Alston & Bird Consumer Finance Blog

Mortgage Servicing

Consumer Finance State Roundup

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The latest edition of the Consumer Finance State Roundup highlights recently enacted measures of potential interest from three states:

Delaware: 

  • Effective August 9, Senate Bill 245 amends mortgage foreclosure provisions of the Delaware Code.  Principally, the measure updates the content of the pre-foreclosure notice that a mortgagee must send – as set forth in Section 5062B of Title 10 of the Code – to reflect that the Delaware State Housing Authority is the appropriate group to contact for financial assistance, and to permit alteration of the statutory language as recommended by the administrator of the Residential Mortgage Foreclosure Mediation Program.  The measure also eliminates the previously scheduled January 1, 2025, expiration date of provisions including Sections 5062A (loss mitigation affidavit), 5062C (Residential Mortgage Foreclosure Mediation Program), and 5062D (complaints) of Title 10; those sections now apply to any foreclosure action initiated on or after January 19, 2012.

Illinois: 

  •  Effective August 9, 2024, Senate Bill 3550 amends the Consumer Installment Loan Act by: (a) clarifying that licensees thereunder have authority to make a loan with a maximum principal amount of $40,000 and to charge, contract for, and receive an annual percentage rate of no more than 36% (rather than charges at an APR of more than 36%); and (b) amending disciplinary provisions, including those applicable to persons engaged in unlicensed activity.  The measure also establishes the “Financial Institutions Act” (20 ILCS 1205/1) from existing provisions of the Financial Institutions Code.
  • Effective January 1, 2025, Senate Bill 2919 amends the Mortgage Foreclosure article of the Illinois Code of Civil Procedure to provide for online foreclosure sales, among other topics.  First, the measure amends Section 15-1507 to permit a mortgagee to request that a judge, sheriff, or other person to conduct the sale of a foreclosed home either in-person and/or online, and to add corresponding content to the public notice of sale that the mortgagee must provide.  Second, the measure adds Section 15-1507.2 to establish procedures for the conduct of online judicial sales, addressing applicable fees, bid procedures, proper information security controls, and the engagement of third-party purchasers.  Finally, the measure adds Section 15-1510.1, prohibiting the charging of any fee beyond the winning bid amount to a third-party bidder or purchaser who is not a party to the case in a residential real estate sale.
  •  Effective January 1, 2025, Senate Bill 3551 amends the Residential Mortgage License Act of 1987 (RMLA) and the Residential Real Property Disclosure Act (RRPDA).  First, the measure adds the term “shared appreciation agreement” to the definitions section of the RMLA, and amends related terms (“mortgage loan”, “residential mortgage loan”, and “home mortgage loan”) to “include a loan in which funds are advanced through a shared appreciation agreement.”  Second, the measure adds to the RMLA a new section addressing counseling and disclosure requirements for shared appreciation agreements.  Third, the measure adds to the RRPDA provisions relating to counseling, such that: (a) counseling is required to be provided in person, or by remote electronic or telephonic means, with the permission of all borrowers; (b) counseling must be provided in a private session; and (c) the counselor must verify the identity of each borrower, as well as document the counseling session, subject to any implementing regulations.

New Hampshire: 

  • On August 23, New Hampshire Governor Chris Sununu signed into law House Bill 1241, which amends provisions of the New Hampshire statutes relating to the regulation of money transmitters and mortgage licensees, among other topics beyond the scope of our reporting.   First, effective October 22, the measure repeals New Hampshire’s existing money transmission laws and adopts the model Money Transmission Modernization Act.  The Act requires the licensing of persons engaged in money transmission and establishes licensing application requirements, licensee reporting obligations, and enforcement provisions, among others. Second, the measure amends Chapters 397-A and 399-A with respect to license renewals for mortgage loan originators; mortgage bankers, brokers, and servicers; small loan lenders; and debt adjustment services. Going forward, a license term will run from the date of approval of an application December 31 of the year in which the license term began; however, if the initial license date is between November 1 and December 31, the initial license term will run through December 31 of the following year.

VA Issues Guidance on Processing Assumptions with Secondary Financing

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What Happened?

