Alston & Bird Consumer Finance Blog

Mortgage Loans

VA Issues Guidance on Processing Assumptions with Secondary Financing

By

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.

Consumer Finance State Roundup

By

The latest edition of the Consumer Finance State Roundup highlights three recently enacted measures of potential interest from California, Missouri, and North Carolina:

  • California: Effective upon approval by Governor Gavin Newsom on July 18, Assembly Bill 295 amends provisions of the California Civil Code applicable to mortgages. Among other changes, first, the measure amends Section 2924(b) to clarify that when responding to a request for payoff or reinstatement information, a trustee is not liable for good faith error resulting from reliance on information provided in good faith by the beneficiary, or subject to the provisions of the Rosenthal Fair Debt Collection Practices Act. Second, the measure amends Section 2924c to allow a trustee to recover reasonable costs and expenses that “will be incurred as a direct result of the payment being tendered,” instead of limiting recovery to expenses actually incurred.  Third, the measure amends Section 2924m, which relates to the sale of tenant-occupied residential property, to clarify that if the winning bidder at a sale is not required to submit an affidavit or declaration regarding eligibility to bid, the trustee must attach as an exhibit to the trustee’s deed a statement that no such affidavit or declaration is required, and that the lack thereof does not preclude recording of the deed or invalidate the transfer of title pursuant to the trustee’s deed.Finally, the measure amends Section 3273.10, under the COVID-19 Small Landlord and Homeowner Relief Act, to clarify that the requirement for the mortgage servicer to provide a notice as prescribed by Section 2923.5(b) after denial of a forbearance applies only to a request made between August 30, 2020, and December 1, 2021.
  • Missouri: Effective August 28, 2024, Senate Bill 1359 enacts the “Money Transmission Modernization Act of 2024” (“Act,” Mo. Rev. Stat. §§ 361.900 to 361.1035) and the “Commercial Financing Disclosure Law” (“Law,” Mo. Rev. Stat. 427.300).First, the Act replaces Missouri’s existing money transmission laws and requires the licensing of persons engaged in money transmission (e.g., selling or issuing stored value, or receiving money for transmission from a person located in the state).  The Act sets forth relating regulatory processes such as license application requirements, licensee reporting obligations, compliance management system requirements (for supervision of delegates), and the relationship between the Act’s provisions and federal law.Second, the Law addresses obligations applicable in connection with a “commercial financing transaction” meaning “any commercial loan, accounts receivable purchase transaction, commercial open-end credit plan or each to the extent the transaction is a business purpose transaction.”  The Law requires a provider of such transaction to provide a disclosure of the terms prior to or at consummation of the transaction that includes, among other information, the total amount of funds provided to the business, the total amount of payments that will be due to the provider, and the manner, frequency, and amount of each payment.  Among others, the Law does not apply to: (a) a depository institution providing commercial financing; or (b) a commercial financing transaction that is secured by real property, a lease, or a purchase money obligation that is incurred as all or part of the price of the collateral (or for value given to enable the business to acquire rights in or the use of the collateral, if the collateral is so used).
  • North Carolina: Effective October 1, 2024, Senate Bill 319 (2024 N. C. Sess. Laws 29) amends provisions of the North Carolina General Statutes relating to powers of sale.  First, the measure amends Section 45-21.4 to permit a sale pursuant to a power of sale in a mortgage or deed of trust to occur at any public location within the county where the land is situated (or, for properties located in more than one county, in one of the counties in which the land is situated) as an alternative to the county courthouse. If permitted by the mortgage or deed of trust, the mortgagee or trustee may designate the alternative location; if the instrument does not contain such authority for the mortgagee or trustee, the clerk of the county superior court may do so.  Second, the measure amends Section 45-21.23, which relates to time of sale, to require a sale to begin no later than three hours (as opposed to one hour, under existing law) after the designated start time in the notice of sale, unless a delay occurs by other sales held at the same place.  Third, the measure adds new Section 45-21.25A establishing the procedure for placing remote bids at foreclosure sales.

CFPB and Other Federal Agencies Finally Adopt AVM Rule

By ,

What Happened?

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

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

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

What AVMs does the Rule Cover?

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

Why Is It Important?

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

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

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

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

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

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

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

Rule Applicability

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

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

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

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

What To Do Now?

