Alston & Bird Consumer Finance Blog

Mortgage Servicing

CFPB Issues Warning to Mortgage Servicing Industry

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A&B ABstract: On April 1, 2021, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) issued a Compliance Bulletin and Policy Guidance (the “Bulletin”) on the Bureau’s supervision and enforcement priorities with regard to housing insecurity in light of heightened risks to consumers needing loss mitigation assistance once COVID-19 foreclosure moratoriums and forbearances end.  The Bulletin warns mortgage servicers to begin taking appropriate steps now to prevent “a wave of avoidable foreclosures” once borrowers begin exiting COVID-19 forbearance plans later this Fall, and also highlights the areas on which the CFPB will focus in assessing a mortgage servicer’s compliance with applicable consumer financial laws and regulations.

The Bulletin

The Bulletin warns mortgage servicers of the Bureau’s “commit[ment] to using its authorities, including its authority under Regulation X mortgage servicing requirements and under the Consumer Financial Protection Act” to ensure borrowers impacted by the COVID-19 pandemic “receive the benefits of critical legal protections and that avoidable foreclosures are avoided.”

Specifically, the Bureau highlighted two populations of borrowers as being at heightened risk of referral to foreclosure following the expiration of the foreclosure moratoriums if they do not resolve their delinquency or enter into a loss mitigation option, namely, borrowers in a COVID-19-related forbearance and delinquent borrowers who are not in forbearance programs.

As consumers near the end of their forbearance plans, the CFPB expects “an extraordinarily high volume of loans needing loss mitigation assistance at relatively the same time.” The Bureau specifically expressed its concern that some borrowers may not receive effective communication from their servicers and that some borrowers may be at an increased risk of not having their loss mitigation applications adequately processed. To that end, the Bureau plans to monitor servicer engagement with borrowers “at all stages in the process” and prioritize its oversight of mortgage servicers in deploying its enforcement and supervision resources over the next year.

Servicers are expected to plan for the anticipated increase in loans exiting forbearance programs and related loss mitigation applications, as well as applications from borrowers who are delinquent but not in forbearance. Specifically, the Bureau expects servicers to devote sufficient resources and staff to ensure they are able to clearly communicate with affected borrowers and effectively manage borrower requests for assistance in order to reduce foreclosures. To that end, the Bureau intends to assess servicers’ overall effectiveness in assisting consumers to manage loss mitigation, and other relevant factors, in using its discretion to address potential violations of Federal consumer financial law.

In light of the foregoing, the Bureau plans to focus its attention on how well servicers are:

  • Being proactive. Servicers should contact borrowers in forbearance before the end of the forbearance period, so they have time to apply for help.
  • Working with borrowers. Servicers should work to ensure borrowers have all necessary information and should help borrowers in obtaining documents and other information needed to evaluate the borrowers for assistance.
  • Addressing language access. The CFPB will look carefully at how servicers manage communications with borrowers with limited English proficiency (LEP) and maintain compliance with the Equal Credit Opportunity Act (ECOA) and other laws. It is worth noting that the Bureau issued a notice in January 2021 encouraging financial institutions to better serve LEP borrowers in a language other than English and providing key considerations and guidelines.
  • Evaluating income fairly. Where servicers use income in determining eligibility for loss mitigation options, servicers should evaluate borrowers’ income from public assistance, child-support, alimony or other sources in accordance with the ECOA’s anti-discrimination protections.
  • Handling inquiries promptly. The CFPB will closely examine servicer conduct where hold times are longer than industry averages.
  • Preventing avoidable foreclosures. The CFPB will expect servicers to comply with foreclosure restrictions in Regulation X and other federal and state restrictions in order to ensure that all homeowners have an opportunity to save their homes before foreclosure is initiated.

Takeaway

As more and more borrowers begin to near the end of their COVID-19-related forbearance plans, and as applicable foreclosure moratoriums near their anticipated expiration dates, mortgage servicers should consider evaluating their mortgage servicing operations, including applicable policies, procedures, controls, staffing and other resources, to ensure impacted loans are handled in accordance with applicable Federal and state servicing laws and regulations.