On August 11, 2024 the Department of Veterans Affairs (the “VA”) released Circular 26-24-17, clarifying how a servicer should process an assumption when there is secondary financing.  Significantly, the VA clarified an open question of whether a junior mortgage obtained simultaneously with the assumption of a first-lien VA-guaranteed loan must also be assumable.

Why Does it Matter?

Assumable mortgage loans have been gaining in popularity in our current high interest rate environment.  Often, however, buyers will need secondary financing to make up the difference between the mortgage to be assumed and the purchase price of the property.  There has been a lack of guidance on how to process the assumption of a first-lien VA-guaranteed loan that involves secondary financing, as well as the question of whether such secondary financing must also be an assumable loan.

VA Circular 26-24-17 clarifies that the VA does not prohibit an assumer (regardless of whether a Veteran) of a VA-guaranteed loan from obtaining secondary financing (i.e., a junior lien) in conjunction with an assumption of the VA-guaranteed loan, and that such secondary financing does not need to be an assumable mortgage.  However, if the secondary financing is not assumable, “the holder of the VA-guaranteed loan should counsel the assumer that this may restrict their ability to sell the property to another creditworthy assumer through an assumption in the future.”

Additionally, to protect the VA-guaranteed loan priority, holders are expected to ensure:

  • The secondary financing is subordinate to the VA-guaranteed loan, such as through a subordination agreement.
  • Documentation exists in the loan file that provides the name of the secondary lender, the amount of the secondary borrowing, and the repayment terms of the secondary borrowing agreed to by the assumer.
  • Proceeds of the secondary financing are used for amounts due to the seller at closing as part of the assumption process or allowable closing costs.  Note, that the assumer cannot receive cash back from the secondary financing.
  • Contract terms of the secondary financing include a reasonable grace period before a late charge is assessed and, in the event of default, before the secondary lender may commence foreclosure proceedings. The interest rate can be negotiated between the assumer and the lender and can be higher than the rate on the VA-guaranteed loan.
  • Underwriting decisions include the recurring payment of any secondary financing.

What Do I Need to Do?

Servicers that process assumptions of VA-guaranteed loans should review the circular closely and ensure the requirements are implemented into servicers’ compliance management systems, as this circular took effect immediately when issued on August 11, 2024.

CFPB Releases Long-Awaited Proposal to Amend Regulation X Loss Mitigation Rules

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What Happened?

On July 10, 2024, the Consumer Financial Protection Bureau (CFPB or Bureau) proposed a rule to amend provisions of its Mortgage Servicing Rules to significantly revamp requirements relating to borrowers experiencing payment difficulties (the Proposed Rule).  The Proposed Rule includes a number of key changes to the servicing requirements in Regulation X (12 C.F.R. Part 1024), including limited English Proficiency requirements. While many of the key concepts were anticipated by the industry, the proposed provisions go much further than expected.

The Bureau is accepting comments on the Proposed Rule through September 9, 2024.

Why Does it Matter?

In June 2023, the Bureau signaled its intent to engage in rulemaking to streamline certain requirements and processes in the Mortgage Servicing Rules to significantly revamp requirements relating to borrowers experiencing payment difficulties (the Proposed Rule). The Proposed Rule would represent the first major changes to the Mortgage Servicing Rules since 2016 (although the Bureau has made targeted updates in the interim – such as the 2018 changes relating to periodic statements). We describe the key provisions below.

Loss Mitigation Procedures

Under the Proposed Rule, the CFPB would remove most of the existing application-based loss mitigation framework from § 1024.41, including the existing provisions regarding loss mitigation application reviews and notices; complete application evaluations and notices); “anti-evasion” facially-complete applications, and exceptions for short-term loss mitigation options and COVID-19-related options; notices of complete application; and the associated commentary.

