Alston & Bird Consumer Finance Blog

Mortgage Loans

Fannie Mae Updates COVID-19 FAQ’s Related to Servicing

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A&B ABstract: On June 30, Fannie Mae updated its “COVID-19 Frequently Asked Questions” as part of an ongoing effort to provide guidance to lenders and servicers in connection with the ongoing COVID-19 national emergency.

The updates address retention workout options and incentive fees, among other topics.

Foreclosure Suspension

Fannie Mae has updated Question 3 to reflect the extension of the foreclosure moratorium through August 31, 2020, in accordance with Lender Letter 2020-02, as well as the COVID-19 payment deferral retention workout option (recently announced in Lender Letter 2020-07).  The payment deferral option would permit a forbearance of up to 12 months.

Payment Deferral

Fannie Mae has added new Question 30 to discuss the requirements for the new COVID-19 payment deferral option, including the application of additional principal payments.

The question clarifies that a servicer  must apply curtailment to the interest-bearing unpaid principal balance (UPB) if the curtailment is less than the interest-bearing UPB.  If a principal curtailment is greater than or equal to the interest-bearing UPB, the servicer must apply the curtailment to the non-interest-bearing balance, if any; and then to the interest-bearing UPB.

Claims

 Fannie Mae has added new Question 30 to clarify that a servicer can submit request for expense reimbursement through a 571 claim as soon as an expense is incurred. Although Fannie Mae does not limit the number of supplemental claims, it recommends that servicers consult the Servicing Guide E-5-01, Requesting Reimbursement for Expenses prior to submitting any request for expense reimbursement.

Incentive Fees

Addressing incentive fees, Fannie Mae has added new Questions 39 and 40.

 Question 39 addresses the eligibility of a servicer to receive incentive fees if it receives a mortgage loan from a transferor servicer.  Because incentive fees are tied to the mortgage loan (rather than the servicer), if the transferor servicer has met the cumulative cap for receiving such fees, the transferee is not eligible to receive any additional incentive fees.

Question 40 makes clear that the cap on incentive fees does not apply in connection with a servicer’s completion of a Fannie Mae Extend Modification for Disaster Relief or a Fannie Mae Cap and Extend Modification for Disaster Relief.

Takeaway

These updates to the FAQs reflect Fannie Mae’s ongoing efforts to provide needed clarification and guidance to servicers in light of the ongoing COVID-19 pandemic.  Servicers should continue to monitor Fannie Mae guidance for further updates.

New York Laws Require Forbearance for Private Mortgage Loans During COVID Emergency

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A&B ABstract

On June 17, 2020, New York Governor Andrew Cuomo signed into law two measures, effective immediately, providing for mortgage forbearances for privately backed residential mortgage loans during the COVID-19 emergency. Senate Bill 8243 (2020 N. Y. Laws 112) amends the N. Y. Banking Law by adding new Section 9-x, “Mortgage Forbearance.”  Senate Bill 8428 (2020 N. Y. Laws 126) relates to state disaster emergency and, among other provisions, amends Section 9-x as added by Senate Bill 8243. These measures apply during the covered period, beginning on March 7, 2020 and ending when no Executive Order issued in response to the COVID-19 pandemic relating to restricting public or private businesses or required postponement or cancellation of all non-essential gatherings of individuals apply in the county of the borrower’s residence.

Mortgage Forbearance

New Section 9-x of the Banking Law imposes new requirements on any New York regulated banking organization, including banks, trust companies, private bankers, savings banks, savings and loan associations, credit unions, and investment companies) and regulated mortgage servicers  (collectively, “regulated entities”)subject to supervision by the New York Department of Financial Services (the “Department”).

First, regulated entities must make applications for forbearance widely available to any qualified mortgagor who, during the covered period is in arrears or on a trial period plan or who has applied for loss mitigation. A qualified mortgagor is a natural person who (i) demonstrates financial hardship as result of COVID-19 during the covered period, (ii) whose loan is from or serviced by a regulated entity, and (iii) whose loan meets the following criteria: the loan is incurred for personal, family or household purposes, s secured by mortgage on a 1-4 family property located in New York, and is the borrower’s primary residence.  Forward and reverse mortgage as well as co-operative units are within scope.