Consolidated Appropriations Act Includes Temporary Provisions That May Affect Servicers

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Among the myriad provisions of H.R. 133, the Consolidated Appropriations Act, 2021, is Division FF, Title X, Section 1001, of which mortgage holders and servicers should take note because it may affect activities with respect to borrowers in bankruptcy.  These temporary provisions expire December 27, 2021.

First, Section 1001 provides that a debtor under a Chapter 13 plan may seek (and a court may grant) a discharge if (1) the debtor has missed three or fewer mortgage payments on or after March 13, 2020 because of a “material financial hardship due, directly or indirectly, by the coronavirus disease 2019 COVID-19) pandemic”; or (2) the debtor’s plan provides for the curing of a default and maintenance of payments, and the debtor has entered into a loan forbearance or modification agreement, and. Importantly, unpaid mortgage payments are not discharged if the debtor is granted a discharge, and thus remain owed to the mortgage holder or servicer.

Second, Section 1001 provides that a consumer cannot be denied a CARES Act forbearance or other applicable CARES Act relief if they are a debtor in a pending bankruptcy case.

Third, Section 1001 permits servicers of federally backed mortgage loans to file supplemental proofs of claim for the amounts forborne under a CARES Act forbearance, provided that they are filed no later than 120 days after the expiration of the forbearance. Mortgage holders or servicers may also move to modify the debtor’s bankruptcy plan to provide for the supplemental CARES forbearance claim within thirty days after filing the supplemental claim.

Takeaway

Servicers may wish to consult counsel to determine whether these provisions will affect 2021 operations.

DOJ Trustee Program Settles with Servicers

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A&B ABstract:

On December 7, the Department of Justice U.S. Trustee Program (“USTP”) announced that it has entered into agreements with three servicers to address mortgage servicing deficiencies impacting borrowers in bankruptcy.

Issues

Addressing allegations that the entities failed to comply with the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure, the agreements reflect issues with the servicing of mortgages for more than 60,000 borrowers in bankruptcy dating back to 2011.

According to the USTP, the issues included application of payments, inaccurate, missing, and untimely bankruptcy filings; and delayed escrow statements.  Specifically, the USTP alleges that:

  • Two of the servicers failed to run annual escrow analyses for borrowers in bankruptcy;
  • Two of the entities failed to accurately apply payments in bankruptcy cases;
  • One servicer failed to file timely and accurate proofs of claim in bankruptcy cases; and
  • All three entities failed to: (1) file timely and accurate notices of changes to mortgage payments for borrowers in bankruptcy; (2) file timely and accurate notices of fees assessed during bankruptcy cases; and (3) provide an accurate final accounting of payments made by borrowers during bankruptcy cases.

Settlement Terms

To resolve these issues, the USTP entered into memoranda of understanding with two of the servicers, and a letter of acknowledgment with the third.  Altogether, the servicers will pay more than $74 million in credits and refunds; additionally, one entity will waive approximately $43 million in fees and charges.

Takeaway

While the issue of servicing mortgages for borrowers in bankruptcy received significant attention with the CFPB’s most recent revisions of the Mortgage Servicing Rules, the USTP’s settlements serve as a reminder that additional obligations arise under the Bankruptcy Code and the Federal Rules of Bankruptcy Procedures.  Servicers should review their practices against the USTP’s allegations to ensure that they are compliant with all applicable provisions.

CSBS Proposes Prudential Standards for Servicers

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A&B Abstract: The Conference of State Bank Supervisors (“CSBS”) proposed regulatory prudential standards (the “Standards”) to develop a consistent regulatory structure of nonbank mortgage servicers.  Comments on all aspects of the Standards are encouraged by December 31, 2020.

Background:

Since the financial crisis, the rapid growth of mortgage bank mortgage servicers has led regulators to call for the enhanced oversight of such entities.  The Financial Stability Oversight Council (charged under the Dodd-Frank Act with identifying risk to the stability of the U.S. markets) recommended in its 2014 and 2019 annual reports that state regulators work collaboratively to develop prudential and corporate governance standards. Earlier this year, the Federal Housing Finance Agency (FHFA) proposed new financial eligibility requirement for nonbank servicers doing business with Fannie Mae and Freddie Mac.