The CFPB proposes to replace the existing loss mitigation framework with a new hand raise framework based on foreclosure procedural safeguards, as follows:

  • Loss Mitigation Review Cycle: Under the Proposed Rule, the foreclosure procedure safeguards begin once a “loss mitigation review cycle begins.”
    • A Loss Mitigation Review Cycle would be defined as a continuous period of time beginning when the borrower makes a request for loss mitigation assistance, provided the request is made more than 37 days before a foreclosure sale and ending when the loan is brought current or when the foreclosure process procedural safeguards (as discussed in Loss Mitigation Procedures) are met. A loss mitigation review cycle continues while a borrower is in a temporary or trial modification and the loan has not yet been brought current.
    • A Request for Loss Mitigation Assistance would include any oral or written communication occurring through any usual and customary channel for mortgage servicing communications whereby a borrower asked a service for mortgage review, including a borrower expresses an interest in pursuing a loss mitigation option. There are a few things to note in this definition. The definition is to be interpreted broadly to include (i) a borrower who expresses an interest in pursuing a loss mitigation option, (ii) a borrower who indicates that they have experienced a hardship and asks the servicer for assistance with making payments, retaining their home, or avoiding foreclosure, or (iii) in response to a servicer’s unsolicited offer of a “loss mitigation option” (as that term is currently defined in Regulation X), a borrower expresses an interest in pursuing either the loss mitigation option offered or any other loss mitigation option. According to the Proposed Rule’s preamble, “a servicer should presume that a borrower who experiences a delinquency has made a request for loss mitigation assistance when they contact the servicer unless they clearly express some other intention.” The proposal clarifies that certain informal types of communications (such as social media messaging or handwritten notes on payment coupons) would not constitute a request for loss mitigation assistance but fails to provide servicers flexibility to designate where borrowers can make such requests.
  • Foreclosure Procedural Safeguards: Under the Proposed Rule, once a “loss mitigation review cycle” begins, a servicer would be prohibited from beginning or advancing the foreclosure process until one of the following procedural safeguards is met:
    • The servicer has reviewed the borrower for all available “loss mitigation options,” a defined term under existing Regulation X, and no available loss mitigation options remain, the servicer has sent the borrower all required notices required, and the borrower has not requested any appeal within the applicable time period or, if applicable, all of the borrower’s appeals have been denied; or
    • The borrower has not communicated with the servicer for at least 90 days despite the servicer having regularly taken steps to communicate with the borrower regarding their loss mitigation review and, if applicable, the servicer’s loss mitigation determination.

Importantly, the Proposed Rule would no longer require a borrower to submit a complete loss mitigation application in order to enjoy foreclosure protections. Rather, borrowers would receive the proposed foreclosure protections as soon as they request loss mitigation assistance.

  • Prohibition on Advancing Foreclosure: Currently, servicers are prohibited from making the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process under certain circumstances, as well as from moving for foreclosure judgment or order of sale or conducting a foreclosure sale under other circumstances. However, currently, servicers may still proceed with other interim foreclosure actions, such as mediation or arbitration.

Under the Proposed Rule, if a borrower requests loss mitigation assistance more than 37 days before a foreclosure sale, a servicer would be prohibited from initiating or advancing foreclosure (which would also include sale scheduling or completion) unless one of the above foreclosure procedural safeguards are met. The CFPB notes that, under the proposed rule, advancing the foreclosure process would include any judicial or non-judicial actions that advance the foreclosure process and were not yet completed prior to the borrower’s request for a loss mitigation option. Such actions might include, for example, certain filings, such as those related to mediation, arbitration, or reinstatement that take place prior to final order or sale; certain affidavits, motions, and responses that advance the foreclosure process; or recordings or public notices that occur before a final foreclosure judgment or sale. Notably, the CFPB is not proposing to require servicers to dismiss pending foreclosures; however, a servicer may be required to make necessary filings to pause the foreclosure proceedings until the safeguards are met.

  • Sequential Loss Mitigation Review: Under the Proposed Rule’s loss mitigation framework, a servicer would no longer be required to collect a complete loss mitigation application for all available options prior to making a determination about whether to deny or to offer a loss mitigation option to a borrower. Accordingly, a servicer would be permitted, but not required to, review a borrower for loss mitigation options sequentially rather than simultaneously. Notably, the CFPB clarifies in the preamble to the Proposed Rule, that “[i]nvestor guidelines, including what are commonly referred to as waterfalls, will continue to determine whether any loss mitigation option is available and whether the borrower qualifies for a given option.”
  • Fee Prohibition: The CFPB is proposing to replace the temporary COVID-19 procedural safeguards in § 1024.41 with a proposed requirement that during a loss mitigation review cycle, no fees beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract shall accrue on the borrower’s account.