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

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

HUD Issues Guidance on Appraisal Reviews and Reconsiderations of Value

By

What Happened?

Continuing its focus on appraisal bias, the U.S. Department of Housing and Urban Development (“HUD”) issued new guidance to Federal Housing Administration (“FHA”) mortgagees regarding appraisal reviews and reconsiderations of value (“ROVs”).  On May 1, HUD issued Mortgagee Letter 2024-07 (the “Letter”), announcing updates to the FHA Single Family Housing Policy Handbook (Handbook 4000.1), finalizing a proposal that outlines when a borrower may request an ROV and how the lender must respond.  The Mortgagee Letter includes substantially identical provisions applicable to FHA-insured forward and HECM (reverse) mortgage loans.

Why Is It Important?

Combatting appraisal bias has been a federal government priority since the 2021 announcement of the Interagency Task Force on Property Appraisal and Valuation Equity (“PAVE”).  As part of the PAVE efforts (as we previously reported), HUD published a draft version of the Letter (Borrower Request for Review of Appraisal Results) for public comment.  In the proposal, HUD sought comment on (among other issues) when material deficiencies in the appraisal process may merit a second appraisal and/or permit a borrower to request an ROV.  The Mortgagee Letter finalizes that proposed guidance, incorporating feedback received.

First, HUD has amended the criteria for determining whether a deficiency in an appraisal is “material.” In addition to having “a direct impact on value and marketability,” a material deficiency may be one that “indicates a potential violation of fair housing laws or professional standards related to nondiscrimination” (such as the USPAP Ethics Rule).  As an example of such deficiency, the amended Handbook will include “statements related to characteristics of a protected class,” unless the consideration is permitted by fair housing laws.

Second, HUD has clarified that when the nature of a material deficiency is such that the appraiser cannot resolve it, the underwriter may forgo communication with the appraiser before ordering a second appraisal.  If a mortgagee orders a second appraisal because of material deficiencies, it must report the deficient appraisal to the relevant state regulator (the appraisal board or equivalent).

Third, HUD has updated its requirements for appraisal review as they relate to the criteria for determining the acceptability of a property.  As in its proposed version, the Letter requires a mortgagee to ensure that its underwriters “review the appraisal and determine that it is complete, accurate, and provides a credible analysis of the marketability and value of the Property.”  The mortgagee must also ensure that as part of such review, the underwriter is able to identify appraisal deficiencies, including discriminatory practices.  The underwriter must remediate such deficiencies by: (a) requesting that the appraiser provide a correction, explanation, or substantiation (as appropriate); (b) requesting an ROV; and/or (c) ordering a second appraisal.

Fourth, HUD has added ROV requirements to its general property acceptability criteria.  When communicating with an appraiser regarding an ROV, the Letter requires the underwriter to: (a) include a description of the areas in the appraisal report and the additional information that require a response from the appraiser; (b) provide, as available, detailed information, data, or relevant comparables; (c) only include comparables that are relevant as of the appraisal’s effective date; and (d) include a maximum of five alternate comparables.  The appraiser must include his or her response in a revised version of the appraisal, and the mortgagee may not charge the borrower for costs associated with the ROV process.

Further, the Letter requires each mortgagee to establish a process for a borrower-initiated ROV request (which an underwriter must assess for applicability, and relevance and appropriateness of information, before communicating to the appraiser).  The Letter requires a mortgagee’s process for borrower-initiated ROVs to include: (a) the provision of a disclosure regarding the process, both at application and upon delivery of the appraisal report to the borrower; (b) specification in such disclosure of the process for submitting an ROV request, including any requirements for or limitations on supporting information; and (c) the establishment of protocols for communication with the borrower regarding the request throughout the ROV process.

Finally, the Letter requires a mortgagee to include in its Quality Control Plan standards for both the appraisal review and the ROV process.

What Do I Need to Do?

Mortgagees of FHA-insured loans have until September 2 to implement the Letter’s requirements (for FHA case numbers assigned on or after that date). However, given that early adoption is permitted, lenders should review the new requirements against their current practices to ensure these requirements are appropriately incorporated into a mortgagee’s policies and procedures and its vendor management oversight program (to the extent the mortgagee utilizes appraisal management companies).

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

By

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.