In 2015, state regulators working through the Mortgage Servicing Rights Task Force proposed baseline and enhanced prudential regulatory standards (including capital and net worth requirements) for nonbank mortgage servicers.  Although those standards were not finalized, several states – including Maryland, Oregon and Washington –imposed new net worth requirements for nonbank servicers.

The CSBS’s newly released  proposed standards update the 2015 proposal “to reflect a changed nonbank mortgage market, continued significant growth and complexity and an evolved understanding of state regulators concerning the need for supervisory standards.” The stated goals of the Standards are to: (i) provide better protections for borrowers, investors, and other stakeholders in the occurrence of a stress event, which could result in borrower harm; (ii) enhance regulatory oversight and market discipline; and (iii) improve transparency, accountability, risk management, and corporate governance standards.

Baseline Prudential Standards vs. Enhanced Prudential Standards:

The Standards include proposed baseline prudential standards (“Baseline Standards”) and enhanced prudential standards (“Enhanced Standards”).  The Standards apply to state-licensed nonbank mortgage servicers and investors, including MSR investors, originator servicers, monoline servicers, subservicers and owners of whole loans.  The Standards are not intended to apply to servicers solely owning and conducting reverse mortgage servicing and they -have limited applicability to entities that only perform subservicing for others.

The Baseline Standards, as proposed, will cover eight areas:

  • Capital
  • Liquidity
  • Risk management
  • Data standards and integrity
  • Data protection (including cyber risk)
  • Corporate governance
  • Servicing transfer requirements
  • Change of control requirements

Notably, CSBS and state regulators intend to align supervisory approaches wherever possible, and the proposed standards are intended to do so with the calculations for capital and liquidity under FHFA eligibility requirements but apply the calculations to the entire owned servicing portfolio, including whole loans. To prevent double counting of MRS, the Baseline Standard’s capital and liquidity requirements differentiates “owned” servicing and servicing for others

The Enhanced Standards, as proposed, cover four areas:

  • Capital
  • Liquidity
  • Stress testing and
  • Living will/recovery and resolution planning

The Enhanced Standards are intended to apply to  Complex Servicers,  companies servicing whole loans plus mortgage servicing rights (“MSR(s)”) totaling the lesser of $100 billion or representing at least 2.5% total market share based on Mortgage Call Report quarterly data of licensed nonbank owned whole loans and MSRs. State regulators may determine that specific servicers, including subservicers only, that do not meet the definition of Complex Servicers are subject to the Enhanced Standards based on their unique risk profile, growth, market importance, or financial condition of the institution.

Request for Feedback:

While the CSBS is seeing comments on all aspects of the Standards, they specifically seek feedback on the following questions:

 General
  • Is the need for state prudential standards sufficiently established?
  • Do any of the standards threaten the viability of a servicer or a specific subsector within the industry?
  • What is a reasonable transition period to implement the standards?
  • Are there specific standards that would require additional time to implement?
  • What effect will the enhanced standards have on the warehouse and advance facility borrowing contracts/capacity of large servicers?
Coverage
  • Is a scaled approach appropriate where all servicers are subject to Baseline Standards and Complex Servicers only subject to Enhanced Standards?
  • Nonbank servicer coverage in the proposal is intentionally unspecific. What should be the appropriate coverage triggers? Should reverse mortgage servicers be included in scope?
Capital and Liquidity
  • Are the capital and liquidity aspects of the proposal alignment with existing and future FHFA Seller/Servicer requirements the right approach?
  • Should there be an alternative net worth calculation method?
  • State supervisors hold jurisdiction over a nonbank servicer’s entire portfolio. Should the FHFA calculations to all owned servicing the appropriate approach?
  • Do you agree with the Standard’s definition for the two types of liquidity needs (servicing liquidity for the direct performance of servicing and operating liquidity for general operations of the organization)?
  • Do you agree that allowable assets for liquidity should align with FHFA’s 2019 Servicer Eligibility 2.0 Proposal?
  • Do the risk management standards appropriately capture the risks faced by nonbank mortgage servicers?
Corporate Governance
  • Should all covered servicers be expected to establish a risk management program under a board of directors scaled to the complexity of the organization?
  • Is it appropriate for the data standards to incorporate the CFPB’s Mortgage Servicing Rules Standards or is there a different alternative that should be considered?
  • Are the data protection standards appropriate for the data risks inherent in nonbank mortgage servicers?
  • Are the Ginnie Mae audit standards the appropriate standards for corporate governance under the Standards?
  • Should all covered nonbank mortgage servicers be required to have a full financial statement audit conducted by an independent certified public accountant?
  • Is it appropriate for the servicing transfer requirements to rely on existing CFPB and FHFA transfer requirements?
  • For change of ownership and contract, do the Standards reflect the correct number of days for notification (30 business days) and appropriate ownership percent trigger (10% or more)?

Takeaways:

Some have called for the imposition of federal capital and liquidity standards.  The states, on the other hand, believe that they should be the primary prudential regulator over nonbank mortgage servicers and have developed the Standards to comprehensively cover safety and soundness and consumer protection concerns. While the Standards are very detailed in some areas, they are vague in others such as coverage and implementation.  Consistent implementation, interpretation, and enforcement of the standards will be imperative for the state’s to achieve their objectives.

Maryland Issues Executive Order Restricting Foreclosure Actions and Prohibiting Evictions During COVID-19 Emergency

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A&B ABstract: Maryland’s Governor has issued an Executive Order providing that until the COVID-19 state of emergency is terminated: (1) foreclosure sales will only be valid if the servicer had notified the borrower of their rights to request a forbearance, and (2) residential and commercial evictions are prohibited if the tenant can show they suffered a “Substantial Loss of Income.” Similar to Section 4022 of the CARES Act, this Executive Order grants borrowers a right to request a forbearance if they are experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency. Additionally, until January 4, 2021, the Maryland Commissioner of Financial Regulation must discontinue acceptance of Notices of Intent to Foreclose, which effectively prohibits new foreclosure initiations until that date. Moreover, effective January 4, 2021 and until the COVID-19 state of emergency is terminated, Notices of Foreclosure will only be accepted if the lender or servicer certifies that they notified the borrower of their right to request a forbearance.

 

On October 16, 2020, the Governor of Maryland issued an Executive Order (No. 20-10-16-01), which amends and restates a previous Executive Order providing certain relief to tenants and homeowners impacted by the COVID-19 pandemic. This Executive order imposes restrictions on servicers’ ability to conduct foreclosure proceedings, and prohibits evictions where the tenant can show a “substantial loss of income,” during the COVID-19 state of emergency.

Restrictions on Residential Foreclosures

The Executive Order provides that “until the state of emergency is terminated and the catastrophic health emergency is rescinded,” foreclosures sales of “Residential Property” (defined as “real property improved by four or fewer single family dwelling units that are designed principally and are intended for human habitation”) under Maryland’s Real Property law will not be considered a valid transfer of title in the property unless certain requirements are met, depending on the type of loan secured by the property:

  • With respect to a property securing a Federal Mortgage Loan:
    1. at least 30 days prior to sending a notice of intent to foreclose to a borrower, the servicer must send a written notice to the borrower stating the borrower’s right to request a forbearance on the loan under Section 4022(b) of the CARES Act; and
    2. the servicer must comply with all of its obligations with respect to the loan owed to the borrower under the CARES Act or otherwise imposed by the federal government or a government sponsored enterprise.
  • With respect to a property securing a Non-Federal Mortgage Loan:
    1. the servicer must have notified the borrower, in writing, that if the borrower is experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency, the borrower may request a forbearance on the loan, regardless of delinquency status, for a period up to 180 days, which may be extended for an additional period up to 180 days at the request of the borrower;
    2. if the borrower did request a forbearance on the loan, the servicer must have provided such forbearance without requiring the borrower to provide additional documentation other than the borrower’s attestation to a financial hardship caused by COVID-19, and without requiring any additional fees, penalties, or interest; and
    3. during the forbearance period, the servicer must not have accrued on the borrower’s account any fees, penalties, or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the loan.