The CFPB states that the proposed fee protection “would be broad, and would restrict the accrual of interest, penalties, and fees during the loss mitigation review cycle.” The Bureau also acknowledges that “this broad prohibition may result in servicers making payments to third party companies for delinquency-related services that servicers may not be able to recoup[.]” However, the CFPB states that it has preliminarily “determine[d] that borrowers who have made a request for loss mitigation assistance should not continue accruing fees that make it harder for them to resolve the delinquency and avoid foreclosure” and “that fee protections may create incentives for servicers under the proposed new framework to efficiently process a borrower’s request for loss mitigation assistance and evaluate them for loss mitigation solutions quickly and accurately.” That said, given that the loss mitigation review framework could go on almost indefinitely, as noted below, it is hard to see how such efficiencies or incentives would be realized.

  • Duplicative Requests: Currently, a servicer is required to comply with the requirements of Regulation X for a borrower’s loss mitigation application, unless the servicer has previously complied with the requirements of that section for a complete loss mitigation application submitted by the borrower and the borrower has been delinquent at all times since submitting the prior complete application.

Significantly, the Proposed Rule would require that servicers comply with the requirements of proposed § 1024.41 for a borrower’s request for loss mitigation assistance during the same loss mitigation review cycle unless one of the procedural safeguards is met. Notably, the Proposed Rule would not appear to prohibit a borrower from re-requesting loss mitigation assistance indefinitely (and, thus, beginning a new loss mitigation review cycle with new foreclosure procedural safeguards), unless otherwise provided by investor guidelines.

Loss Mitigation Determination Notices

  • Coverage of Determination Notices Expanded: Currently, Regulation X requires that loss mitigation determination notices state, in relevant part, which loss mitigation options, if any, the servicer will offer to the borrower on behalf of the owner or assignee of the mortgage, the specific reason or reasons a borrower’s complete loss mitigation application is denied for any trial or permanent loan modification option available to the borrower and, if applicable, that the borrower has the right to appeal the denial of any loan modification option as well as the amount of time the borrower has to file such an appeal and any requirements for making an appeal.

The Proposed Rule would expand § 1024.41’s loss mitigation determination notice provisions to require that servicers provide determination notices for all types of loss mitigation offers and denials, including forbearances, deferrals, and partial claims.  In other words, servicers would be required to include in determination notices the specific reason or reasons a borrower’s loss mitigation request is denied for any loss mitigation option (not just loan modification options) available to the borrower as well as information regarding the borrower’s appeal rights (which would extend to all loss mitigation denials).

  • Expanded Information on Determination Notices: Under the Proposed Rule, in addition to disclosing the amount of time the borrower has to accept or reject an offer, the borrower’s right to appeal the loss mitigation determination, and the specific reason or reasons for that loss mitigation determination, a servicer’s determination notice would be required to include the following additional information:
    • Information about key borrower-provided inputs that served as the basis for the loss mitigation determination;
    • A telephone number, mailing address, and website address, where the borrower can access a list of non-borrower provided inputs used by the servicer in making the loss mitigation determination;
    • Information that would enable a borrower to access a list of all loss mitigation options that may be available from the investor; and
    • Information about all other loss mitigation options that may remain available, previously offered options that the borrower did not accept, and whether any offered option will remain available if the borrower requests review for additional options prior to accepting or rejecting the offer.

The expanded information requirements, as proposed, raise a number of unanswered questions.

For example, it is unclear what would constitute a “key” borrower-provided input. The preamble to the Proposed Rule suggests that any borrower-provided input that served as the basis for the servicer’s determination would arguably be covered. Similarly, it is unclear what is the scope of non-borrower provided inputs servicers must permit borrowers to access. For example, it is unclear whether servicers would be required to list that, among other things, the property is secured by a first-lien mortgage loan, the property is owner-occupied, and/or the borrower’s loan meets specified delinquency requirements (if applicable).