Second, regulated entities must grant forbearance of all monthly payments due on a New York residential mortgage secured by a qualified mortgagor’s primary residence for up to 180 days with the option to extend the forbearance for up to an additional 180 days provided the borrower continues to demonstrate a financial hardship. Such forbearances may be backdated to March 7, 2020.

Third, any mortgage forbearance granted by a regulated entity to a qualified mortgagor as a result of a financial hardship pursuant to Executive Order 202.9 the regulation promulgated thereunder (3 NYCRR Part 119) or Section 9-x of the Banking Law subject to post forbearance repayment requirements. Specifically, the qualified mortgagor shall have the following four options:

  • Extend the term of the loan for the length of the period of forbearance with no additional interest or late fees or penalties incurred on the forborne payment
  • Have the arrears accumulated during the forbearance period payable on a monthly basis for the remaining term of the loan without being subject to penalties or late fees as a result of the forbearance
  • Negotiate a loan modification or any other option that meets the changed circumstances of the borrower, or
  • If the borrower and regulated entity cannot reasonably agree on a mutually acceptable loan modification, the regulated entity must offer to defer arrears accumulated during the forbearance period as a non-interest bearing balloon loan payable at the maturity of the loan, or at the time the loan is satisfied through a refinance or sale of the property.  Late fees accumulated as a result of the forbearance must be waived.

The measure prohibits a regulated entity from reporting negatively to any credit bureau that the borrower has exercised any of the four post forbearance options

Significantly, Section 9-x of the Banking Law does not apply to any mortgage loan made, insured, purchased or securitized by: (i) any agency or instrumentality of the United States (such as FHA, VA or USDA); (ii) any government sponsored enterprise  (such as Fannie Mae or Freddie Mac); (iii) a federal home loan bank;  (iv) a corporate governmental  agency of the state constituted as a political subdivision and public benefit corporation; or (iv) “the rights and obligations of any lender, issuer, servicer or trustee of such obligations, including servicers for” Ginnie Mae.

Privately backed mortgage loans are also subject to New York Executive Order 202.9, which modified Subdivision two of Section 39 of the Banking Law to provide that it is an unsafe and unsound business practice for any financial institution subject to the jurisdiction of the Department to, in response to the COVID-19 pandemic, fail to grant a forbearance to any person or business who has a financial hardship as a result of the COVID-19 pandemic for a period of ninety days. The Executive Order also directed the Superintendent of the Department to promulgate emergency regulations to require that the application for such forbearance be made widely available for consumers, and such application shall be granted in all reasonable and prudent circumstances solely for the period of such emergency. These regulations are set forth in new Part 119 to 3 NYCCR. The covered period of Executive Order 202.9 was extended by subsequent executive order to be valid through July 6, 2020, unless further extended.

Capital and Liquidity

New Section 9-x of the Banking Law provides that the obligation to grant the forbearance relief required by Section 9-x is subject to the regulated entity “having sufficient capital and liquidity to meet its obligations and to operate in a safe and sound manner.” If a regulated entity determines it is not able to offer the forbearance to any qualified mortgagor, it must notify the Department within five business days of making such determination. Any such notice filed with the Department must include: (1) information about the mortgagor; (2) the reason the regulated entity determined that it was unable to offer any forbearance relief pursuant to Section 9-x; (3) information about the institution’s financial condition supporting the its determination; and (4) any other information required by the Department. Additionally, when such a notice is provided to the Department, the regulated entity must advise the mortgagor that the application for relief was denied and provide a statement that the applicant may file a complaint with the New York state department of financial services at 1-800-342-3736 or http://www.dfs.ny.gov if the applicant believes the application was wrongly denied.

Defense to Foreclosure

Section 9-x of the Banking Law, provides that adherence with Section 9-x is a condition precedent to commencing a foreclosure action stemming from missed payments which would have otherwise been subject to this section, and that a defendant may raise the violation of this section as a defense to such a foreclosure action commenced on the defendant’s property.

Takeaway

These New York measures provide protections to New York borrowers who aren’t otherwise covered by the CARES Act.  Servicers should take note of these provisions as well as similar ones in other states, such as the District of Columbia, Massachusetts and Oregon.  In the immediate term, servicers will need to quickly operationalize these new protections.  In the longer term, questions may be raised as to whether these types of measures infringe upon any private investors’ rights.

