suggests that additional guidance will be issued by the federal agencies permitting borrowers who have not yet taken advantage of a COVID-19 forbearance to do so through September 30, 2021 and announcing additional steps in July to offer borrowers additional payment reduction options to enable more homeowners to stay in their homes. Accordingly, servicers should continue to monitor for any additional guidance from the federal agencies and GSEs regarding the foreclosure moratorium or other COVID-19-related borrower relief.

The QM Patch Is Down for the Count

By

Whether they realize it or not, absent a last-minute intervention from the Federal Housing Finance Agency (FHFA), effective July 1, 2021, creditors will no longer be able to originate qualified mortgage loans using the “QM Patch.” The reason for this dramatic event is that on April 8, 2021, Fannie Mae and Freddie Mac announced in separate pronouncements that effective for loans with application dates after June 30, 2021 (for Fannie Mae; for Freddie Mac, applications received on or after July 1, 2021), the loans must conform with the revised qualified mortgage (QM) loan rules—and cannot be QM Patch loans.

Because the FHFA is terminating the QM Patch, loans underwritten to the QM Patch after July 1, 2021 will no longer be eligible for sale to the government-sponsored enterprises (GSEs), and in effect, the QM Patch disappears after that date. This development contradicts the Consumer Financial Protection Bureau’s (CFPB) final rulemaking delaying the mandatory effective date of the revised QM rules until October 1, 2022. Under that CFPB rulemaking, during the period between March 1, 2021 and October 1, 2022, the CFPB intends for creditors to have the option of originating QM loans either under the legacy QM rules, including the QM Patch, or the revised QM rules.

In a client advisory, Steve Ornstein parses how the death of the QM Patch will affect creditors seeking to originate residential mortgage loans under Fannie Mae, Freddie Mac, or Consumer Financial Protection Bureau regulations.