Further, the expanded notice requirements are likely to create significant operational challenges for servicers. For example, servicers will likely need to track not only the loss mitigation options generally made available by the owner or assignee of each loan they service, but also the loss mitigation options previously offered to each borrower, the options each borrower did not accept, and whether any previously offered option will remain available if a borrower requests review for additional options prior to accepting or rejecting the offer. These operational complexities are compounded by the fact that investors and agencies routinely update their loss mitigation guidelines.

  • Denial Due to Missing Documents or Information Not in Borrower’s Control: In addition to relocating the current requirements relating to when a servicer may deny a loss mitigation application due solely to missing information not in the borrower’s or servicer’s control, the Proposed Rule would also amend the requirements to align with other proposed changes.

First, the Proposed Rule would prohibit servicers from denying a request for loss mitigation assistance due solely to missing information not in the borrower’s or servicer’s control unless the servicer has “regularly taken steps” to obtain the missing information and has been unable to obtain the information for at least 90 days. The CFPB indicated that it “expects that regularly taking steps would minimally include repeated attempted contact through the 90-day period with the relevant third party from whom the servicer needs to obtain the information.” The intent is to “ensure that servicers are making efforts to obtain needed information before denying a loss mitigation application due to missing information.”  While the Bureau proposes to replace the term “reasonable diligence” with “regularly taking steps,” the CFPB “does not intend to reduce or to lessen a servicer’s current obligation to obtain missing documents or information not in the borrower’s control.”

Second, the Proposed Rule would require servicers to provide a notice to borrowers if they deny such a request for loss mitigation assistance. The notice would retain certain information currently required, including requiring a statement that the servicer will complete its evaluation of the borrower for all available loss mitigation options promptly upon receiving the missing third-party information, but also would provide borrowers with additional information, including informing the borrower that the servicer will complete its evaluation of the request for loss mitigation assistance if the servicer receives the referenced missing documents or information within 14 days of providing the missing information determination notice to the borrower.

Third, the Proposed Rule would require servicers to provide borrowers with detailed information, which includes, among other things, a list of all other loss mitigation options that are still available to the borrower and a statement describing the next steps the borrower must take to be reviewed for those loss mitigation options, or a statement that the servicer has reviewed the borrower for all available loss mitigation options and none remain.

  • Unsolicited Loss Mitigation Offers: The Proposed Rule would require that a servicer provide the borrower with a notice when it offers a loss mitigation option based solely on information that the servicer already has instead of new borrower-provided information. The notice would be required to include the amount of time the borrower has to accept or reject the offer of loss mitigation and information notifying the borrower, among other things, of all other loss mitigation options that may remain available to the borrower and investor information.

Notably, the Proposed Rule would not revise the definition of “loss mitigation option,” which includes, among other things, refinancings. Moreover, the requirement to provide notice for unsolicited loss mitigation offers would not be limited to delinquent borrowers. As a result, it is unclear whether a lender/servicer that makes an unsolicited refinancing offer based solely on information that the lender/servicer already has (such as for a streamline refinancing) would be subject to the proposed notice requirement.

Loss Mitigation Error Resolution and Appeals

The CFPB proposes two significant changes to the notice of error provisions:

  • Covered Errors Expanded: The CFPB proposes to clarify that a failure to make an accurate loss mitigation determination on a borrower’s mortgage loan is a covered error, subject to the procedural requirements of § 1024.35.  According to the Bureau, this is merely clarifying its longstanding position, although courts have thought differently.
  • Notice of Appeal Also Covered Error: The Bureau is proposing that a notice of appeal could also be subject to the error resolution procedural requirements and vice versa.  More specifically, when an appeal meets the error resolution procedural requirements of § 1024.35, the proposed rule would require servicers to treat it as a notice of error and comply with the procedural requirements.  Similarly, if a borrower submits a notice of error under § 1024.35 relating to a loss mitigation determination, the notice of error would also constitute an appeal under Regulation X if the borrower submits the notice of error within 14 days after the servicer provides its loss mitigation determination.  When a notice of error is also an appeal, the Proposed Rule would require a servicer to complete the notice of error response requirements in § 1024.35 prior to making a determination about the borrower’s appeal.  So, a servicer would need to comply with the 30-day time period for a notice of appeal even in those instances where the notice of error provisions provides a longer response time.