CFPB Issues CARES Act Consumer Reporting FAQs

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A&B ABstract

On June 16th, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) issued a Compliance Aid titled “Consumer Reporting FAQs Related to the CARES Act and COVID-19 Pandemic.” This Compliance Aid clarifies the Bureau’s April 1, 2020 Statement that providing furnishers flexibility in handling disputes during the pandemic is not unlimited, putting consumer reporting agencies and furnishers on notice that the Bureau is enforcing the Fair Credit Reporting Act (“FCRA”), as amended by the CARES Act, and its implementing Regulation V.  The Compliance Aid also addresses questions on reporting CARES Act accommodations.

CFPB Focusing on Credit Reporting Accuracy and Dispute Handling

In its April 1, 2020 statement, the Bureau indicated that while furnishers are expected to comply with the CARES Act, the Bureau “does not intend to cite in examinations or take enforcement actions against those who furnish information to [CRAs] that accurately reflects the payment relief measures they are employing” and will not take enforcement or supervisory actions against furnishers and CRAs for failing to timely investigate consumer disputes. On June 16th the Bureau clarified that it is enforcing FCRA and that while it previously provided some flexibility the April 1st Statement “did not state that the Bureau would give furnishers or CRAs an unlimited time beyond the statutory deadlines to investigate disputes before the Bureau would take supervisory or enforcement action.”  The Bureau warns that it will take public enforcement action against companies or individuals that fail to comply with FCRA, but will consider the unique circumstances that entities face as a result of the COVID-19 pandemic and entities’ good faith efforts to timely investigate disputes.

CARES Act Amendment to FCRA

Section 4021 of the CARES Act amends FCRA by adding a new section providing a special instruction for reporting consumer credit information to credit reporting agencies during the COVID-19 pandemic.  Specifically, if a creditor or other furnisher offers an “accommodation” to a consumer affected by the COVID-19 pandemic in connection with a credit obligation or account, and the consumer satisfies the conditions of such accommodation, the furnisher must:

  • report the credit obligation or account as “current;” or
  • if the credit obligation or account was delinquent before the accommodation maintain the delinquent status during the effective period of the accommodation, or, if the consumer brings the account current during such period, then to report the account as current.

Stated differently by the CFPB, “during the accommodation, the furnisher cannot advance the delinquent status.” The CFPB provides the following example:

If the credit obligation or account was current before the accommodation, during the accommodation the furnisher must continue to report the credit obligation or account as current.

If the credit obligation or account was delinquent before the accommodation, during the accommodation the furnisher cannot advance the delinquent status. For example, if at the time of the accommodation the furnisher was reporting the consumer as 30 days past due, during the accommodation the furnisher may not report the account as 60 days past due. If during the accommodation the consumer brings the credit obligation or account current, the furnisher must report the credit obligation or account as current. This could occur, for example, if the accommodation itself brings the credit obligation or account current (such as a loan modification that resolves amounts past due so the borrower is no longer considered delinquent) or if the consumer makes past due payments that bring the credit obligation or account current.

An “accommodation,” as defined in this section, includes relief granted to impacted consumers such as an agreement to defer a payment, make a partial payment, grant forbearance, modify a loan or contract, or any other assistance or relief granted to a consumer affected by COVID-19. The reporting requirements do not apply to charged-off accounts.  This section applies from January 31, 2020 through the later of 120 days after: (i) enactment of this section, or (ii) termination of the national emergency declaration.

Questions on Reporting Accommodations under FCRA

There has been much confusion in how the CARES Act requirements translate into Metro 2 reporting requirements.  The CFPB offers the following guidance:

  • When furnishers are reporting an account to the CRAs, furnishers are expected to understand all the CRA’s data fields, to ensure that the information reported accurately reflects a consumer’s status as current or delinquent. Specifically, the Bureau provides “information a furnisher provides about an account’s payment status, scheduled monthly payment, and the amount past due may all need to be updated to accurately reflect that a consumer’s account is current consistent with the CARES Act.”
  • With respect to the use of special comment codes, the CFPB provides that “Furnishing a special comment code indicating that a consumer with an account is impacted by a disaster or that the consumer’s account is in forbearance does not provide consumer reporting agencies with this CARES Act-required information.  Left unaddressed is whether servicers are permitted to report special comment codes and other fields as required by CDIA/Metro2.
  • With respect to reporting the status of an account after an accommodation ends, the Bureau provides two instructions.  First, the Bureau states “[a]ssuming payments were not required or the consumer met any payment requirements of the accommodation, a furnisher cannot report a consumer that was reported as current pursuant to the CARES Act as delinquent based on the time period covered by the accommodation after the accommodation end.” Second, “a furnisher also cannot advance the delinquency of a consumer that was maintained pursuant to the CARES Act based on the time period covered by the accommodation after the accommodation ends.”