Notably, as discussed in the next section, these requirements appear applicable only to foreclosure proceedings already in progress prior to January 4, 2021 (because the Executive Order effectively prohibits the initiation of new foreclosure actions until that date), and to those initiated between January 4, 2021 and the termination of the COVID-19 state of emergency.

Directives to the Maryland Commissioner of Financial Regulation

The Executive Order also directs Maryland’s Commissioner of Financial Regulation to alter certain practices regarding its processing of residential foreclosures.

Specifically, as of the date of the Executive Order, and until January 4, 2021, the Commissioner is directed to suspend the operation of the Commissioner’s Notice of Intent to Foreclose Electronic System, and to discontinue acceptance of Notices of Intent to Foreclose. This effectively imposes a moratorium on the initiation of new foreclosure actions. Under Section 7-105.1(c) of the Real Property Article of the Maryland Code, as the first step in the foreclosure process, a Notice of Intent to Foreclose is required to be sent to the borrower at least 45 days before an action to foreclose a mortgage can be filed, and a copy of that notice must be submitted to the Commissioner within 5 business days thereafter via the Commissioner’s Notice of Intent to Foreclose Electronic System. (COMAR 09.03.12.02(E)). Citing the Executive Order, the Notice of Intent to Foreclose Electronic System website currently states that “no new [Notice of Intent] submissions will be accepted until January 4, 2021.” As such, this directive effectively prohibits the initiation of new foreclosure proceedings until December 28, 2020 (the earliest date a Notice of Intent can be mailed to the borrower and then submitted to the Commissioner within 5 business days).

Moreover, the Executive Order provides that effective January 4, 2021, and until the state of emergency is terminated and the catastrophic health emergency is rescinded, when a servicer submits to the Commissioner the Notice of Foreclosure required under Section 7-105.2(b) of the Real Property Article of the Maryland Code, the Commissioner must obtain a “certification” from the servicer or secured party that the servicer complied with the Executive Order’s requirement that the borrower be informed of their right to request a forbearance, as discussed above.

Prohibition on Residential and Commercial Evictions

The Executive Order provides that until the state of emergency is terminated and the catastrophic health emergency is rescinded, Maryland courts shall not effect any evictions by giving any judgment for possession or repossession on residential, commercial, or industrial real property, if the tenant can demonstrate to the court, through documentation or other objectively verifiable means, that the tenant suffered a “Substantial Loss of Income.”

The Executive Order defines “Substantial Loss of Income” as follows:

  1. with respect to an individual, a substantial loss of income resulting from COVID-19 or the related proclamation of a state of emergency and catastrophic health emergency, including, without limitation, due to job loss, reduction in compensated hours of work, closure of place of employment, or the need to miss work to care for a home-bound school-age child; and
  2. with respect to an entity, a substantial loss of income resulting from COVID-19 or the related proclamation of a state of emergency and catastrophic health emergency, including, without limitation, due to lost or reduced business, required closure, or temporary or permanent loss of employees.

This prohibition applies to evictions for failure to pay rent under Section 8-401 of the Real Property Article of the Maryland Code, as well as evictions based on a tenant’s breach of the lease under Section 8-402.1 of the Real Property Article of the Maryland Code.

Takeaways

Notably, the forbearances that servicers are required to offer with respect to non-federally backed loans under this Executive Order present forbearance terms and conditions that substantially parallel those offered for federally backed loans under the CARES Act. It is possible that other states will follow suit with Maryland and create similar state mandates effectively applying to non-federally backed mortgages the forbearance rights available for federally backed mortgages under the CARES Act, in addition to state-mandated foreclosure restrictions. We will continue to monitor for such state requirements.