Early Intervention

In addition to removing language relating to the COVID-19 pandemic, the Proposed Rule would make the following changes to the early intervention requirements in existing § 1024.39:

  • Written Early Intervention Notice Requirements: Under the Proposed Rule, servicers would be required to include the following additional information in the written early intervention notice:
    • The name of the owner or assignee of the borrower’s loan along with a statement providing a brief description of each type of loss mitigation option that is generally available from the investor of the borrower’s loan;
    • A website address and telephone number where the borrower can access a list of all loss mitigation options that may be available from the owner or assignee of the borrower’s loan; and
    • If applicable, a statement informing the borrower how to make a request for loss mitigation assistance.
  • Alternative Early Intervention Requirements for Performing Borrowers in Forbearance: The Proposed Rule would partially exempt servicers from the live contact and written early intervention notice requirements while a borrower is performing pursuant to the terms of a forbearance.
  • Terms of a Forbearance: The Proposed Rule would require that, at least 30 days, but no more than 45 days, before the scheduled end of the forbearance, the servicer establish, or make good faith efforts to establish, live contact with the borrower. During this contact, the servicer would be required to inform the borrower of the date the borrower’s current forbearance is scheduled to end and of the availability of loss mitigation options, if appropriate. In addition, the Proposed Rule would require that the servicer to provide a written notice, that discloses the date the borrower’s current forbearance is scheduled to end as well as the information required by the proposed written early intervention notice, at least 30 days, but no more than 45 days, before the scheduled end of the forbearance. The Proposed Rule also would require that, when a forbearance ends for any reason, a servicer must resume compliance with the early intervention and live contact requirements on the next payment due date following the forbearance end date.

Given the narrow time frame (15 days) within which servicers must establish, or make good faith efforts to establish, live contact with a borrower before the scheduled end of the borrower’s forbearance, this proposed requirement may create operational challenges for servicers.

Language Access

Currently, Regulation X does not contain requirements concerning serving limited English proficient borrowers. In its proposal, the Bureau strongly states that it “expects mortgage servicers to assist borrowers with limited English proficiency.”  To that end, and without clear statutory authority and without providing proposed regulation text, the CFPB proposes the following:

  • Specified Written Communications Required in Spanish: Servicers would be required to accurately (which term is not defined) translate into Spanish the specified written communications, meaning the early intervention notices (but not the website listing loss mitigation options that the CFPB is proposing) and notices whose forbearances will soon end, as well as written notices concerning loss mitigation. A servicer would be required to provide the Spanish and English versions to all borrowers.
  • Translations of Certain Written and Oral Communications in Five Additional Languages: Upon borrower request, servicers would be required to provide accurate translations of the specified written communication in one of the servicer-selected languages. Additionally, upon borrower request, the servicer would be required to make available and establish a connection with interpretative services before or within a reasonable time of establishing connection with the borrower during the specified oral communications to the extent that the borrower’s requested language is one selected by the servicer under the Proposed Rule. The specified oral communications would be the live contact and continuity of contact requirements. The servicer would be required to select five of the most frequently used languages from languages spoken by a significant majority of their non-Spanish speaking borrowers with limited English proficiency.
  • In-language Statements: Servicers would also be required to provide five brief statements accurately translated into the five languages selected by the servicer in the English version of the specified written communications. These statements would identify the availability of translation and interpretative services for the specified written and oral communications in the five languages and how borrowers can request such services.
  • Solicitation through Servicing: Under the Proposed Rule, if a borrower received marketing for their mortgage loan before origination in a language other than English, and the servicer knows or should have known of that marketing, the servicer would be required to make available translations or interpretations for that language even if it is not one of the servicer-selected languages.
  • Accurate translations: Failure to provide accurate translations or interpretations would result in a violation of the proposed requirement and the underling requirement.