Questions remain on how to address a consumer’s delinquency after an accommodation ends if the delinquency hasn’t been resolved through loss mitigation or otherwise.  Also unaddressed is whether furnishers are permitted to report (i) a “special comment code” for natural disaster or forbearance or (ii) the “terms frequency” field (each of which can indicate an account is in forbearance or deferment, even while the “account status code” field is marked “current”), without violating the CARES Act requirement to report borrowers in forbearance as “current.”

Takeaway

CFPB has put furnishers on notice that the Bureau will begin to enforce the CARES Act credit reporting requirements.  Companies should pay attention to credit reporting complaint trends in the coming months.  Companies should also document good faith efforts to comply and respond to disputes as soon as possible.  Last, with the CFPB’s revised Responsible Business Conduct Policy, companies may consider getting in front of any issues while the environment is still favorable. Once forbearance ends and foreclosures resume, and given where we are in the election cycle, the situation could turn political this Fall and the enforcement posture could change.

Alston & Bird Hosts Calabria, Kraninger to Discuss COVID-19 Challenges

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A&B ABstract: On June 15, Alston & Bird partners Nanci Weissgold and Brian Johnson hosted Dr. Mark A. Calabria, Director of the Federal Housing Finance Agency, and Kathy Kraninger, Director of the Consumer Financial Protection Bureau, to discuss federal regulatory responses to the COVID-19 pandemic and how they affect consumer lending and mortgage servicing.

The discussion was the inaugural event in Alston & Bird’s Financial Services Regulatory Speaker Series.

Pandemic Response

Directors Kraninger and Calabria first addressed their respective agencies’ efforts (individually and jointly) to respond to the effects of the pandemic.

Focusing on efforts relating to the GSEs, Dr. Calabria discussed the foreclosure moratorium (which he stated will soon be extended past June 30), and the focus on borrowers who are truly suffering a hardship.  He further indicated that approximately a quarter of borrowers in forbearance are continuing to make payments, which lead to the agency’s announcement in May that such borrowers will be treated as current for purposes of eligibility for refinancings or new purchases.

Director Kraninger expressed pride in the CFPB’s broad-based response to the crisis, and specifically mentioned efforts to educate consumers on their rights and expectations for relief, adjusting supervisory and enforcement processes to be more responsive to current needs and circumstances, and engaging all of the CFPB’s stakeholders in regulatory work (including the production of guidance relating to mortgages and consumer loans).

Market Prognosis

Asked for his assessment of the overall health of the residential mortgage market, Dr. Calabria compared current circumstances favorably to the 2008 financial crisis.  He specifically referenced the low number of GSE loans for which borrowers are underwater, indicating that borrowers with equity are less likely to walk away.  However, he anticipated that it will not be until the fourth quarter of the year that the true “wild card” – the number of loans in forbearance that will go into delinquency and foreclosure – will be known.

Coordinated Action

Director Kraninger stressed the importance of federal regulators acting in concert, and continuing conversations with the states to send a “clear signal across the regulatory landscape” of expectations for regulated institutions to accommodate their customers.  She stressed that the CFPB is using the examination process to conduct priority assessments as an opportunity to engage institutions, understanding how forbearance programs work and how they are engaging consumers.  Regulated institutions, she said, should expect the process to be iterative, rather than only a matter of identifying violations.

CARES Act and the Mortgage Servicing Rules

With respect to the interplay of the CARES Act and the Mortgage Servicing Rules, Director Kraninger addressed specific concerns regarding payment deferral.  Specifically, as to whether servicers are required to collect a complete loss mitigation application before approving a borrower for a payment deferral, she indicated that the CFPB is actively working with the FHFA on how best to provide options to consumers, and that the agencies expect to provide clarification on how the Mortgage Servicing Rules apply to CARES Act deferrals in the near term.  In the longer term, Director Kraninger suggested that the CFPB is considering new provisions  of the Rules applicable to national disasters (e.g., the COVID-19 pandemic, or severe weather).

