Alston & Bird Consumer Finance Blog

Mortgage Servicing

The CFPB is Sending Mixed Messages on COVID-19 Flexibility

By

A&B ABstract: The CFPB’s inconsistent statements about the need for flexibility to address the pandemic suggest a deeper game afoot.

 CFPB warns that continued COVID flexibility for financial institutions is not prudent…

On March 31, 2021, the CFPB announced it would be rescinding seven policy statements issued last year that provided financial institutions with flexibilities regarding certain regulatory filings or compliance with consumer financial laws and regulations due to the COVID-19 pandemic. One of the rescinded statements, for example, encouraged financial institutions to “work constructively with borrowers and other customers affected by COVID-19 to meet their financial needs” and to that end, “when conducting examinations and other supervisory activities and in determining whether to take enforcement action, the Bureau will consider the circumstances that entities may face as a result of the COVID-19 pandemic and will be sensitive to good-faith efforts demonstrably designed to assist consumers.”

In explaining the rescissions, Acting CFPB Director Uejio reasoned: “Because many financial institutions have developed more robust remote capabilities and demonstrated improved operations, it is no longer prudent to maintain these flexibilities.” Accordingly, the CFPB provided notice that it “intends to exercise the full scope of the supervisory and enforcement authority provided under the Dodd-Frank Act.”

To further drive home its point, on April 1, 2021, the CFPB issued a press release and compliance bulletin warning mortgage servicers that “unprepared is unacceptable” with regard to the treatment of mortgage borrowers exiting extended forbearances this fall. The CFPB stated it is “committed to using its authorities, including its authority under Regulation X mortgage servicing requirements and under the Consumer Financial Protection Act (CFPA), to ensure that homeowners facing the ongoing economic impact of the Coronavirus Disease (COVID-19) national emergency receive the benefits of critical legal protections and that avoidable foreclosures are avoided.”

…Except when it is!

On March 2, 2021, the CFPB issued a notice of proposed rulemaking (NPRM) to delay the mandatory compliance date of the General Qualified Mortgage (QM) final rule from July 1, 2021 to October 1, 2022. The reason cited by the CFPB for the compliance delay is the “need to provide maximum flexibility [to financial institutions] to address the effects of the pandemic.” In particular, the CFPB’s proposal states:

“The Bureau is concerned that the potential impact of the COVID-19 pandemic on the mortgage market may continue for longer than anticipated at the time the Bureau issued the General QM Final Rule, and so could warrant additional flexibility in the QM market to ensure creditors are able to accommodate struggling consumers.”

Additionally, on April 7, 2021, the CFPB proposed to delay the effective date of two recent debt collection rules by sixty days, from November 30, 2021 until January 29, 2022. The reason cited by the CFPB for its proposed delay is “to give affected parties more time to comply due to the ongoing COVID-19 pandemic.” In particular, the CFPB’s proposal states:

“Since the Debt Collection Final Rules were published, the global COVID-19 pandemic has continued to cause widespread societal disruption, with effects extending into 2021. In light of that disruption, the Bureau believes that providing additional time for stakeholders to review and, if applicable, to implement the final rules may be warranted. The Bureau believes that extending the rules’ effective date by 60 days, to January 29, 2022, may provide stakeholders with sufficient time for review and implementation.”

What is really going on?

 Both of the CFPB’s delay NPRMs are curious. With respect to the QM delay proposal, a broad coalition of both housing and mortgage industry and consumer and civil rights groups files a joint comment letter stating that the recent enhancements to the General QM definition will replace loans that were designated QM under the temporary GSE Patch, and as a result, the organizations do not believe that extending the July 1 mandatory compliance date is necessary. And as our colleague Stephen Ornstein explained, recent FHFA actions will effectively sunset the GSE Patch on July 1 with or without the CFPB taking action. Further, with respect to the debt collection delay proposal, it is unlikely that 60 extra days before the rules take effect will make any appreciable difference to most market participants, considering that they were already given a full year to implement the rules, and they still won’t take effect for seven months.

The CFPB clearly has a strong desire to revisit both the underlying QM and debt collection final rules issued last year. For instance, as early as February 4, 2021, Acting Director Uejio stated that the CFPB would “[e]xplore options for preserving the status quo with respect to QM and debt collection rules.” And Diane Thompson, the Biden Administration political appointee now overseeing CFPB rulemaking efforts, publicly declared her hatred for the CFPB’s new General QM rule. If the CFPB does revisit these rules, it makes sense to do so soon; completing new rulemakings before the old ones take effect or require compliance could provide the CFPB a significant advantage in framing its mandatory Section 1022 cost-benefit analysis, depending upon the economic baseline established for analyzing the effects of its proposals. However, delaying rules simply for the purpose of changing them in light of the policy preferences of an incoming administration can be viewed skeptically by reviewing courts, since such actions tend to undermine the purposes of the Administrative Procedure Act. Perhaps that is the reason why the CFPB is disclaiming its plans to revisit the underlying rules in its delay NPRMs and, contrary to its own recent policy pronouncements, is relying instead upon the need for institutional flexibility to deal with the pandemic in the limited context of these two rules alone. Given the time constraints involved, the CFPB can be expected to show its full hand and propose changes to the QM and debt collection rules soon after it finalizes its associated delay rules.

CFPB Issues Warning to Mortgage Servicing Industry

By ,

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

By

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

By

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

By

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.