Other Servicing Issues

In addition to the principal changes outlined above, the CFPB is seeking comments on a number of other topics that impact borrowers and servicers’ practices, to include credit reporting, zombie mortgages, and successors in interest.

  • Credit Reporting: The CFPB notes in its proposal that credit reporting issues arise with borrowers undergoing loss mitigation, specifically with respect to the accuracy and consistency of the information that servicers furnish. Specifically, the CFPB calls out the examples of:
    • after a borrower and servicer have agreed to a loss mitigation option, and the borrower is performing under the terms of that option, the servicer furnishing information to a credit reporting agency indicating that the borrower is delinquent based on the loan terms in place prior to the loss mitigation option; and
    • a servicer inconsistently using, or failing to use, appropriate industry guidance when reporting tradeline data for borrowers affected by a natural disaster, especially with respect to reporting optional data or reporting data without appropriate context.

In light of these issues, the Bureau is requesting public comment about how it could ensure that servicers furnish accurate and consistent credit reporting information for borrowers in connection.  Specifically, the CFPB is soliciting comment on:

    • What servicer practices may result in the furnishing of inaccurate or inconsistent information about mortgages undergoing loss mitigation review?
    • What protocols or practices do servicers currently use to ensure that mortgages are reported accurately and consistently? Are there specific protocols or practices for ensuring that loans in forbearance, or affected by natural disasters, are reported accurately and consistently?
    • Would it be helpful to have a special code to flag all mortgages undergoing loss mitigation review in tradeline data?
    • What steps should the CFPB take to ensure that servicers furnish accurate and consistent tradeline data?
  • Zombie Mortgages: Over the past year, the CFPB has become increasingly vocal about the issues that “zombie” (i.e., dormant, subordinate-lien) mortgage debt may pose to consumers, opining that certain protections under TILA, RESPA, and the Mortgage Servicing Rules apply to the collection of such debt. To guide further action, the Bureau is requesting public comment on the prevalence of zombie mortgages, whether such mortgages are likely to cause consumer harm in the future, and what action the CFPB could take to protect borrowers.
  • Successors in Interest: The Bureau’s major amendments to the Mortgage Servicing Rules in 2016 included the addition of provisions relating to successors in interest (using the framework established by the Garn-St. Germain Depository Institutions Act of 1982). The CFPB notes in the introduction to the Proposed Rule that it continues to receive feedback on challenges these provisions pose – whether by restricting the ability of successors in interest to take advantage of the protections, or by unintentionally excluding certain categories of consumers from the definition of a successor in interest.  Accordingly, the Bureau is requesting comment, data, and information on the prevalence of issues relating to successors in interest, as well as comment on what additional actions it could take to better protect potential, confirmed, and prospective successors in interest.

Similarly, as part of the Proposed Rule the CFPB is considering updates to its commentary to Regulation X, particularly as it relates to a request for loss mitigation assistance received from a potential successor in interest prior to confirming that individual’s identity and ownership interest in the property, and to the application of the Proposed Rule’s foreclosure procedural safeguards.

Impact on “Small Servicers”

Important to note is that the requirements of the Proposed Rule would not apply to a “small servicer,” meaning an entity that:

  • Services (together with any affiliates) 5,000 or fewer mortgage loans, for all of which the servicer (or an affiliate) is the creditor or assignee;
  • Is a Housing Finance Agency (as defined in 24 C.F.F. § 266.5); or
  • Is a non-profit entity (i.e., a 501(c)(3)) that services 5,000 or fewer mortgage loans on behalf of associated non-profit entities, for all of which the servicer or associated entity is the creditor.

What Do I Need to Do?

Given that this represents the first widespread changes to the Mortgage Servicing Rules in eight years, the Proposed Rule could result in significant changes to industry practices – requiring investment of time and other resources as servicers consider the move toward implementing new requirements.  At the Proposed Rule stage – when the opportunity for public comment remains open – servicers should carefully review the Bureau’s proposal to consider how it would impact servicing practices, and whether they can offer public comment or data that would be beneficial to guiding the CFPB as it moves forward in implementing amendments to Regulation X.  Servicers should consider submitting a comment letter to ensure that the Bureau receives any necessary feedback on the Proposed Rule and its invitations for data and other information.