Takeaways

Closing the discussion, Directors Calabria and Kraninger discussed overall perceptions of their agencies’ responses to the pandemic. Director Kraninger reiterated that the CFPB is committed to making clear its expectations for regulated entities.  By comparison to the financial crisis, the CFPB is focused on getting ahead of issues (e.g., with the credit reporting industry).

Dr. Calabria said that the greatest misunderstanding about the CARES Act relates to the scope of and eligibility for forbearance.  Borrowers are eligible for “up to” a year of forbearance – a ceiling, not a floor.  Additionally, to obtain an initial forbearance and the optional extension, a borrower must have suffered (and continue to suffer) economic hardship relating to the pandemic.  Thus, he indicated, initial estimates about the number of loans that would be in forbearance were too high.  Further, the number of borrowers with significant equity in their homes makes it more likely for the impact of the pandemic to be a liquidity event, not a solvency event.

Alston & Bird thanks Directors Calabria and Kraninger for sharing their insights with the hundreds of listeners in attendance. Stay tuned for more events in the series.

OCC Rule Affirms Valid-When-Made Doctrine

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A&B ABstract:

On May 15, the Office of the Comptroller of the Currency  (“OCC”) issued a final rule, effective August 3, 2020, addressing the “valid-when-made” doctrine.  The rule clarifies that the interest rate on a loan originated by a national bank or federal savings association, if permissible at the time of origination, will continue to be a permissible and enforceable term of the loan following a sale, transfer, or assignment of the loan, regardless of whether the third party debt buyer is a federally chartered bank.

Discussion

In November, 2019 the OCC issued a proposed rule to address the ambiguity created by the Second Circuit in Madden v. Midland Funding, LLC. The Madden court held that a purchaser of a loan (unsecured credit card debt) originated by a national bank could not charge interest at the rate permissible for the bank if that rate would not be permissible under the applicable state usury cap. Madden did not address the valid-when-made doctrine, and the U.S. Supreme Court declined to hear the case in 2016.

Final Rule

The OCC’s final rule, effective August 3, 2020, effectively codifies the valid-when-made doctrine.  Specifically, the rule provides that interest on a loan that is permissible pursuant to section 85 (applicable to national banks) and section 1463(g) (applicable to federally chartered thrifts) of the National Bank Act “shall not be affected by the sale, assignment or other transfer of the loan.” The OCC emphasized that “that sections 85 and 1463(g) incorporate, rather than eliminate, these state caps.”  A bank must comply with the interest rate limit established under the law of the state where it is located. The OCC recognized that disparities between interest rates between banks arise as a result of the state laws that impose such caps.

In affirming the valid-when-made doctrine, the OCC indicated that “to effectively assign a loan contract and allow the assignee to step into the shoes of the national bank assignor, a permissible interest term must remain permissible and enforceable notwithstanding the assignment”.  Further, the OCC, in rebutting comments made during the rulemaking that a third party non-bank debt buyer should not step into the shoes of the national bank originator, observed that “the enforceability of an assigned interest term should [not] depend on the licensing status of the assignor or assignee.”  Simply put, the OCC affirmed that when a bank transfers a loan, interest permissible before the transfer continues to be permissible after the transfer.

The rule does not address which entity is the true lender when a bank transfers a loan to a third party. The OCC’s rule applies to “interest,” as that term is defined in 12 C.F.R. §§ 7.4001(a) and 160.110(a).

Takeaways

The rule is welcome news, ensuring that uncertainty concerning the effects of the Madden decision does not erode the liquidity of the secondary market for loans originated by national banks and federally chartered thrifts.  It effectively levels the playing field by allowing purchasers of these loans to collect the same agreed upon interest rate and contractual loan terms as the original. Such uniformity is critical for the secondary market.  Hopefully, the FDIC will similarly finalize its proposed rule.

Nevertheless, we note that the OCC rulemaking does not reverse Madden, and while the pronouncement should be influential in circuits aside from the Second Circuit, it is expected to face court challenges, not to mention criticism from congressional Democrats.   The saga will likely continue.