 

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.

Large Nonbank Ginnie Mae Issuers: Ginnie Mae Wants Your Recovery Plans

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What Happened?

Following the release of the Financial Stability Oversight Council (FSOC) Report on Nonbank Mortgage Servicing, Ginnie Mae announced in APM 24-08 that certain large nonbank Ginnie Mae Issuers will now be required to prepare and submit recovery plans to address the event of a material adverse change in business operations or failure.  Such issuers will also be required to attest to the content in the recovery plans every to two years.

Why Does it Matter?

To understand why it matters, it is important to consider some interesting statistics.  According to the recent report of FSOC (an interagency panel of regulators commissioned by the Dodd Frank Act to monitor financial stability) on nonbank mortgage servicing, the share of loans serviced by nonbank mortgage servicers for Ginnie Mae rose from 34 percent in 2014 to 83 percent in 2023.  For the last several annual reports, FSOC has highlighted the vulnerabilities of nonbank mortgage companies.  In its most recent report specific to nonbank mortgage servicing, FSOC has indicated that such concerns are becoming “more acute” because of government’s increasing exposure to nonbank mortgage companies, the strain on mortgage origination due to the high interest rate environment, and the fact that “vulnerabilities in mortgage origination can bleed into mortgage servicing.”  FSOC is particularly concerned with the ability of nonbank mortgage companies to carry out their responsibilities in times of stress and provides, in relevant part, that “[t]he federal government has an interest in addressing servicing risks due to . . . the direct responsibility for Ginnie Mae’s guarantee to bond investors.” FSOC encourages Congress to provide Ginnie Mae more tools to manage counterparty risk.  If and until that occurs, it should come as no surprise that Ginnie Mae is utilizing its existing tools for managing the failure of servicers (such as facilitating servicing transfers), by requiring its nonbank Issuers to document how they would proceed if an adverse event were to occur.

What Do I Need to Do?

First, it is important to determine if your company is subject to these new obligations.  Generally speaking, nonbank Ginnie Mae Issuers whose portfolios equal or exceed a remaining principal balance of $50 billion at the end of December 31, 2024 will be required to prepare and submit recovery plans to Ginnie Mae by no later than June 30, 2025. Of note, the requirements do not apply to bank holding companies, banks, wholly owned subsidiaries of bank holding companies that are consolidated for purposes of regulatory oversight, thrifts, savings and loan holding companies, and credit unions.

Second, it is important to start developing a plan which, at a high level, must include:

  • Business Operations Description: For business operations relevant to the Ginnie Mae MBS Program (i.e., single-family, multi-family, manufactured housing and HECM), the plan must provide a detailed description of the company’s corporate structure, identify the interconnections and interdependencies among the company and its key stakeholders, related financial entities, and critical operations of the core business. The plan must also identify major counterparties, to whom the company had pledged MBS collateral, and the locations of its servicing operations.
  • Information Systems: In the event that Ginnie Mae must complete a servicing transfer, it is requiring companies to provide a detailed inventory and description of all key management information systems and applications in servicing Ginnie Mae loans along with a mapping of such systems and a description of how ancillary systems feed into the core servicing system.
  • Recovery Planning: Companies will need to consider and respond to a series of questions including but not limited to, providing a general framework for the order in which the company’s assets would be liquidated in the event of a material adverse event, identifying whether funding has been set aside to continue operations for a certain period. Ginnie Mae also requires how intercompany services would continue under such circumstances and to provide excerpts of its business continuity plan relevant to this recovery planning exercise.
  • Current Documentation: Ginnie Mae requires the plan to identify senior management official who will serve as a point of contact and a vendor directory for material vendors.

While the deadline for submitting recovery plans to Ginnie Mae is June 30, 2025, it is not too early to start gathering all the stakeholders, calendaring the deadline, and starting the framework for a thoughtful plan.